Happy Thanksgiving, Systematic Errors, Student Loans Scam and Moral Hazard

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While some college students take a couple of days off to visit their family, perhaps, this year, the forbidden topic to talk about while having the traditional Thanksgiving dinner may also include student loans, in addition to religious and politics. It is too scary and too painful for some to even think about it. No one in her or his right mind would like to ruin the once-a-year family gathering by bringing the student loans topic on the dinner table.  It is such a precious moment to be tainted.  But not discussing about it, does not mean it will bring the issue away.

However, in the real life that what million of American families have to deal with many years to come in their life.  If the US lawmakers do not have the will to deal with the biggest issue in the 21th century in the history of the country, it may impact the future of young generation’s well being.  While there are many other current problems facing by the US, such as immigration, oil price, the declining of the DOW, trade wars and others, it seems the student loans issues are not in the regulator’s priority list, at least for now.  Consequently, it may catch everyone eyes by surprise–one day in the (near) future.  However, citizens of the country need to be thankful for the support of Uncle Sam to educate them, just need a little tweak to make it more efficient.

Do Student Loan Systematic Errors ≈ A Scam?

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The general public perceives it as the same.  If this is the case, may be the only option left is solving it through the deregulation.  Meaning the lawmakers need to do something meaningful.  The logic leads one to believe that they, the lawmakers are the one who can solve the issue, one-and-for-all.  So long they stand still, the problem will get worse.  So, Uncle Sam has to decide when to move.  The directions have been analyzed and shared pretty clear.  It is up to the Legislative and Judicative branch to take actions.  It is not, by any means can be solved by Executive.  Executive cannot solve the issue.  Especially when it does not have the interest to do so or it has sided toward the producers of the systematic errors. Until this happens, the American public will continue suffering.  Perhaps, other countries in the world are surprise to find out that the Uncle Sam is so powerless to solve its own problem associated with the skyrocketed student loans.  Perhaps, many economists astounded to learn that a country who has the most Nobel Laureates in Economics cannot solve this simple issue, especially when the examples can be found easily in many Asian countries, such as in Singapore, Japan, India, South Korea or China.

Systematic Errors Infused On Student Loans System Proved To Exist

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Unlike random errors, systematic errors are errors that fed into the system purposely.  Today, we learned from an article that confirms such errors do occur.  Based on researching and studying the US student loans historical data, the Association has written and hypothesized about it many times.  Now that, according to the published article, such issues have been proved to happen by the DOE, but was hiding from the public, until today (November 20th).  It is pretty obvious who will suffer from this classical example of moral hazard.  Even though, this malpractice obviously scattered all over the places, the administrator seems to go the other ways.

From the statistical, econometric or classical theory of measurements, increasing the sample size will solve issues related to random errors, but surely not for curing, minimizing or eliminating the systematic errors.  This kind of vital errors can only be fixed if the sources that produce them are completely removed. Otherwise, the results may not pass the reliability test.  Needless to say that the loan servicing companies are not the only source that may have infused the errors into the student loans system either by design, unintentionally or unknowingly as a compromise to a more important management goals such as making profit.  This is the caveat, if letting publicly own company, i.e., Wall Street to get involved on basic public interest area. The game of the student loans is more than a one-party game.  If the regulator is part of the issue, then things may not look so ………smart.  The American public is the only party and the judge who can test this maintained hypothesis.  Good luck!

How Much Wealth Has Been Transferred From the Students To The Wall Street Through Student Loans?

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The Association pulled some daily stock price from one of the public companies who has business on the student loans. Over the period of fifteen years, this company has done pretty well as measured by the stock price which is almost double during the period of analyses as shown below. Among many factors, one of the drivers of this company performance is its ability to make money or profit and then distributed part of it to its stakeholder and shareholders. Sharing of such a profit can be seen as wealth transfers from the students and their families to the Wall Street investors.  The company’s profit has a positive correlation with the increase in student loans i.e., as more students take the loans, the more profit and the more wealth is transferred.

 

 

 

Lessons Learned From Other Industries: GE, BB, AAPL and AMZN

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Data analytics professionals are trained to observe what are happening in the competitive environments where they are working.  If anyone notices the recent AAPL’s stock price movement in recent weeks, then she or he noticed something significance has occurred.

