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Student Debt Bubble: Impending Doom for Colleges

Posted by Larry Doyle on May 14, 2012 11:27 AM |

“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.

 

  • Peter S.

    It must be very hard for young graduates not to look the other way when faced with a moral dilemma in the work place and a college loan burden matching your rent.

  • Ross

    I suspect many private institutions borrowed extensively during the last decade to finance expansions and physical plant improvements. I know my school borrowed heavily to buy land and build.

    Perhaps you could initiate some kind of IR swap against these private university bonds.

  • fred

    LD,

    Isn’t this the generation that we are relying on to bail out social security, pay down our national debt and stabilize the real estate industry?

    I don’t see how they can possibly shoulder the financial burden with 1)under-employment, 2)an inappropriate skill set, 3)global competition pressuring real wages lower 4) more than 10,000 per day or 3.5 million baby boomers retiring every year, 4) interest accruing on interest for student loans outstanding.

  • LD

    Well put. As none other than Doubleline’s Jeff Gundlach said, there will be some sort of defaults (in terms of extending the age when benefits are paid, means tests, et al) involved.

    Cuban’s article is good. The NY Times article is equally outstanding. So many of our young students and their families have had little appreciation as to the amount of debt they were taking on and the implications of that debt.

    Sub-prime deja vu all over again.

  • Russ

    Larry,

    Liberals are trying to frame this debate as “Conservatives want to keep the average Joe from going to college.” The reality is that easy money is the reason that college tuitions have sky rocketed over the past two decades. Whenever the government meddles in the free market system, there are consequences…sometimes unintended. This may be one of those cases.

    As you know, there are also a number of non-credentialed schools that are gaming the system. They have been created solely for the purpose of getting as much easy money as possible, without regard to how their “education” affects their students.

    All of these programs are “feel good” programs that the majority of unattentive people who live in this country believe are doing the general population good. It’s a joke.

    • Bad Boy

      There’s another aspect of having a well educated population – it makes the country more economically competitive and more secure. International conflicts between modern nations are going to be increasingly economic rather than military. If we want the US to not fall further behind we need to have a work force able to compete in the markets of the 21st century.
      This means we need plenty of engineers, scientists and technicians. Also we need businessmen who understand the languages and cultures of other countries (how many times has American Business been burned b/c we didn’t ‘get’ the other guy?).

      But let’s not leave aside the military significance of having a well trained workforce and modern economy – right now Asian and European countries make a lot of the critical electronic parts which go into our high tech military… how smart is that? If we want an American to go into space we have to ask for a ride form China or Russia – how prestigious is that?

      Our high tech economy is more of a looming iceberg than the student loan meltdown – we train far too many entry level engineers in colleges (and import many from other nations) so the starting salaries are low, and when they get 5-10 years of experience they jump into management so they can make a better income… or go back to their home nation to start a company that will compete with the American company which gave them invaluable experience.

      When you look at all of these factors it looks like America WANTS to fail – or is extraordinarily short-sighted.

