Subscribe: RSS Feed | Twitter | Facebook | Email
Home | Contact Us

Are Student Loans an Impending Bubble? Is Higher Education a Scam?: Part II

Posted by Larry Doyle on June 22, 2011 7:52 AM |

Few commentaries here at Sense on Cents have received as much attention as that which I wrote a few months ago highlighting issues within the student loan market and questioning the value and integrity of higher education. That commentary, Are Student Loans an Impending Bubble? Is Higher Education a Scam? hit a nerve on many fronts.

Today, our focus on this segment takes a new twist and we get a “behind the scenes” look at the intrigue and innuendo encompassing a hedge fund which would seem to believe that the student loan market may be a bubble and higher education for profit may just be a scam.

Potential of insider trading, investigative hedge fund research, prospects for increased regulation of the for profit education industry. This story would seem to have it all. 

Let’s navigate as the Project on Government Oversight released just yesterday a scathing commentary entitled POGO Investigation Provokes Probe from Private Dick, (interesting choice of words!!),

If only I’d seen it coming. With barely a “hello” after I picked up the phone last week, Diane Schulman launched into a slew of questions about an item I’d just written for POGO’s blog, an item about arguably inappropriate, possibly illegal information-passing between the Department of Education (DoED) and Wall Street short sellers.

Never having spoken to Schulman before in my life, I asked her who she was working for. She told me that she did “research” for some outfit called The Indago Group on behalf of investment companies and law firms.

I didn’t realize that Diane Schulman was actually a licensed private investigator in league with a troubled New York hedge fund.

Specifically, Schulman has been helping out one of Wall Street’s biggest short sellers, a guy named Steve Eisman. But she didn’t mention that.

Eisman won fame and especially fortune betting on the collapse of the housing market. I’d cited him in my piece last week because of his latest target: the for-profit education sector, which includes firms like giant Phoenix University, that the Dept. of Education is trying to regulate. Harsher regulation, which Eisman had been lobbying the DoED to endorse, would have meant bigger profits for him and other short sellers.

According to emails obtained under the Freedom of Information Act, Schulman personally assisted Eisman in his many contacts with only-too-willing top officials at the Department eager for the dirt he (and Schulman) had dug up on for-profit companies.

And, for some of those companies, there was a lot to dig, especially dirt on how firms reaped tens of millions of dollars in federally guaranteed student loans, leaving many of their graduates in debt and unable to find jobs.

Eisman and Schulman are not credentialed education experts, and neither seems to have shown any particular prior commitment to working in the field. Yet emails show Schulman personally importuning DoED on behalf of Eisman and others connected to his FrontPoint Financial Services fund (owned by Morgan Stanley).

Some of the officials she targeted were in the process of formulating rules from which short sellers stood to profit. At least one such meeting actually took place last year. (FrontPoint is currently in reorganization amid charges of insider trading—none of which involve Eisman specifically. He recently indicated he is leaving the fund.)

In her phone call to me, Schulman labeled the widespread criticism of short sellers “a red herring.” Then she got down to business, repeatedly asking me to provide evidence I might be aware of that short sellers (presumably like her client, and possibly herself) could have received leaks of confidential, market-sensitive information from the DoED, a central point of my article.

If short sellers had gone on to buy and sell stocks based on confidential information from DoED, it could amount to insider trading, subject to civil and criminal penalties.

Not grasping that she might have a distinctly personal stake in the matter, I told Schulman that Morgan Stanley—owner of Eisman’s fund, FrontPoint Financial Services—had issued a report to investors in the spring of 2010 that specifically refers to a “leak” about the timing and substance of the Education Department’s impending actions.

That provoked a strong objection from Shulman. I thanked her for being in touch, ending the increasingly weird phone call.

Schulman’s bio mentions that some 20 years ago she worked as an “investigative producer” for CBS and ABC affiliates in Boston. Helping out a New York hedge fund probably pays better.

While the POGO writer clearly takes serious exception to the manner in which Ms. “Dick” Schulman engages him, I welcome bringing attention to this story for a number of reasons including:

1. To highlight an investigative practice of a high profile Wall Street hedge fund manager.

2. The potential for insider trading activity as alleged by the writer.

3. Perhaps most importantly, further confirmation of the fact that the student loan market likely is a bubble and for profit education likely has elements of being a scam.

You can not make this stuff up.

Navigate accordingly.

Larry Doyle

Isn’t it time to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook?

Please get your friends and colleagues to do the same. Thanks!! I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Bill Gross

    Mr. Gross weighs in with some strong opinions and data on this topic,

    College was great as long as the jobs were there.

    Now, however, a growing number of skeptics wonder whether it’s worth the time or the cost. Peter Thiel, an early investor in Facebook and head of Clarium Capital, a long-standing hedge fund, has actually established a foundation to give 20 $100,000 grants to teenagers who would drop out of school and become not just tech entrepreneurs but world-changing visionaries. College, in his and the minds of many others, is stultifying and outdated – overpriced and mismanaged – with very little value created despite the bump in earnings power that universities use as their raison d’être in our modern world of money.

