Housing isn’t the only bubble the feds helped create. Debt has been driving up the price of all sorts of consumer goods for years. Higher education has been no exception.

Thanks to debt the feds make available for schooling — directly through federal student loans and indirectly by artificially lowering the cost of borrowing —  schooling has been getting more expensive. The trend has accelerated in lockstep with the general postwar expansion of credit and with the acceleration of such that began in the early 1980’s on Greenspan’s watch. The rise in tuition is as fueled by easy credit and funny money as the now obviously unsustainable rise in real estate prices.

All that federal money is also encouraging the proliferation of trade schools who seduce prospective students and debt slaves with promises of marketable skills, stable work and new lives. This shameful business is getting more lucrative for for-profit and trade schools as more people, desperate for a new start as the collapsing credit bubble leaves them jobless, are roped in.

From a recent New York Times article…

“The stakes are enormous: For–profit schools have long derived the bulk of their revenue from federal loans and grants, and the percentages have been climbing sharply.”

“The Career Education Corporation, a publicly traded global giant, last year reported revenue of $1.84 billion. Roughly 80 percent came from federal loans and grants, according to BMO Capital Markets, a research and trading firm.”

The Apollo Group — which owns the ubiquitous University of Phoenix — got a whopping 86% of its revenue from the federal student aid money last year, up from a not quite as whopping but still disturbing 69% a couple of years ago.

Talk about misallocation! The feds themselves are feeding this beast…and then complaining when it gets fat. And they’re also ready with more rules to rein in abuses they invite by tossing money where the market would never tread. They’ve been throwing money (taken from other people) at these schools, essentially rewarding them for saddling up their misled students with debt.

Let me make this clear: the government is taking money directly from you the taxpayer and shoveling it into these institutions that produce people with skills that won’t pay the debts that they incurred to the feds. And to add insult to this injury, these institutions are simply lying to the people about that last part. They assure the patsies that for a measly $30,000 in federal debt, they’ll get a useful career with remuneration on the order of $50,000 or so per year. But the odds are strongly against that.

This really isn’t that complicated, to wit: make false promises of income in order to get people to fork over their money. It’s your basic scam. And the feds make it profitable…with other people’s money. And that’s the part that should bother you because all of that money comes from the stuff they withhold from your paycheck and demand you pay in capital gains every year.

While these schools won’t promise anything in writing, they do indeed do everything to imply that they’re the magical doorway to new careers that pay well. Prospective students line up with federal dollars in hand. If these schools actually had to scrap for scarce private dollars (that is, compete), the force of competition would tend to do two amazing things: weed out the less effective schools and keep prices down. But the availability of federal funds (money in the hands of central planners who didn’t earn it) predictably causes distortions. Things that should have died or never have been born end up thriving. The schools grow fat on public money; Prices are artificially inflated by the availability of that very money. The debt incurred by the students through which the money moved from the public to the schools becomes bigger than the return on the investment.

That the federal government spends your money this horribly is comic in its inevitability. The tragedy here is that these schools don’t really teach these students anything useful, and if it weren’t for the federal funding via student loans, the number of these schools wouldn’t be nearly as high. They might not exist at all.

In the past, people who wanted to learn a skill would apprentice themselves under other people who were already good enough at it to make money at it. For most careers you didn’t need an official course of study and a piece of paper; you needed to be willing to start at the bottom and learn from people who’d gotten good enough to make a living.

The New York Times article used the example of one culinary arts school…

…Several local chefs said the program merely simulated what students could learn in entry-level jobs.

“When they graduate and come in the kitchen, I tell them, ‘I’m going to treat you like you don’t know anything,’ “ said Kenneth Giambalvo, executive chef at Bluehour, an upscale restaurant in Portland’s Pearl District. “It doesn’t really give them any edge.”

What the school does give many students is debt, often at double-digit interest rates — debt that even bankruptcy cannot erase without a lengthy, low-odds legal proceeding.

To underscore the point, however, let’s look to one of the most revered and ancient professions: bartending.

How does one go about getting such a great gig? Some advice from random, anonymous folks who’ve made a living out of it follows. Take it for what it’s worth:

“…A bartending course will not get you a job in a bar. In fact, in most of the bars I worked in for over ten years, all it would have gotten you was laughed at. Find a bar you like the atmosphere in, and start chatting up the bartenders. Let them know you’re interested in learning more about how bars work, and you’d be willing to barback for a while for free to see if you liked the work. Once you get to that point, work your ass off. Show enthusiasm, a cheerful disposition and interest in helping the bartenders and learning their craft.”

Could bartending schools be that big a waste of time and money?

“Yeah, bartending schools are scams. Even if a degree from one would actually get you a job in the business (which it never will), it would still be a better use of your time to get experience first. My advice is to get into serving at a pretty big chain restaurant, like an Applebee’s or some such. The advantage to these places is that they have great training programs in place, and they also have higher turnover than most places (since a lot of people work there to build a resume). That’s how I got behind the bar- six months on the floor, and as soon as one of the bartenders walked off his shift I was scheduled for bar training. Why pay $300 for a course when all you have to do for server/bar training at a restaurant is work for minimum wage (or maybe less than) for a few days? Trust me, when the cash starts rolling in, it is very worth it.”

School can indeed be a waste of time, you see. This isn’t always the case — and some things need years of formal schooling — but how do we determine which things require serious school time, and which schools are worth going to? Well, the market tends to sort things like that out…at least it does when governments don’t distort the picture by throwing other people’s money into the mix. If a school — or anything else for that matter — wouldn’t exist without federal funding, then odds are pretty damned good that it’s either a boondoggle, a scam, or some marriage of the two.

As comically unnecessary as most people in the relevant industry seem to think bartending schools are, those schools have a price that reflects the market’s opinion of them. Bartending school is relatively cheap, less than $1000 to complete the course in about a couple of weeks. They may largely waste the enrollee’s time — and a nice little chunk of his money — but it won’t turn him into an indentured servant for the rest of his working life. You have to wonder if this would still be true if bartending schools were eligible for federally-funded student loans.

Actually, you don’t really have to wonder at all.

Regards,
Gary Gibson
Managing Editor, Whiskey & Gunpowder

March 19, 2010

Gary Gibson

Gary Gibson is the managing editor for Whiskey and Gunpowder. He joins the Whiskey staff as a long-time fan and reader of both Whiskey and Gunpowder and the Daily Reckoning. A graduate of Fordham University, Gary now spends his days reading about and writing on limited government, sound money, personal responsibility and resource investing.

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