  • coe

    LD – I believe this “time bomb” has massive implications…you have long pointed out how our education system is failing to remain competitive vs much of the developed world..our “literacy” in math and the sciences has been on the decline for decades..the nature of the college finance system – especially so at the private schools – is anachronistic, mispriced, and vulnerable..the problems graduating seniors now face in “monetizing” their educations are well chronicled and will not be solved anytime soon – especially with the current Administration’s thinking that bigger government is the answer to all of society’s problems..only fractions of the dollars allocated in the crisis linked small business lending program have actually found their way into loans, the loans into small business growth, and business growth into jobs! Somewhere/somehow the misguided values of society have directed college students into law school, into MBA programs – not intrinsically evil in itself, but we have lost our liberal arts compass – i.e. an understanding of the arts, philosophy, religion – the intrinsic worth of our human dignity and the responsibilities to build a community of man…no jobs there, I guess…when a year’s tuition, room and board at a well thought of private school crests $50K, and that is an after-tax number,it’s no wonder things have gone haywire..btw, watch how this epidemic spreads globally – consider the demographics..I may hail from days of yore, but I remember doing work/study at my college, holding a 25hr/wk part time job and taking 21 credit hours a a semester= as the oldest of four I needed to carry some college debt – but it was nonetheless a manageable number (no future in prostitution for me)…there is no nostalgia for the good old days, but honestly, I believe the product that the colleges delivered was a better one then…as an investor, one must be wary of the impending nightmare in delinquencies and non-payments in all forms of Student Loan programs…most states got caught up in the ARS problem as part of managing their guarantees on student loans and are trying to restructure those exposures…I’m drawn to remember a comic schtick by Stephen Wtight, who found himself fielding a phone call in the middle of the desert from his student loan administrator…when asked what he had been doing since college and why he wasn’t paying, the answer was simply that he was busy developing a weapon, and he would appreciate it if the bank stopped bothering him…funny?, listen to the original bit..prophetic, you bet…I remember some contrarians pointing out that “College was not for everyone”…have we reached a point in our own devolution where the truth is that “College is only affordable by those blessed by parents with resources” – just another brick in the wall as we march toward the decline and fall of our American way of life…you nailed it again, LD!!!

  • LD

    Coe,

    Speaking of Mr. Wright, I had never heard of him but it sounds like he has a heavy Boston accent so he must be a good guy. Figured we would share this student loan humor with the faithful…

    I got into an elevator at work and this man followed in after me… I pushed “1” and he just stood there… I said, “Hi, where you going?” He said, “Phoenix.” So I pushed Phoenix. A few seconds later the doors opened, two tumbleweeds blew in… We were in downtown Phoenix. I looked at him and said, “You know, you’re the kind of guy I want to hang around with.” We got into his car and drove out to his shack in the desert. Then the phone rang. He said, “You get it.” I picked it up and said, “Hello?”… The other side said, “Is this Steven Wright?”… I said, “Yes…” The guy said, “Hi, I’m Mr. Jones, the student loan director from your bank. It seems you have missed your last 17 payments, and the university you attended said that they received none of the $17,000 we loaned you. We would just like to know what happened to the money?” I said, “Mr. Jones, I’ll give it to you straight. I gave all of the money to my friend Slick, and with it he built a nuclear weapon… And I would appreciate it if you never called me again.”

    • coe

      I at least was somewhere in the ballpark. It really is no joke, as you know, LD…the burden on the student and the family (especially if there is a cosigning involved) is almost too overwhelming to comprehend…this “investment” is proving quite a bit more ephemeral than the traditional major investment that Americans take on – i.e. a mortgage – at least there one gets shelter out of the process…I think the colleges are one of the greatest marketing scams perpetrated on the American psyche…if you measure the actual time the kids are in class, the costs are staggering..I don’t deny that college is a place to learn how to grow up, manage first time freedoms, make both good and bad choices, make lasting friendships, and hopefully learn something about oneself and about some stuff – but at what price? I would suggest families consider the community college feeder system for the first year or two…so many success stories to point to at a fraction of the cost before transferring to a “name” school for the degree…not what people want to hear nor what has been sold…and as for the quality of workers produced, I can honestly say over some 40yrs in financial services, there are legions of non-college kids who perform with grace, ethics, and tremendous success

  • Bill

    College costs, like medical costs, have far outstripped general inflation. The data indicate every time federal college aid has increased, college costs have gone up at least commensurately. Many of these colleges and universities are quite similar to the public employee unions in terms of the explosion in cost of their maintenance. And lastly, if something is unsustainable, it will cease to be so.

  • Patricia

    I loved learning about this. You provide material which gets the mental juices flowing — I appreciate this very much.

