Sense on Cents

“We know the model is not sustainable,” said Lawrence T. Lesick, vice president for enrollment management at Ohio Northern University. “Schools are going to have to show the value proposition. Those that don’t aren’t going to be around.”

(The New York Times; May 14, 2012)

The student loan debt bubble is beginning to get a LOT of attention. As well it should.

That attention is deserved when a level of debt surpasses $1 TRILLION. The New York Times drew further attention to this situation this weekend in an extensive and very personal commentary, A Generation Hobbled by the Soaring Cost of College.

I have tried to draw focus to the MASSIVE size of this problem and its accompanying implications over the course of the last year in writing the following: 

1. Are Student Loans an Impending Bubble? Is Higher Education a Scam?; April 26, 2011

2. Are Student Loans an Impending Bubble? Is Higher Education a Scam?: Part II; June 22, 2011

3. Very Disturbing UPDATE: Student Loan Bubble and Seeking Arrangements; August 4, 2011

4. Student Loan Debt Bomb’s Collateral Damage; February 28, 2012

5. The Prohibitive Cost of Higher Education: A Racket?; April 10, 2012 

I provide these links only because they address a number of issues connected to this problem and it will hopefully serve as an easy resource for students and families involved in or facing student loan questions. What are some of the issues?

The very integrity of our college and university system. The costs of higher education in general. The impact this student debt bomb has on the development of new families, new housing starts, and our entire economy. The fact that there are young female students literally engaging in prostitution in an attempt to make their loan payments. I hope any young woman will seek other avenues to address their loan payments than resorting to prostitution.

Who else shares my concerns on the problems embedded in the student loan market?

Mark Cuban, who lays out in spades the ultimate impending doom and consequences of this problem. I fully concur with Mr. Cuban’s assessment which he comprehensively outlines in writing, The Coming Meltdown in College Education and Why The Economy Won’t Get Better Anytime Soon (credit to eWallstreeter):

Its far too easy to borrow money for college.  Did you know that there is more outstanding debt for student loans than there is for Auto Loans or Credit Card loans ? Thats right. The 37mm holders of student loans have more debt than the 175mm or so credit card owners in this country and more than the all of the debt on cars in this country. While the average student loan debt is about 23k. The median is close to $12,500. And growing. Past 1 TRILLION DOLLARS.

We freak out about the Trillions of dollars in debt our country faces. What about the TRILLION DOLLARs plus in debt college kids are facing ?

The point of the numbers is that getting a student loan is easy. Too easy.

What do I project will happen? Very simply, over time the demand for college education in general AND 4-year private colleges and universities specifically is going to tail off. In the process, these institutions of higher education are going to get increasingly squeezed financially to make ends meet.

Let’s further extend that thought. I think it is not only plausible BUT likely that over the course of the next decade we will witness a number of colleges and universities, primarily private, literally shut their doors.

Cuban delivers a similar dose of medicine in writing:

You would think traditional university educators would take notice. Beyond allowing some of their classes to be offered online, they haven’t. They won’t.

Its the ultimate Innovators Dilemma. They don’t believe they should change and they won’t. Until its too late. Just as CEOs push for that one more penny per share in EPS, University Presidents care about nothing but getting their endowments and revenues up. If it means saddling an entire generation with obscene amounts of school debt, they could care less. This is how they get their long term contracts and raises.

It’s just a matter o time until we see the same meltdown in traditional college education. Like the real estate industry, prices will rise until the market revolts. Then it will be too late. Students will stop taking out the loans traditional Universities expect them to. And when they do tuition will come down. And when prices come down Universities will have to cut costs beyond what they are able to.

They will have so many legacy costs, from tenured professors to construction projects to research they will be saddled with legacy costs and debt in much the same way the newspaper industry was. Which will all lead to a de-levering and a de-stabilization of the University system as we know it.

And it can’t happen fast enough.

The cards are all on the table. I actually think this projection of impending challenges, troubled times, and ultimately doom for selected institutions is fairly easy to make.

From an investing standpoint, I wonder how we could short our college and university market as a whole and selected schools specifically. Anybody out there have any ideas?

Navigate accordingly.

Those involved in the student loan market in whatever capacity, please share your thoughts and opinions. Information is everything. Thank you!!

Larry Doyle

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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.

This entry was posted on Monday, May 14th, 2012 at 11:27 AM and is filed under General, student loans. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.