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Posted on 11/14/2011 4:14:34 PM PST by dennisw
Pittsburgh, Pennsylvania – A month ago, at an investment conference in Baltimore, my colleague Eric Fry asked if I think there’s another “bubble” out there that’s going to pop. My reply was that I believe the “education” bubble is destined for doom. It’ll be just one more thing to smack down the US economy, and makes for another reason — as if we need more — to hold precious metals as portfolio protection.
In the US, there’s over $1 trillion of “student loan” debt on the books. This is money that people borrowed from banks and government agencies (Sallie Mae comes to mind). The funds flowed through the “education” landscape and cash flow mills, paying for faculty, administrators, buildings, overhead and much else.
This gusher of student loan money over the past two generations (!) has been a key factor — THE key factor — in the super-inflation of the cost of education. That is, the more money that goes for loans and grants, the more leeway and incentive the schools have to raise tuition and let internal costs soar.
At the student level, some people borrowed to pay the tuition at impressive universities, where they received things like medical degrees and Ph.D.s in physics. Good for them.
But at other times and places, students borrowed funds to attend school and major in things for which there’s not much of a demand in the true, competitive economic marketplace. You know what I mean, right? Courses with the word “studies” appended to the end come to mind.
How bad is the student loan situation? Currently, around 9% of student loans are “slow pay,” if not in technical default. That’s after two years of alleged economic recovery from the crash of 2008-09. To make matters worse, it’s next to impossible to discharge student debt, even in bankruptcy.
So I don’t have a warm feeling about this student debt bottomless pit.
Let’s think it through. We have a generation of young people, many of whom with sizeable student debts, along with their underwater basket weaving degrees and such. They are unable to obtain the jobs they believed their degrees would accord them.
So there’s a lot of resentment and bitterness, which I witnessed firsthand during a recent walk through the “Occupy Pittsburgh” crowd downtown. I saw a lot of protest signs concerning student debt. It’s a very raw nerve.
The bottom line is that a lot of US young people will never find suitable employment that aligns with their education. Consequently, they’ll never earn enough to repay their student loans. Yet due to the banking lobby, and how that particular cabal has gamed the legal system, the indebted young basket weavers of the nation can’t get a classic “fresh start” in bankruptcy.
Something has got to give, and I believe we’ll see some sort of crash in the student loan markets. The student debt sector has failure built into it, down to the debt-DNA.
Also along the lines of the education bubble popping, I’ve been pondering where and when the first pin would penetrate the latex. Just this week, I believe we may have seen it: The Penn State scandal.
I’ve always had a high regard for Penn State, which is one of America’s great public universities. But if you’re following the news, you’ve likely seen where Penn State President Graham Spanier and iconic football coach Joe Paterno were just fired.
Neither Messrs. Spanier nor Paterno personally committed any indecent act. But they, apparently, knew that a subordinate within the university hierarchy — within the nationally ranked football program — was totally out of line (and I’ll spare you the disgusting details on that).
In a manner reminiscent of how certain churches cover up bad acts — “for the greater benefit of the institution,” goes the excuse — Penn State never properly handled its issues. After a period of time, however, the pot boiled over. A grand jury convened, and people testified.
This week, several Penn State officials and a former high-level Penn State coach were arrested. The Pennsylvania attorney general announced a major prosecution. All around, it’s a bad time for the Nittany Lions.
Yes, this may just be an “isolated” incident of one bad guy doing something bad, and several other people sweeping the issues under the proverbial rug. But the larger story here tells another tale of how some things in the university sector have gotten just too darn big — as in “too big to fail” — until they fail.
With Penn State, we’re seeing Big Football fail, and take down Big Coaching — as in Joe Paterno. This failure is taking down Big University Management too — as in, the president of the institution.
University managements — and, I hope, their boards of trustees — across the country had better be watching the Penn State scandal and looking hard in the mirror. They had better be asking themselves the hardest questions and looking under those lumpy rugs.
This Penn State scandal is not just some issue of having an academically ineligible kid playing linebacker for a few minutes in the fourth quarter. Or even that the star quarterback “borrowed” a Corvette automobile from some car dealer who’s a major football booster.
No, when people start to dissect this Penn State thing, they’ll have to follow the money. At Penn State, Big Football meant Big Money, and it spawned an entire culture that affected everything — permeating the overall university culture.