    I refused to carry any debt while attending college — which turned out to be a life saver as I became disabled during my final year. Today I am debt free and abide with the fast rule, ‘If I can’t afford to pay for it I don’t need it and will make do with what I have.’ I am glad I stuffed money into interest earning CD’s and ‘sat on it’ and allowed it to grow. Disabled window’s benefits alone would have left me to attempt and survive on $12,000.00 per year – not highly likely to use the term ‘survive’ in the same sentence as $12,000.00 annual income. With the interest earned from CD’s I manage to hang on and do in fact ‘live’ on the $12,000.00 annually where I allow all earned interest in the CD’s to roll over and GROW more wealth. I’m frugal and love GROWING money and this is the ONLY reason I am allowed any life while living under such harsh circumstances. I putter around out in my gardens on my mobility scooter and am so THANKFUL to have no debt. Disability/illness can strike at anytime – and will be unexpected and potentially devastating where DEBT can easily be a deal breaker in survival, especially with how our society caters to MONEY and those without it, no matter what circumstances they may be in, are pretty much going to be left as dead. Debt needs to be considered seriously.

    • LD

      Patricia,

      Thank you so much for sharing your story. There are real lessons there for all of us. In so many words, you just laid out the true essence of “sense on cents”.

      Given that we are in the midst of graduation season, I think we will bestow upon you a Sense on Cents Honorary Degree for Lifelong Wisdom!!

      In all seriousness, I commend you for your approach and thank you again for sharing it.

  • Big Problem

    I agree that this is a dark storm on the horizon… My student loan payments are 1200 per month and will be for the next 25 years if I don’t pay them off sooner.

    Fortunately, I chose a profession to where that is a good days pay, so by the grace of God, for now, it is not a hindrance to me and my family…

    Unfortunately, we all know that there are many more grads with less then profitable degrees that will be hammered by this…..

    Why will people pay their loans on time? We already saw the government forgiving mortgage debt.. there is no reason why they won’t do the same on college loans… It is bad enough, but the government is making it much worse for the future…

  • Black Swan

    If one can’t get student loan debt discharged through bankruptcy, the obvious thing to do is pick up as many credit cards as possible, use credit card money to pay off the student loans, and then show Capital One and the big credit card issuing banks that there really is nothing in your wallet.

  • Gault

    Simple solutions – eliminate every dean position with an “associate” or “assistant” included in the title and eliminate the fluff majors.

    Eliminate tenure, and require all faculty to teach.

    Require all universitities to use a certain percent of the endowment every year to support tuition reductions.

  • DJ

    My take on some of the potential deleveraging outcomes by 2020

    1.The market for college professors will be in a massive oversupply mode. Community colleges will be able to routinely pick up PhD’s to teach English 101.

    2. Expect colleges to start selling existing dorms as a condo or renting to the general public.

    3. Consolidation of administration functional overhead across regions (they will call it a consortium) to decrease payroll.

    4. Privatizing entire schools by selling outright to corporations. Especially corporate R&D programs taking over Science and Technology schools. This will be primarily motivated by proprietary or intellectual property.

    5. Radical escalation of selling land to develop on-campus senior co-housing.,apartments/condo. Buy a condo and get to take classes for life. (not all Boomers will want to live back in the dorms). This is currently happening on over 40 school campuses and expect this trend to increase 1000%

    6. Schools guaranteeing jobs with a degree in certain fields. This will be used to attract foreign students.

    7. Early and Mid cycle accelerated selling off entire schools/land to foreign governments,sovereign funds and corporations…Anyone remember Teikyo University in the late 1990’s?

    The shakeout is beginning. Alumni not getting good jobs will be unable to fully fund endowments. Entire programs will disappear, along with tenure ,Cola’s and paid sabbaticals. Economic Darwinism will be the free market mantra. This does not even include adaption to AI instruction that will completely replace human instruction in another 30 years.

  • LD

    From Bloomberg,

    May 15 (Bloomberg) — Colleges and universities are due for
    a meltdown as students are increasingly saddled with debt they can’t repay, according to Mark Cuban, the billionaire owner of the HDNet cable-television channel.

    As the CHART OF THE DAY illustrates, the amount owed on
    loans for tuition and other educational expenses exceeds the
    comparable totals for credit-card or auto debt, according to
    quarterly data from the Federal Reserve Bank of New York.

    Student debt rose to $867 billion last year, according to
    the New York Fed, whose methodology for compiling the data was
    revised during the year. More than $1 trillion of loans are
    currently outstanding, according to the Consumer Financial
    Protection Bureau.

