Monday Morning Open Thread

As has often been noted here and elsewhere, no one and nothing is immune from the economic fallout. Not even private schools and colleges. I was fascinated by this New York Times story about the Conserve School in Wisconsin. The Conserve School is entirely funded by an endowment from a trust that draws its financial basis from the Central Steel and Wire Company, a Chicago steel company.

Stefan Anderson, the headmaster, told them that the trustees were essentially shutting down the prep school because of the dismal economic climate. Its four-year program would be converted to a single semester of study focused on nature and the environment.

“We thought we would hear they were cutting financial aid,“ recalled Erty Seidel, a senior on the wooded campus, which is filled with wildlife and sprawls across 1,200 acres in Land O’ Lakes.

Greta Dohl, a student from Iron River, Mich., in her third year at the school, broke down and cried. “I was absolutely heartbroken,“ she said of the closing.

Now students and parents are banding together and challenging the action, contending the school’s underlying financial condition does not look so dire. In fact, the school’s endowment would be the envy of many a prep school. With $181 million and 143 students, it has the equivalent of more than $1 million a student.

In a lawsuit filed in State Circuit Court in Wisconsin, the parents argue that the trustees are acting in their own interests — as officials of a separate, profit-making steel company — and want them removed from oversight of the school.

The situation raises several interesting questions– only some of which are investigated in this article. Firstly, there would seem to be a serious conflict of interest  - the trustees of the endowment are also officials in the Central Steel and Wire Company. The endowment could gain an enormous amount of cash by selling the company shares – enough money to keep the school running, plus find less risky investments for the future stability of the endowment (like converting it into bullion and burying the gold on the school’s grounds). But selling the shares will, naturally, send the price of the shares plummeting, which is something no company official wants. So what’s good for the company is bad for the endowment and vice versa. Clearly, someone wasn’t doing fiduciary due diligence when this structure was put in place, and the students may be the ones who ultimately suffer.

But the other, larger point is the fact that this is what happens when schools are forced to rely on private sources of income to work – the money flows well in good times, but in bad times, it dries up and there is no legal obligation for continued funding. I am sure the Conserve School won’t be the only institution facing this problem over the next few years, and of course, it’s students that suffer, not shareholders.

Secondly, the Times also ran this doozy about colleges wondering how many students it should accept, and how many students that do decide to go to their schools in March will be able to show up in September.

[S]ome colleges are trying new methods to gauge which applicants are serious about attending: Wake Forest, in North Carolina, is using Webcam interviews, while other colleges say they are scrutinizing essays more closely. And they are making more vigorous appeals to try to convince parents and students who will be offered admission in April that theirs is the campus to choose. But mostly, they are guessing: Will pinched finances keep students closer to home? Will those who applied in December be feeling too poor to accept in May — or show up in August?

Colleges have been in the catbird seat for the past decade or so. As the number of high school students swelled, applications rose, allowing colleges to be more selective. And families benefiting from a flush stock market seemed willing to pay whatever tuition colleges charged.

But all that has changed. For students, the uncertainty could be good news: colleges will admit more students, offer more generous financial aid,and, in some cases, send acceptance letters a few weeks earlier. Then again, it could prolong the agony: some institutions say they will rely more on their waiting lists. But there is no question, admissions officers say, that this year is more of a students’ market.

It’s like a damned if you do, damned if you don’t scenario for students – the pressure to achieve the perfect package to stand out in ever-increasing pools of applicants may be somewhat assuaged, but you trade that stress for wondering if your parents/family can afford for you to go to your dream school. Again, the story raises some interesting points, but fails to answer the larger question – is the funding of tertiary education fundamentally screwed up? Two weeks ago, Eliot Spitzer, in his recently launched column in Slate postulated yes (and gosh, it feels strange to be in agreement with Spitzer about something…) His solution? Continue to fund education through loans, but peg the repayment to a percentage of post-college salary for a fixed period of time.

[T.here may be a "third way" that eliminates the educational financing problem. Milton Friedman first proposed the following idea, and James Tobin then refined and tried to effectuate it. If two Nobel laureates of decidedly differing worldviews agree, it must be worth at least a quick look. It is, moreover, successful and commonplace in Europe and Australia.

Marketed under the decidedly unappealing name of “income-contingent loans”—how about we call them “smart loans” instead?—the concept is simple: Instead of paying upfront or taking loans with repayment schedules unrelated to income, students would accept an obligation to pay a fixed percentage of their income for a specified period of time, regardless of the income level achieved. Suppose a university charged $40,000 a year in annual tuition. A standard 20-year loan in the amount of $160,000 (40,000 times four) would produce an immediate postgraduate debt obligation of $1,228.50 per month, or $14,742 per year, not sustainable at a salary of $25,000 or anything close to it. Under a smart loan program, the student could pay about 11 percent of his income, with an initial payback of $243 per month, or $2,916 per year, which is feasible at a job paying $25,000. If, after five years, the student’s salary jumped to $100,000, payments would jump accordingly and move up over time as income increases. After 20 years, assuming ordinary income increase, the loan would be paid off.

FWIW, DH, being Australian, went to university here. He paid off his uni fees within 10 years of graduating. Spitzer neglects to mention a few salient details about how the US system differs from the Australian system: firstly, all but a few universities in Australia are public institutions – ie, funded by taxpayer money. Fees are capped and vary by degree, presumably to reflect the technical differences/costs therein; an English degree (a four year program) might cost something like $40,000, while a medical degree (a five year program) might cost $100,000. There is rationing of places based on your final year examination results. And finally, the school fees that you pay post-graduation are paid directly to the government; there is no loan institution intermediary. Interest is strictly capped at the cash rate plus a certain percentage – it is not a form of profit-maximizing.

In any event, MTs of teenagers, how are these issues impacting on you? What else is going on in your world?