    Fact: College tuition has increased at a rate 6% higher than the general rate of inflation for the past 25 years, making it four times as expensive relative to other goods and services as it was in 1985. Subjective explanation: University administrators have a talent for increasing top line revenues via tuition, but lack the spine necessary to upgrade academic productivity. Professorial tenure and outdated curricula focusing on liberal arts instead of a more practical global agenda focusing on math and science are primary culprits.

    Fact: The average college graduate now leaves school with $24,000 of debt and total student loans now exceed this nation’s credit card debt at $1.0 trillion and counting (7% of our national debt). Subjective explanation: Universities are run for the benefit of the adult establishment, both politically and financially, not students. To radically change the system and to question the sanctity of a college education would be to jeopardize trillions of misdirected investment dollars and financial obligations.

    Conclusion to ponder: American citizens and its universities have experienced an ivy-laden ivory tower for the past half century. Students, however, can no longer assume that a four year degree will be the golden ticket to a good job in a global economy that cares little for their social networking skills and more about what their labor is worth on the global marketplace.

  • james

    Gross makes some good points in highlighting the expenses and level of debt but he is also wrong to paint a Liberal Arts education with a broad brush.

    If future generations can not write and think cogently, I can assure you our nation’s decline will escalate rapidly.

    • fred


      You miss his point, liberal arts or more specifically the ability to communicate effectively, should be the foundation of any education, that being said, in order to have a competative workforce in a global economy where business can go almost anywhere to find labor, we need to educate more scientists, engineers and techs or settle for low end service jobs.

      There’s a reason why Vertex decided to locate in Boston today, a technically educated labor force with a skill set in demand.

  • Steve

    Interesting stuff. Would seem to be a fine line between real investigative research and stepping over into the world of insider trading. Also interesting to see how hedge funds are active in bringing issues to the attention of public officials.

    On one hand that can be a very good thing. On the other, influencing policy and profiting from it via the use of confidential information is a dangerous game.

    Hard not to believe that the major banks/brokers do not do this all the time via their people and contacts in Washington. Do you think Goldman and JPM don’t engage in this activity? Defies logic to think otherwise.

    Interesting look behind the scenes. Thanks for highlighting it!!

  • Sam

    Front Point has been rocked by an insider trading scandal centering on Chip Skowron and his getting insider knowledge. Bloomberg reports he is looking to cut a deal,

    Maybe just maybe Frontpoint had some compliance issues.

    Also interesting that Morgan Stanley supposedly wrote the report questioning leaks when Frontpoint had a close relationship with MS.

    What a tangled web.

  • LD

    I reviewed the site for The Indago Group and learned,

    The Indago Group a boutique independent research firm serving both financial institutions and law firms. Our company is comprised of experienced former investigative journalists. We do not give investment advice. Instead, we investigate the target corporations by examining public records and gathering intelligence to provide financial clients with a unique perspective on corporate business practices. In addition, we provide investigative services to law firms specializing in securities fraud and false claims litigation.

    On the surface would seem to fill a role and niche that can be extremely useful. The question begs whether what they learn would fall into the realm of insider and confidential.

    Where is the line between real strong investigative research and utilizing insider and confidential information?

  • LD: Recommended

    A good read on this topic was recently published at Bloomberg, U.S. Universities Feast on Federal Student Aid,

    The public is in a foul mood over increasing college costs and student debt burdens. Talk of a “higher education bubble” is common on the contrarian right, while the Occupy Wall Street crowd is calling for a strike in which in which ex-students refuse to pay off their loans.

    This week, President Barack Obama held a summit with a dozen higher-education leaders “to discuss rising college costs and strategies to reduce these costs while improving quality.” The administration plans to introduce some policy proposals in the run-up to the presidential campaign.

    Any serious policy reform has to start by considering a heretical idea: Federal subsidies intended to make college more affordable may have encouraged rapidly rising tuitions.

    It’s not as crazy as it might sound.

    As veteran education-policy consultant Arthur M. Hauptman notes in a recent essay: “There is a strong correlation over time between student and parent loan availability and rapidly rising tuitions. Common sense suggests that growing availability of student loans at reasonable rates has made it easier for many institutions to raise their prices, just as the mortgage interest deduction contributes to higher housing prices.”

    It’s a phenomenon familiar to economists. If you offer people a subsidy to pursue some activity requiring an input that’s in more-or-less fixed supply, the price of that input goes up. Much of the value of the subsidy will go not to the intended recipients but to whoever owns the input. The classic example is farm subsidies, which increase the price of farmland.