    Borrowing to pay for higher education is “the collegiate
    equivalent of flipping houses,” Cuban wrote two days ago on his blog. “At some point, potential students will realize that they can’t flip their student loans for a job in four years.”

    For-profit education companies are among institutions at
    risk as students look to other schools, according to Cuban, who lives in Dallas and owns the Dallas Mavericks basketball team.

    He cited the University of Phoenix, run by Apollo Group Inc.,and Strayer Education Inc.’s namesake schools in the posting.

    Cuban received a bachelor’s degree in business
    administration from Indiana University’s Kelley School of
    Business in 1981. He went there because tuition was the lowest among top-10 business schools at the time, according to a story on Kelley’s website.

  • Swift

    Cuban & Doyle are essentially spot on, but most fail to recognize the education system as a whole when discussing ‘higher’ education.

    First off, 2 out of the 4 years needed for your average college degree are complete nonsense and a total waste of time.

    ‘Higher’ education needs to take a deeper look into eliminating the majority of pre-requisite and general education requirements that tend to drag the entire process out, thus creating a longer college career and pilling on more debt.

    We really need to focus on specializing our major courses and condensing the curriculum into a 2-3 year tenure. Let’s face it, the 5 months in astronomy and mid level calculus aren’t doing us favors today, and this is coming from a 22 year-old who is relatively fresh off the collegiate scene and not from the outside looking in.

    Colleges are just corporations hiding behind textbooks and multi-multi-multi-million dollar athletic programs. It’s time to rethink our education paradigm as a whole and better adapt to an ever evolving psychological landscape of innovators and fair minded pioneers.

  • Craig

    I teach part-time at a very expensive New York private university.

    It is more expensive per hour to take an undergrad foreign language class for credit in a large group setting taught to 20 students than to take private one-on-one lessons from the very same teacher who moonlights for extra money. 2X to 3X as expensive.

    That makes little sense.

  • Citizen

    A potential trade idea would be to short the publishers of textbooks that supply the colleges that have the highest proportion of student loans, particularly the for profit scam colleges.

  • LD: recommended

    “The notion that universities can do business the very same way has to stop,” said Mr. Gee, who is also the chairman of a commission studying college attainment, including the impact of student debt.

    College presidents across the country are confronting the same realization, trying to manage their institutions with fewer state dollars without sacrificing quality or all-important academic rankings. Tuition increases had been a relatively easy fix but now — with the balance of student debt topping $1 trillion and an increasing number of borrowers struggling to pay — some administrators acknowledge that they cannot keep putting the financial onus on students and their families.

    Increasingly, they are looking for other ways to pay for education, stepping up private fund-raising, privatizing services, cutting staff, eliminating departments — even saving millions of dollars by standardizing things like expense forms.

    And Wall Street is watching.

    Moody’s issued a negative outlook for a majority of colleges and universities heavily dependent on tuition and state revenue.

    “Tuition levels are at a tipping point,” Moody’s wrote, adding later, “We anticipate an ongoing bifurcation of student demand favoring the highest quality and most affordable higher education options.”

    Read the entire article at Slowly, as Student Debt Rises, Colleges Confront Costs

  • LD

    A federal judge has ruled that a lawsuit can proceed against a large for-profit education company accused of using improper sales tactics to lure unqualified students and the billions of dollars in financial aid they bring.

    Judge Terrence McVerry said in a ruling Friday that the whole case against Education Management Corp. shouldn’t be dismissed.

    The whistle-blower lawsuit, which the Department of Justice backed last year, alleges the company paid recruiters billions of dollars in illegal incentives to sign up students, in violation of a 1992 law.

    The judge called the case “massive and complex” and said there are legal grounds to give the plaintiffs the opportunity to prove the allegations of company-wide fraud.

    Education Management, based in Pittsburgh, runs more than 100 higher-education programs across the country, offering diplomas and degrees in fashion, culinary arts, business and other fields, some through online courses. Many of its 100,000 yearly students are non-traditional — working adults, single parents and low-income and minority students.