Bazos is correct when he said, one day the AMZN brand will fail.  He is realistic when seeing the world.  GE, one of the beloved US company has experienced a tremendous drop in its stock price, recently.  On November 16, 2000 it was traded around $51.00-52.00, exactly 18 years later it is traded around $8 (today it hits less than $8)  There is around 84 to 85 percent drop.

So, what this has anything to do with analytics and higher education.  Well, let us try to make some inferences, based on the stories above.

  1. The non-education industry is usually pretty fast when adapting themselves with changes.  But some big names still fail.  Higher ed institutions usually need a longer time to adjust to any changes.  Think what will happen…
  2. Like GE, some institutions will become a history, usually for those that have limited resources.   While others who can make rapid adjustments will survive.  These organizations include non-state-owned organizations with tremendous leadership talents and financial resources.  Including in these groups are selected few state universities and colleges.
  3. When the publicly served administrators at the federal or state level struggle to allocate the “pie”, less funding may be available to support higher ed, such that less people will be able to afford attending a higher ed.  Therefore, most likely students and their families have to take more loans from the commercial financial institutions or completely scrap the idea to attend a college.  Those, who decide to go on, but majoring in soft-science will carry tremendous debts, which they will not be able to repay it, ever.  So, borrowers think it over before you sign the paper.

Here is one example of the change that the IRI professional can do.  Focus on analyzing the internal data to support the management to operate more effectively.  Cut all the reporting burdens unless there are mandated by the state/federal laws such as IPEDS.  Old school has made so big of a deal for putting their information online–either fact book or fact sheet, make them colorful without further analyzing them.  In other words, majority of folks are still make a big deal of data visualization (DV) instead of data analytics (DA).  If one needs to make a parallel, stressing on DV will copy what has happened to GE, maybe!

US Higher Ed & Student Loans: Who Are Carrying The Burdens Associated With Moral Hazard?

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There are several parties who have to deal with the burdens.  However, the entity that bare them the most in the macro level is the Country and all its citizen.  In addition to the country here are the additional lists of sustainers:

  • Individual borrowers and their co-signers.
  • US Higher Ed institutions.
  • The hiring companies or employers.

The acts of moral hazard may not be easily or directly be observed, but their results are pretty obvious.  Many US families are waiting when the policy makers will do something meaningful for their own citizens.  Ignoring that such systematic errors exist, will not solve the existing problem, rather it may make it worse.  But, toward the end, the Uncle Sam may bill everyone out.  Hopefully, but do you know why?

Reactive or Proactive, Systematic Errors and Moral Hazard

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The question is not whether to be a proactive or reactive, but what is best for an institution.  From a college level Management 101 course, students are fed with the most fundamental POAC or POLC, the four management functions basic concept, which later add by others such as Fayol to POCCC.  Some others add other functionalities and turn the 4-basic concept into POSDMCCC.  The point that the Association is trying to bring to the readers is on the first two letters which is P and O.  These two letters have appeared regardless of who define the management functions.

From the basic concept to the most fancy one, the P is always put on the top or the first letter.  Activities in any organization, regardless of it size, goals or business structures will start with P for PLANNING.  Without it, an organization soon will collapse.  This is exactly the situation that one will find many are happening in the US higher ed institutions.  Perhaps, only handful organizations are operating based on the P, and the results are real.  One can search on the internet by simply typing the words of “student loans”, and there will be many articles on the topic.

Despite all the crystal clear facts, there are always others who think differently.  When the decision makers have to be realistic with the budget situation, they are facing a strong resistance, which then causes a dilemma.  This kind of situation should not happen at the first place, if an organization operates based on short or long range planning.  But what unique about US higher ed, is that the top person hops from one institution to the next or retire if she or he learns problems.  Therefore, they do not need to make a plan in managing the institutions, except exit plan for themselves.  This is another example of systematic errors that cause by moral hazard which the Association has discussed many times in the past.  Therefore, none of any analytics can be used effectively, if an organization is run without the P magic word or where the systematic errors exist.

Systematic Errors Have Increased the US Student Loan Debt By The Factors Of +σ

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In the absence of random and systematic errors, the average amount of student loans will equal to μ as shown below.  However, the real world data may not be μ.  Rather μ ± σ.  Therefore, the average amount is distorted by the standard deviation (σ).  The source of these distortions could have been caused by the 4 endogenous actors in the system as the Association has discussed in its BLOG.  Even the US lawmakers have admitted the existence of σ.  These are the proofs that σ does exist.  Hard evidences on the borrowers side also confirmed the problems.  Therefore, these issues cannot be denied any longer, and by anyone.