And while people are dissecting the Big Football money, they had better check out the Big Student Loan money, too — courtesy of government grants and loan guarantees. What ELSE is going on in the dim shadows of the locker rooms and shower stalls, what with all that money at stake? What’s going on with the fundamental mission of the education institutions of this nation?
The Big Money, provided so liberally by the student lending institutions, created lots of excesses and corruptions — great and small — that are just beginning to unwind.
Big Money means that people wind up doing whatever it takes to keep the cash flowing. It means that people will find some way to justify cutting corners, even ethical, moral and criminal corners. Until it all blows up.
Don’t sell your gold.
The Public schools have done their job well.
Tragic, really, how easily America has given up her freedoms for “free” babysitting, and the resulting loss of the heritage all children of America were entitled to.
This is moronic. The only way a lender will hand over large sums of money without collateral is if the debt cannot be discharged through bankruptcy. The problem isn't the banking lobby - it's politicians who want to use the banks to lend money to their constituents without any regard to their demonstrated ability to repay those loans.
In fact, I’d say the problem isn’t the banking lobby - it’s the education lobby. Students will go school regardless of whether loans are available. What loans affect is (1) student indebtedness and (2) the amount of money people in the education industrial complex are paid. The bigger the loans, the higher the salaries of the educrats, and the more money these educrats have to funnel towards Democratic political campaigns.
Wait a minute. My understanding is that student loans are guaranteed by the federal government.
That means that the bankers don't need to game the legal system. They were still getting their money back when a student loan could be discharged in bankruptcy.
The law prohibiting discharge of a student loan protects the federal government, and therefore the taxpayer. The law was enacted because too many students were declaring bankruptcy soon after they finished school and effectively stiffing the federal government (and taxpayers).
The "students" were gaming the system, and this law shut them down. The banks were simply the middleman.
I posted another reply: I don't think the banks needed to worry about that. Student loans are guaranteed by the federal government.
If a student loan is discharged through bankruptcy, the federal government picks up the tab, and the taxpayers get stiffed.
In virtually every school district across the nation, pension manipulation runs rampant.
The following is a report commissioned in NJ - during the Corzine administration, go figure. So this was prepared for corrupt Democrats (warning, be in a relaxed and apathetic mood before you read this - it’s just a drop in the bucket).
http://www.state.nj.us/sci/pdf/SCIHigherEdReport.pdf
Grabbing all they can is the national pastime of the education extortion industry.
After all, it’s for the kids, right ?
That’s the deal. To banks, it’s just a loan, that’s the business they’re in.
When lending money, one gets as many co-signers and guarantors as possible, right ? Whatever idiot will guarantee someone else’s loan - you give’m a pen, smile, and say sign here. It just makes the portfolio of loans worth more, as the collection rate gets closer to 100%, which, after all, is what a bank needs to remain solvent, a collection rate somwhere near to 100%. Loans are assets to the bank. They need to get all the interest due plus the principal.
This is trouble with most sovereign debt today (including trillions of dollars in U.S. treasuries); the governments can only pay redeem the bonds they have issued by selling more bonds. They have no other way to pay the principal back as it comes due.
Exactly. The Universities are more to blame than anyone.
And the market may not even get a reacharound out of the deal.
The University scam is right up there with the housing scam. None of those kids knew what the were signing up for...just like Jose the janitor making 12 bucks/hr signing a 300,000 mortgage.
Having been abused by the system..none of them will be supporting it. Occupy is the tip of the iceberg.
“..or payoff?????”
DING DIG DING WINNAWINNA!!
501c3’s..the “not-for profit” IRS designation...=laudromats
Anyone making $12 an hour knows they can’t afford a $300,000 mortgage.
Anyone taking out student loans to pay for a private college education at $45,000 a year knows it’s not a good investment.
Anyone running up $25,000 in credit card debt knows they’re going to have trouble paying it off.
The concept of personal responsibility is in short supply - even here at a conservative site.
As a side note, is there anyone here who can convince me that it is a mistake to pay off a fixed rate massive student load with an existing variable rate home equity line at HALF the interest rate?
(And the equity line is not essential for emergencies due to savings).
Cheers!
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