    The government said the company inflated its career placement opportunities, preyed on applicants’ psychological vulnerabilities and enrolled students regardless of their qualifications.

    Read the entire article, Judge: Parts of Pennsylvania Education Firm Lawsuit Can Proceed, Others Dismissed

  • Huckleberry

    The amazing this is how the adjunct-system has driven down the cost-per-hour of teachers. I cannot help but think that this aided and abetted the explosion of college building and course offerings. There might be a parallel with the way unorganized (and often illegal/undocumented) workers played a role in the housing bubble, but this is just speculation. Were both of these enabled by easy-lending and unrealistic expectations of returns on both sides of the deal?

    The short-term (5-10 year) financial impact of education morass is one thing. The long-term societal implications is another.

    For two generations (three if you count WW2 veterans) the deal has been simple: keep out of trouble, get a college degree in something vaguely useful, and be prepared to work a job for thirty or forty years, after which you can expect some sort of a pension, social security, as well as seeing your offspring end up doing the same as you but better thereby.

    This deal is over. Kaput. We can argue about why, but the simple fact is that our economic future had no space for tens of millions of college-educated workers. (Of course, the larger problem is this: Our global economic future will have no place for hundreds of these millions of workers, period.)

    An entire generation went into debt to obtain an education. The political-economy has not produced jobs for them.

    To wave a copy of Atlas Shrugged at the problem and say, “Well, there’s no guarantees in life” is a short-cut to thinking. A foundational part of American life has been shredded.

    To say that we need to funnel students into expected growth areas isn’t very wise either. First, a glut of health care administrators, for example, will simply drive down wages for health care administrators. Second, recent experience has caused me to doubt our capacity to accurately gauge these needs more than a few years out. I remember in the mid-90s when people were being encouraged to go into computer repair. Where are those people now? Same place as typewriter repairmen.

    Far better to develop critical thinking skills and, above all, basic ethics and functional literacy and writing skills.

    People have to learn how to learn. This cannot be done in classes of more than about fifteen students. It also ought to be done in public schools and at younger ages. And this means people are going to have to be taxed and tenure eliminated. Many students spend a fifth or even sixth year getting a four-year degree because they come out of secondary school unable to handle college-level work. But even after all of this, they emerge with degree in hand unable to handle actual work in a real-life workplace.

    The economics of this is the easy part. The long-term effect on societal relations is the real issue that needs to be addressed. It is possible that the entire notion of higher education for large numbers of citizens has run its course, at least if it is viewed through a narrow and soul-less cost/benefit lens. Yet I cannot believe that this puts us on the right side of history…

  • LD

    Graduate school, a path to higher learning and potentially higher income, increasingly lands students in higher debt brackets.

    But while Congress searches for ways to alleviate the loan burden for undergrads, experts say little attention is being paid to master’s students. In fact, lost in the debate over the nation’s student loan debt topping the $1 trillion mark is that graduate students account for a third of that sum — and that their indebtedness is likely about to grow much worse.

    Beginning in July, subsidized Stafford loans will no longer be available to graduate students, a shift that experts say will force student borrowers into more expensive loans to cover tuition. These loans are the most popular type for graduate school, with more than one-third of all students signing up for them annually, because the government covers the interest payments during the years of enrollment. In contrast, other loans require students to pay the full cost.

    Without the subsidized Stafford loan, experts say graduate students will likely soon account for a much bigger share of the student-debt pie.

    Grad School: Higher Degrees of Debt

  • Mike

    I got a bachelors degree. College was a good time but it wasnt necessary.

    After graduating (with about 17K in debt) I could only get part time jobs like waiting tables and delivering fruit baskets. Eventually I found great full time work as a car salesman.

    I’m living at home and saving lots of money driving a car I bought with cash. I paid off my student loans in under 3 years. I don’t know what I’ll do next. I don’t want to get married because I dont like how divorce laws in this country favor women so much.

    Anyway, bottom line, college is really unnecessary and this will soon become the mainstream thinking. And grad school is the DUMBEST decision you can make if you’re paying for it yourself.

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