Cui Bono?

Barack Obama is promising an increase in government grants for college education, presumably to help people like Tracy Kratzer, who was interviewed by Forbes about her crushing student loans:

Tracy Kratzer, 27, enrolled in the International Academy of Design & Technology in Orlando, Fla. in 2003. With visions of making big bucks as a Web designer, she didn't give much thought to the interest rate on her loan from Sallie Mae(nyse: SLM - news - people ), the Fannie Mae(nyse: FNM - news - people ) of student lending. Kratzer didn't know it at the time, but she was part of an experiment that has proved disastrous for borrowers and shareholders of Sallie's parent, SLM Corp. It's called "nontraditional" lending.

"That's not a sociological term," Albert Lord, chief executive of SLM Corp., told an audience of financial analysts last fall. "It's basically kids and parents with poor credit who are at the wrong schools."

 

Sallie Mae was set up by the government in 1972 and began privatizing its ownership in 1997. It began nontraditional lending in the easy-money heyday of 2002, when it cut deals with dozens of trade schools to become their preferred subprime student lender. Over the next four years Sallie doled out about $5 billion to people like Kratzer, waiving the credit scores and cosigners formerly required for its loans.

The bill arrived last year after nontraditional borrowers began entering the workforce. Of the half no longer studying, Sallie had written off 15% of loans by last June, the most recent period for which it has released figures; another 24% were delinquent. Among traditional loans for four-year universities, writeoffs ran 2% and delinquencies 4.9%.

SLM set aside $884 million to cover these bad loans in 2007 and posted its first loss. It expects nontraditional-loan writeoffs to peak this year. SLM's stock has lost 80% since the beginning of 2007, wiping out $15 billion in value. Lord, who was unavailable for comment, is a 28-year company veteran. He made $72 million as chief executive in 2007 by unloading SLM stock before it tanked. Sallie largely abandoned nontraditional lending last January.

That's little consolation to Kratzer. Shortly after graduating with an associate of arts degree, she discovered that the high-paying jobs she'd hoped to qualify for go to people with bachelor's degrees and years of experience. After a bout of unemployment, when she lived off credit cards, Kratzer recently found an hourly job as a clerk at a magazine, where she earns less than the average high school grad. In the meantime her $14,000 student loan has mushroomed to $27,000--more than she makes in a year--and continues to accrue interest at 18% a year. She says collection agents for Sallie and others hound her to hit up relatives for the money she owes.

"My mom works in a restaurant. My stepdad is in prison," says Kratzer. "There are so many people like me out there. They don't get seen. They don't get heard."

The question to contemplate is who benefitted from making it easier to pursue degrees that don't get you very far?

Not Ms. Kratzer, obviously, but not the "greedy" loan company, either.  No, the beneficiaries are the schools that take peoples' money in exchange for worthless degrees.

Back in my day, Sallie Mae wasn't so free with her money, but I nonetheless had a substantial brush with the seamy world of gray market education.  Having been laid off from two jobs (in my twenties I had a pretty remarkable gift for picking companies that were just about to go out of business), I ended up, miserably, as a secretary at a nonprofit.  Shortly thereafter, I decided to learn to be a network administrator, which I'd enjoyed doing briefly at my previous firm, before the venture capitalists had shut off the money spigot.

I don't know how I ended up at Career Blazers (yes, I cringe myself at the name).  It was like one of those plucky, poor-but-honest people you read about in Victorian novels--everything clean, freshly painted, and nonetheless falling apart.  But I was too desperate to get out of that secretary's chair to be picky.  I gave them something like $5,000, in 1995, to teach me to be a Certified Netware Engineer--an administrator of Novell's corporate networking software.

The technies in the audience are wincing, and believe me, I am too.  As I found out after I'd wasted thousands of dollars and three months, a CNE was a necessary, but not sufficient, credential to get a job in IT.  The minute anyone tells you that he has one (or an MCSE, the Microsoft equivalent), any seasoned professional will bar that person from touching his equipment.  Anyone who would actually mention his CNE is definitionally too ignorant to be useful, and just knowledgeable enough to be dangerous.  Of course anyone competent usually had the credentials--but all the credentials proved, by themselves, was that you could breathe and answer a multiple choice test.

As far as I know, out of my class of fifteen people, a lot of whom were harder up than me and using the last of their severance to "retrain", two ended up with jobs after "graduation".  I was one of them, lucking into a half-administrative, half-technical position.  When that company too, was shut down four months later, I was now blessed with just enough experience, in the booming mid-1990s, to get a job and a 30% pay rise.

At any given time, that company was running two or more of these classes.  And we were the ones at least arguably learning marketable skills. Downstairs, day and night other less fortunate people labored over Microsoft Word, Microsoft Excel, "computer" classes, typing--all financed by a combination of credit cards, much-needed personal savings, and government subsidies.  The best off of them were having their useless lessons paid for by the taxpayer, merely wasting valuable time they might have spent finding a real job. I have no reason to believe that their placement rates were any better than those of my class.

It's easy to be horrified by these fly by nights--but what's the difference between these classes and half of what goes on at many campuses with libraries and gyms?  It is perhaps not quite so blatant, and some of the kids do all right.  More of them, however, waste a few years and then end up doing something that doesn't require a college degree.  They are, of course, better off if the taxpayer picks up the tab.  But then the taxpayer isn't.  Tuition has still been wasted.  And no one ever yells at the schools--or the presumption that we should shoehorn every eighteen year old into college, rather than structuring an economy that comfortably accomodates those who are not academic.