Part II: AAEA Has Become The Important Source of Honest & Innovative Ideas in The US Higher Ed Sector

You may not be trained as an economist or a math whiz, so we are going to explain it real easy–bare with us.  If you have a chance to look at Figure I, presented also on the Home page, you will notice different lines intersect or cross to one another.  You can read the story behind it here.  For now, let us pay attention on rectangle T1 T2 D B, which indicates the total aids that Uncle Sam has poured-out in the higher ed industry.  This amount then will be used by the US colleges and universities to finance their (efficient and inefficient) operation.  In such a case, the Uncle Sam’s role is equivalent as the loan-guarantor.  What unfortunate implications this system can bring as the by product of this policy?  If the institutions operate based on profit motive or if morale, as suggested by the founding father of the capitalism idea/concept is not in the equation when strategic decisions are made, it creates a lot of loopholes that can be taken advantages by any entities.  For example, higher ed institutions may increase its tuition and fees constantly.

Data showed that the spirit of 1958, when the first Act was enacted was faded away over-time.  Higher ed institutions forgot the sole purpose of the National Defense Education Act (NDEA).  Which is to make the country to be more competitive.  In facts, the Act was created after the US was shocked, because another country has successfully launched its first-ever satellite, Sputnik.  However, over time, some “smarts” people have different ideas and they look at the NDEA as opportunities to satisfy their own ego, such as making profit or to increase their materialistic well-being from the society to their own pocket(s).

Let us analyze this whole situation academically and set aside the politics, using Figure 1 as the starting point. Though, this graph shows the analyses are in a static equilibrium notion, but it actually is a dynamic game with incomplete information (assume a two-period game for simplicity).  In period one, before the students graduated, the total amount of taken student loans are paid to the Universities and Colleges by Uncle Sam.  In such a case, from the borrowers point of view, signing the student loans contract can be seen as a binding promise to willingly share or partially giving up her or his future-income to the third parties such as school, private lenders, banks or any financial borrowing institutions.  Of course, this is the most profitable business, because in one side, they have the government as the regulator, and it has the power to garnish students’ future income if the loans got defaulted.  Therefore, it minimizes the issue moral hazard on the loan borrowers side, but not on the lenders.  Are there any rules which will punish those institutions charge higher tuition above normal or the lenders that charge late fees, higher interest rate, etc (Please click here for Yale University’s Lecture)?

In the other side, the whole system has been set-up such that diploma, or any college degree is a signal of competency to the employers.  Unfortunately, these employers not only, are in fact, the financial institutions who partially own the companies (through NYSE, the stock market) or the lenders of other businesses in manufacturing, services and others.  Think about the practice to appoint the schools’ or colleges’ or universities’ Board of Directors?  How many of them have ties to financial institutions or companies as such?  These clearly will affect the school when making strategic decision., i.e potential source of moral hazard.

So, in period one, taken student loans can be seen as the advanced transferred of future wealth or income from the small guys (students) to the big guys (higher ed institutions and lenders). Regulator works as the loan-guarantor, a middleman or the financial institution itself.  For its effort, it receives the interest income and other related loan origination fees and late fee penalties.

In period two, after student graduated, either the guarantor or other financial institutions and private lenders will start taking back their money, plus interest.  In such a case, higher ed and others involved in the whole process are the biggest winners, while the borrowers and their family or the general public, especially the working bees (class) are the real losers.  Did the readers see this dichotomy imitates something?

The student loan borrowers or the whole society need to start asking critical questions such as (1). Why they may need to borrow their own money and (2) Pay the interest; (3). Why as an alum, you should support your school?

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