Systematic errors (SE) have distorted the student loans away from its population average amount by the factor of +σ minus errors due to randomness.  Distortion increases could have been caused by any factors, but systematic errors are one of the most damaging elements.  Letting these SE to occur is equivalent to pushing the current $1.5 trillions student loans to grow out-of control.

No analytics can cure for these type of errors for they may have been intentionally fed into the system by any of the players, or because moral is not in the equation when the decision or policy is made.

Do US Student Loan Problems Produced As The Results of Systematic Errors?

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Before answering the above question, one needs to understand what is systematic error in the education industry, who are the producers and sources of these errors as the first step to understand the issues.  There are four major players (1). Regulators; (2). Administrators; (3). College decision makers and (4). American public i.e., students and their family.  The first-three group, as it has discussed in this BLOG are endogenous to the system, while students are exogenous, i.e., they do not have the power to influence the outcome.

When the regulator permits the for-profit institutions and the student loans servicing companies to go-public or selling their stock in Wall Street then we have another entity added as an exogenous force.  Therefore, all together there are 4 endogenous and one endogenous variable.

Let us define what could be the systematic errors in the education industry?  This type of errors are well known in the Physic research area where researchers collect information, data or events, based on tainted equipment that consistently produces biased outcomes.  One needs to know what is the desirable or optimal outcome before she or he is able to make the inference that other than the optimal outcome is the undesired or tainted results.  In the education industry the equivalent of “tainted outcome” are numerous such as lower graduation rate, pilled up student loans, unaffordable tuition, lower delivered education qualitys, higher operating cost, inefficiency and many others.

Now, let us take the following important questions:  Who are among these subsystems (endogenous variables) are the instruments that could have direct impact to generate the tainted outcomes?  The first-three members of the endogenous group have the power to make the public policy, while the fourth member of the group may have the power to affect the public interests through corporates’ policies.

  • Regulator/law makers’, government and college administrator’s objectives should be consistent with the tax payers’ interests.  If not then they potentially are the sources and producers of the systematic errors.
  • The Wall Street’s interests are leaning toward the corporates’ objective is to make profit.  Therefore, it may generate conflict with the tax payers’ interests.  This group will have higher probability to make systematic errors.

Things are out-of control if all these endogenous forces directly or indirectly working against the public interests.  The $1.5 trillion piled-up of current student loans which show no sign of slow down is nothing but showing the results of different policies that have been implemented by these endogenous groups caused the systematic errors.  Therefore, there is no cure for the current US student loans issue, until after these systematic errors are managed, minimized or eliminated.

What Is The Guiding Principle To Manage An Institution?

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The answer to this question is, it depends.  For public companies who sell their stock in the Wall Street—the CEOs often use the EPS (earning per share).  These companies are trying to beat the Wall Street analysts on the estimated EPS each quarter.  Otherwise, their stock price will be punished. Therefore, the motivation for these companies is profit margin.  This makes perfect sense for the for-profit entities.  The questions one may ask, will this EPS always has a positive correlation with time?  The answer is yes, so long there is a new innovation that will drive to the new product developments.  Otherwise, it will stagnant.

Let us turn our discussion to the education industry.  As the public may know–there are for-profit higher learning institutions and non-profit Colleges and Universities.  The for-profit certainly follows the Wall Street’s example.  Especially those institutions who are selling their stock in the Market.  Therefore, there is no surprise when the data show that attendees of these institutions are experiencing difficulties related to their student loans.  This may imply whoever permits these type of institutions to operate has made a suboptimal decision.

What about the non-profit higher educations?  What are the guiding principles that they look and apply in managing their institutions?  Do they have any guidelines?  Well, the School Board has the final say about a school policy.  Therefore, members of this Board also have to apply some sort of principles.  Did they?

If the current student loans data are the reflection of the results of these collective principles that have been applied in the industry for ages, then the answer is no.  Majority of the School Board and, therefore US Higher Learning institutions may not have a clear guideline when managing the school, except for using traditional metrics such as enrollment growth.  This student enrollment growth is equivalent with the EPS in the Wall Street.  Now that public may have a better picture what has happened.  This situation even more dire in the absence of strong regulations.

However, Adam Smith who is considered to be the Father of Capitalism has argued that including moral consideration when making strategic decisions produced results that are far superior than those of produced merely based on ratio or rational expectation.  Your thoughts?