Skip to comments.The next bubble: student loans and Academia
Posted on 02/05/2009 5:28:01 PM PST by SeekAndFind
Picture a market with overpriced product, driven by government-subsidized consumers that create an artificially high demand with overextended debt, on which major institutions rely as investments. A description of the American housing market, 1998-2008? Sure, but it also describes the American college market, and Kathy Kristof writes for Forbes that Academia may be the next bubble to pop:
"Misguided easy-money policies that are encouraging the masses to go into debt; a self-serving establishment trading in half-truths that exaggerate the value of its product; plus a Wall Street money machine dabbling in outright fraud as it foists unaffordable debt on the most vulnerable marks.
College graduates will earn $1 million more than those with only a high school diploma, brags Mercy College radio ads running in the New York area. The $1 million shibboleth is a favorite of college barkers.
Like many good cons, this one contains a kernel of truth. Census figures show that college grads earn an average of $57,500 a year, which is 82% more than the $31,600 high school alumni make. Multiply the $25,900 difference by the 40 years the average person works and, sure enough, it comes to a tad over $1 million.
But anybody who has gotten a passing grade in statistics knows whats wrong with this line of argument. A correlation between B.A.s and incomes is not proof of cause and effect.
Offsetting that million-dollar income discrepancy is the $46,700 four-year cost of tuition, fees, books, room and board at a public school and $99,900 at a private oneeven after financial aid, scholarships and grants. Add all this to the equation and college grads dont pull even with high school grads in lifetime income until age 33 on average, the College Board says. Even that doesnt include the $125,000 in pay students forgo over four years."
Its impossible to recap Kristofs thorough reporting here; one has to read the entire column. One difference between the housing subprime market and what Kristof describes as the student subprime market is the lack of government guarantees on the most profitable of the loans. Lenders can do better by avoiding government purchase of the paper, as they can avoid some of the restrictions.
Otherwise, the student lending market carries most of the same characteristics of the housing meltdown: exaggerated claims, predatory lending, and overburdened borrowers who quickly learn that theyve gotten in over their heads. Many of these loans come at credit-card interest rates, as the regulations do not impose a cap. What happens? Students default, ruining their credit for years and leaving the lenders and their investors with empty pockets. SLM, called Sallie Mae, has lost 80% of its shareholder value thanks to what it called nontraditional lending, although its CEO mananged to cash out in 2007 with $72 million in stock sales before the bill came due. If that sounds familiar, see Franklin Raines and Fannie Mae.
The root cause of this impending bubble is the same for the housing market. Politicians decided that all students should go to college, just as they decided that all people should own their own home. Those are certainly admirable goals, but prescriptions for disaster as public policy. Rather than create public colleges with no requirement for tuition, which would have been the honest way to implement that policy but completely unpalatable as a spending plan, the federal government pushed for tuition loans, upping the demand at universities. With billions of dollars flooding the market and consumer demand dramatically rising, prices increased across the board, predictable from the basic economic law of supply and demand. When prices increased, the subsidies increased, which increased demand and pushed prices higher, creating a vicious cycle exactly as it did in the housing market.
Government has to get out of the lending markets altogether. If politicians want to subsidize education, they should create more supply and lower the price in order to create the increased accessibility they want, not create bubbles in lending markets. Better yet, government should stay out of it altogether and let the market take care of itself.
Given the fact that the economy is in the tank for as far as the eye can see, these kids won’t be able to get jobs or pay back loans. They will start life by defaulting.
That Forbes article is garbage, it quotes two people with law degrees, each making 100K+ a year with a combined student loan debt of only 190K as saying “two people with this much debt just shouldn’t be together” making the claim that the marriage broke up because they didn’t have enough money to pay their debts. When the wife and I got out of school we pulled in 65K each and had a 200K mortgage and 120K in student loan debt and we still both drove nice cars and lived very comfortable because we spent responsibly, so I don’t know what this Forbes writer is talking about.
Going to an expensive university may be the worst decision I ever made.
I thought the government guaranteed the loans and therefore the lenders will always get their money back. Considering that you’re not allowed to bankrupt out of them, won’t they get the money sooner or later??
This amazes me how people so blindly except that tuition goes up more that the cost of living every year.
But the real problem is going to be those who went to those colleges that “advertise on the Jerry Springer show”....the ones that really not really accredited....but get Federal Student Aid and loans
Most of those people never graduate and usually end up with low paying jobs and cant pay the debt.
A lot of people like you and your wife will never be the problem with student loans...it will be the ones who went to those “neo-colleges”
Yes, the govt guaranteed it to the banks.
You will be chased for the rest of your life. No bankruptcy possible when it comes to college loans
Now that is a eureka moment. The government has been so good and helping that it has helped increase the cost of education, it helped increase the cost of housing and now inflated education loans are going to go bust but the difference is that those that hold them will find it much harder to get out of them.
True, they’re not going to land a job to pay back the loans going to the University of phenix online college, I agree 100%, I just wanted to point out that the author of the article is a clown with her examples.
Why don’t these young people go in the military first? Then you can go to college for way less. Also, what gives? Didn’t you need a degree in only certain fields years ago? Doctors, Lawyers, Accountants, positions of trust? What happened? Why does every living breathing person in America need a degree to be say, a secretary, or manager? Aren’t those positions where you would start at the bottom, work your way up, and gain the skills needed in a sort of apprenticeship role?
I didn’t go to college, I was a stay at home mom after marriage, prior, I worked my way up from an employee to a manager at a restaurant. Hubby went in the army, got HVAC training, and makes 53,000 a year (finally got another job after 4 months woo hoo). My oldest son, no college, he is a personal trainer for our city gym. Middle boy going to seminary next year, youngest not sure yet. What gives with all the college besides a money grab?
Meanwhile, the taxes in Idaho to support higher education are a fraction of what they are here. Someone explain that!
Many college degrees these days are a scam. I’ve known young people who went in debt for nearly $100,000 to get an advanced degree is something like “women’s studies”. There’s no way a degree like that will pay for itself.
Young people who get technical training in IT or as plumbers or electricians will be far better off financially.
Of course, everyone has to decide what they want, but a college degree is not necessarily a good financial investment.
This is what's known as an "anecdote".
Your opinion is duly noted.
College degrees do “open more doors” but I don’t think it makes too much difference *where* you go to college, and it is very affordable to attend community college for 2 years and then transfer to a 4-year state college after that.
I’m surprised financially strapped families don’t take that approach, and take out student loans instead.
Student loans are awful. They do nothing but drive up the cost of tuition.
I recommend that you take the time to read the full article so that you can properly understood my comments.
When an annual household income of 200+K a year can’t afford payments on a 30 year term of 190K debt there’s much more wrong in that house than the author states. To say that student loans broke up the marriage is absurd and downright stupid.
That's amazing! I must have left my webcam on, allowing you to monitor my FR reading!
Re-reading my post, I notice that I didn't say a thing about the article.
I just noted that your post was an "anecdote" (which it is), and that I had duly noted your opinion. Nothing more, nothing less.
Perhaps your screen name is apt. I know that your reply amused me. ;-)
No, no, you “instructed” us all that my post was indeed an anecdote, the implication being that it is somehow less valid as such. Perhaps english is not your first language and you don’t fully understand what you typed, and if thats the case I apologize for my rush to judgement.
Once again, I'm awed. You're the first one in years to see through my incomplete grasp of the English language!
Years ago, I tricked the boobs in college admissions into giving me a free ride on my phony English skills.
I'm just fortunate that you weren't one of the screeners...