    Increasing Salaries

    A 1998 article in the American Economic Review explored another example: federal research and development subsidies. Like farmland, the supply of scientists and engineers is fairly fixed, at least in the short run. Unemployed journalists and mortgage brokers can’t suddenly turn into electrical engineers just because there’s money available, and even engineers and scientists are unlikely to switch specialties. So instead of spurring new activity, much of the money tends to go to increase the salaries of people already doing such work. From 1968 to 1994, a 10 percent increase in R&D spending led to about a 3 percent increase in incomes in the subsidized fields.

    “A major component of government R&D spending is windfall gains to R&D workers,” the paper concluded. “Incomes rise significantly while hours rise little, and the increases are concentrated within the engineering and science professions in exactly the specialties heavily involved in federal research.”

    The study’s author was Austan Goolsbee, then and now a professor at the University of Chicago but until recently the chairman of the president’s Council of Economic Advisers.

    Goolsbee did similar research, with similar results, on the effects of investment tax credits for capital equipment. Much of the benefit of such subsidies, he found, goes not to the company buying the new equipment but to the manufacturers who make it. A 10 percent investment tax credit raises equipment prices by 3.5 percent to 7 percent.

    Like the scientists and engineers who benefit from R&D subsidies, the workers who make capital equipment also capture many of the subsidies’ benefits. Their wages go up, Goolsbee found, by 2.5 percent to 3 percent on average and as much as 10 percent, depending on the workers’ particular characteristics.

    Goolsbee declined a recent request to comment on the subject, but the parallels to higher education are hard to miss.

    In the short-term, the number of slots at traditional colleges and universities is relatively fixed. A boost in student aid that increases demand is therefore likely to be reflected in prices rather than expanded enrollments. Over time, enrollments should rise, as they have in fact done. But many private schools in particular keep the size of their student bodies fairly stable to maintain their prestige or institutional character.

    Soaring Enrollments

    The new breed of for-profit institutions has grown much faster than its nonprofit competition. Traditional private colleges expanded their enrollments 27 percent from 1999 to 2009, an increase of about 664,000 students, while for-profit private colleges grew 478 percent, by almost a million students.

    Figuring out exactly what’s going on is tricky, because colleges price discriminate, offering steep discounts to some students while charging list prices to others. Treating published tuition as the real price of a college education is like believing the sticker price on a used car.

    Some of the most elite schools, which could theoretically jack up their prices the most, face the most pressure from alumni and others to use their ample financial resources to extend more student aid.

    At the most selective private schools, as defined by the College Board, federal grants and tax benefits for the average student are indeed lower than at less-selective schools, both as a percentage of all aid and in absolute dollars. These selective institutions’ own grants to students are much larger than elsewhere. Yet even after all this aid, they have the highest net prices: an average of $16,577 net tuition and fees (not including room, board and other expenses), compared with $10,823 for moderately private selective schools.

    On the whole, it seems that universities are like the companies making capital equipment. If the government hands their customers the equivalent of a discount coupon, the institutions can capture at least some of that amount by raising their prices — especially when demand for their product is increasing independent of aid, because a college degree promises to pay off in higher wages. They can then pay their employees more or simply not economize as they might otherwise have to do. Federal aid may also allow institutions to shift fundraising efforts away from drumming up scholarships and toward raising money for buildings, new programs or big-name professors.

    Inflated Prices

    This doesn’t mean that colleges capture all the aid in higher tuition charges, any more than capital-equipment companies get all the benefit of investment tax credits. But it does set up problems for two groups of students in particular. The first includes those who don’t qualify for aid and who therefore have to pay the full, aid-inflated list price. The second encompasses those who load up on loans to fill the gaps not covered by grants or tax credits only to discover that the financial value they expected from their education doesn’t materialize upon graduation.

    That’s the situation many young people find themselves in today, which is one reason for their anger. The other is a widespread feeling, which the recession has intensified, that higher education is unfairly insulated from the everyday competitive pressures most people have to cope with. Instead of having to find ways to operate more efficiently and deliver ever-more value without raising costs, the way private-sector managers do, college administrators seem able to pass higher and higher bills on to their customers and the public.

    A good chunk of the educated public has decided that college educators are decadent and lazy. Many are positively lusting to see higher education get its Detroit-style comeuppance.

    This attitude is unfortunate and often unfair, but it’s the direct result of decades of federal policies. Any strategy to reduce college costs needs to look beyond traditional subsidies to remove some of the insulation that stifles innovation and feeds public resentment.

    • fred


      To take the analysis a step further, if the gov’t cuts back on student loan or grant funding programs, no worries for U.S. colleges and universities, they’ll just step up their foreign student recruiting and instead of educating our children, schools will be educating foreign students with a large percentage then choosing to return to their country of origin after graduation.

      We lose on two counts, 1) our children don’t get access to the best education, 2) our foreign competition gets U.S. educated talent.

      It’s already happening!

Recent Posts