Monday, September 12, 2011

TD Bank Likes Having Students in Debt

A new study from Toronto-Dominion Bank say education costs are going up but a degree is still one of the best investments you can make.

Anybody seen Science for Smart People? I'm not sure what the details of this study look like, but I highly doubt their scientific. I'm willing to bet this study is the molded opinion of elitist gatekeepers.

My opinions are in the spirit of non-aggression, an unhampered market economy and private law.

You decide which one has more merit.

“Canadians over estimate cost, underestimate benefit,” of post secondary education, according to the report. It notes that among individuals 15 and over with a post-secondary education, the employment rate is 72.6% compared with 61.4% for those with only a high school education. Those without a high school diploma have only a 33.6% employment rate.

In the last ten years Canadians have been experiencing an inflationary boom. When the United States entered a recession in 2001, Canada was set to follow. What “saved” both economies was when the Bank of Canada followed the Fed approach to cut interest rates further. This ended the recession promptly and both countries experienced massive booms, particularly in real estate.

But all booms end in a bust; either it be in real estate, the stock market or education. Canadians will face the day of reckoning. Centrally planning monetary policy always ends in disaster; it's historically, empirically and logically proven.

The boom creates jobs that otherwise would have never come into existence. It misallocates capital and labour to expansionary sectors that are dependent on the new money. When supply and demand start to reflect true scarcities, the boom ends. Degree or no degree, unemployment is a guarantee as bad debts are liquidated.

So while this study seems to suggest the obvious: A university degree gets you a better job than dropping out of high school, future realities could put a hamper on that statistic. How many jobs, where they are, what they are, who they belong to and why they exist reflect consumer demands. In a bust that governments refuse to correct, coupled with a debasement of the currency, there will be more demand for one skill over another. Say, farming than professional photography. Now this doesn't mean one shouldn't go to school for either, but comparing the present number of students in the former to the latter indicates that the above statistics may not reflect future employment figures.

Education also means higher earnings. The median after-tax income for university graduates was $35,168 compared to $27,741 for college graduates. The median after-tax income for high school graduates was just $19,744 and only $15,523 for people who didn’t complete high school.

The problem here is two-fold. The first is the exact problem we just went through, whereas booms end in a bust and what pays $35,168 today may not tomorrow. The second problem is the median after-tax income. Taxation distorts market prices for labour; what a corporate lawyer makes compared to a small-business entrepreneur is ultimately determined by consumers. A government's attempt to favor some groups at the expense of others, using the tools of taxation among others, result in a distorted figure of wages and salaries slightly (or completely) incompatible with consumer demands.

“The benefits are [sic] undisputable,” says TD, noting the costs of a degree can be high. An average four-year degree in Canada is now $55,000 for students living at home and $84,000 for those living away.

Different kinds of education are more beneficial than others, and for an uncertain future post-secondary education can't be discredited as an investment. What discredits post-secondary education in its present form is that the entire sector is in a bubble. Interest rates are at historic lows, student loans are at all time highs, as are student debts. The prospect of future employment for all these students is on shaky ground.

How did the price become so high? Well like all bubbles it starts with little savings and artificially low interest rates. This makes credit cheap and lowers the time preference of individuals. Traditionally, one would have to wait and save for school, or finance their debt by working while studying. Central planners decided that everyone deserved an equal opportunity for enrollment.

The growing number of eligible students meant that post-secondary institutions were making more money. They invested these profits back into the schools, expanding resources and hiring more staff. Better schools with more graduating students reinforced the idea that going to school was a good investment.

But government investment crowds out private investment; with student loans being made left, right and centre, prices rise. By artificially suppressing the price of school, government increased demand, crowding out consumers that had the ability to pay. The entire post-secondary education sector now relies on cheap credit.

Cheap credit doesn't replace genuine savings; in this case it also doesn't create jobs. The increased number of graduates doesn't guarantee increased employment, it just means that some graduates will be working at jobs they are overqualified for.

The TD report says there is no question youth face more challenges today in the labour market and that student debt is rising, “however there is every reason to believe that investment in education remains the single best investment that a person can make.”

In today's climate, whether or not you're a student, the best investment you can make is purchasing some gold. As for Canada's post-secondary institution... Ignore my advice, the TD Bank is calling it a good investment. Too big to fail, I guess. it's not like a lot of what schools have to offer isn't already on the internet for free....

With the entire sector dependent on credit, the only way for schools to continue offering their goods and services at present levels is for credit to continue on expanding infinitely. This cannot happen. A lot of young Canadians are going to be either overqualified or unemployed but definitely indebted.

There is a remedy to this situation, however. If all economic restrictions placed on entrepreneurs were vanquished and Canadians were free to openly trade with each other without bureaucratic regulations, future generations could be in for a soft landing. Albeit, the bust won't be easy but at least there's good evidence to determine if these student loans are fraudulent.

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