No Child Left Behind?

By Kate "Short Fuse" Incontrera

VIEWS FROM THE FUSE: NO STUDENT LEFT BEHIND?

Debt. It's been a major them in not just these pages, but all over the more "mainstream" press lately. And with good reason. But there is one aspect of the debt monster that is often overlooked: student debt.

If you have put your child (or children) through college, you can attest to the fact that a college education is expensive - to say the least. Adjusted for inflation, tuition and fees at public universities have risen by 40 percent in the past five years. Even worse, if you look at college tuition over the past 30 years, you'll see that it costs around triple of what it did in the 1970's.

That said, it is nearly impossible for the average American to attend a four-year university without some sort of financial aid. AlterNet's article, "Student Debt Crisis: Are There Any Solutions?" shows that "between 1993 and 2004, the percentage of students needing to borrow money jumped from 46 to 66 percent. Debt for graduates averages around $19,000 across public and private schools. Ten years ago, public school borrowers needed about $8,000. Now they borrow about $17,250 - a 65 percent increase, adjusted for inflation."

Student loans are a double-edged sword. While you are getting the money you need to obtain a degree, you'll be paying for it for years to come - and for some it will take the rest of their adult life to dig their way out of student loan debt.

"2006 has been the worst in history for government action against student borrowers," continues the article. "In February, President Bush rolled out the Deficit Reduction Act, which cut $12 billion in federal student aid money. Part of the plan includes a hike in interest rates on federal student loans and loans taken out by parents. The interest rate on Stafford Loans to students rose from 5.3 percent to 7.14 percent on existing loans and to 6.8 percent on new loans. Interest rates for Parent Loans for Undergraduate Students (PLUS) loans increased even more dramatically, from 6.1 to 7.4 on existing loans and to a whopping 8.5 percent on new loans."

Once you add these rising interest rates to the equation, you have a situation not unlike the one we are seeing in the real estate market right now. But instead of defaulting on a mortgage payment and losing your home, students are finding it more and more difficult to complete or even begin their college education.

Like with most things, this has an interesting trickle-down effect. Toby Chaudhuri with Campaign for America's Future estimates, "In the next decade, over 4.4 millions low- and moderate-income academically qualified students will opt not to enroll in four-year university degree programs, and another two million will opt not to enroll in higher education at
all."

To try and dissuade prospective student from writing off a college education all together, places like the Interboro Institute step in. Interboro is one of the largest, fastest-growing profit-making colleges in the state of New York. They see to give low-income students who have not graduated high school an opportunity to earn a high school equivalency degree in 16 months.

While this sounds like a nice plan, a closer look at this institution shows something else. In late July of this year, a class-action suit was brought up against Interboro's parent, EVCI Colleges Holding Corporation. The New York Times reports:

"The complaint, filed in Federal District Court in the Southern District
of New York, alleged that cheating in determining whether students were
eligible for federal and state financial aid was routine, not unusual, and
that the company dismissed employees who failed to meet quotas in
enrolling students.

"The complaint also quoted former employees as saying that admissions
workers routinely changed answers and scores on completed exams used to
determine whether students were eligible for federal and state financial
aid, which accounted for more than 90 percent of Interboro's revenue."

While EVCI denies these allegations, most people can put two and two together. Similar to waving an adjustable-rate mortgage under the nose of a pizza delivery boy, EVCI has been accused of "exploiting economically disadvantaged students for personal gain."

Sound a bit familiar? Think of all the Americans who had no business getting involved in the real estate market to begin with - the "subprime borrowers" - but were given the opportunity to buy a home with no money down.

In round numbers, half the people who bought a house last year have negative equity. As the housing bust deepens, their equity is going to get more and more negative every month.

But it's not just recent buyers who have negative equity. With the refinancing boom, millions of long-term owners have borrowed all the equity out of their homes. Americans have treated their homes like piggy banks, taking the money out and spending on frills. This will not end well
for a large portion of our country.

by Short Fuse for The Daily Reckoning

P.S. Ever since the Enron debacle, you can't open up a newspaper without reading about some CEO cooking the books - and now a scandal is permeating the real estate market as well. Folks who refinanced a year or two ago are finding out their homes are worth less than the appraised value. All over the country, appraisals have been inflated by lenders eager to make loans and real estate agents eager to close the deal whatever it takes.