Could Higher Education be the next "Bubble"?

[SparrowHawk]

Now that we have a poor debt deal done and the Republican Party being poised to win the White House, we have a potential new threat to our economy. Thanks to easy credit for students, high college tuition, and poor job prospects for graduates, the higher education industry could become America’s next bubble, according to a report in Reason magazine.

The delinquency and default rates on nearly $1 trillion worth of private and federally subsidized loans are growing, the report discloses.

In August of last year, data showed student loan debt for the first time had surpassed credit card debt. And a month later, the Department of Education said default rates for student loans had risen from 4.6 percent in 2005 to 7 percent in 2008, the most recent year for which data is available.

“While the two announcements went largely unnoticed, some took the data points as evidence that America’s next big bubble — higher education — was becoming dangerously inflated,” writes Mike Riggs in Reason.

He cites several reasons why the student loan program is in trouble:

• Unlike home and auto loans, which are approved only under conditions that have tightened drastically since 2008, student loans are “for everybody.”

• Borrowing for higher education is not based on income or salary expectations, but on the belief that a degree will pay for itself.

• College graduates from even the best programs and schools are having difficulty finding employment in the fields they studied.

• Tuition has doubled since 2000.

The ratings agency Moody’s projects that the delinquency and default rates will get worse in the next few years even if the economy recovers.

Moody’s diagnosis: “Unless students limit their debt burdens, choose fields of study that are in demand, and successfully complete their degrees on time, they will find themselves in worse financial positions and unable to earn the projected income that justified taking out their loans in the first place.”

This is yet another example of how a well intentioned Federal Government has saddled itself and us with obligations that may not be able to meet under current budgetary and economic conditions. Ross Perot warned us about the Federal Government unfunded guarantees. To date we haven't listened. We have reached the end of the road when it comes to incurring more debt. If the student loan bubble bursts we have no borrowing power to mitigate the blow to our economy. The Student Loan program started under Eisenhower and was tweaked or expanded by virtually every POTUS since, including Mr Obama. No, you can't lay this one at Obama's feet as even he tried to reign it in a bit. No, this is a true bipartisan effort. A shining example of how Government Interference usually ends with we the people footing the bill.

 

[Ms Tree]

I always thought the school loan program was a bit screwy. I would like to see the schools on the hook for the loans. Some of these schools charge insane amounts of money for a simple education. Some of the grads have a poor chance of repaying the loan. I rather see the schools on the hook for it. Perhaps it will force them to reevaluate their pricing structure. The schools can test the kids to see who they want but cannot ask for financials. You accept the kids based on merit. If the ids cannot afford the school that accepted them then the school gets to foot the bill.

If the government gets involved, I would like to see a community service pay back program. Med students can work in hospitals and trauma centers around the country to pay off their debt. Perhaps a five year stint before they go into private practice. I think there are a lot of ways for students to reimburse who ever loaned the money for the education.

I have always felt it was obscene that the top universities can get away with charging $20-$30 k a year for a undergrad education and could not for the life of me see why someone would find that worth it. If they are going to get away with it I do not think it is fair that only the rich can get they 'top tier' education and the rest of us have to suffer with a public education.

Education is our most precious resource. All kids who qualify for higher education should have access to it regardless of economic status. Paying $5k a year just for tuition at UTA is obscene in my opinion. I pay 3% a year in state property tax, most of which is for the schools and the kids still have to pay $5k? WTF?

 

[Veritas]

I have always felt it was obscene that the top universities can get away with charging $20-$30 k a year for a undergrad education and could not for the life of me see why someone would find that worth it.

$20,000 to $30,000 a year? I wish.

California residents pay close to 30K to attend the University of California when you factor in the costs of living in a dorm.

Base tuition at the top schools (i.e., Northwestern, Vanderbilt) in north of $40K. Add $14 - $15 for room and board, another thousand or so for books, transportation to and from school and some miscellaneous expenses and the total pushes $60,000 a year.

 

[Ms Tree]

I guess I have not been shopping school tuition for quite some time. We are becoming more of a have/have not society. Education should never be about money. We are shooting our self in the foot. An educated society is our best hope at a bright future. That kid from south central, the barrio or the back hills of Kentucky could be the person who cures cancer or develops a new energy source. Very sad and very short sighted.

 

[SparrowHawk]

I'm not so sure the specific dollar amount is all that important. If you take the low numbers posted and multiply by 4 to 6 years it's a boatload of debt for a 22-24 year old to start life with. There are places in this country where you can buy a house for less than it costs to go to a decent college.

This is yet another example of a well meaning Federal Government causing problems where none really existed. when you "Guarantee" a loan for anything actually you shift the burden off of one to another. The influx of students due to "Easy Money" that was guaranteed to be paid to the university did exactly what Welfare does to many. It made higher education wasteful. Throw in the fact that we now have to few students chasing open seats and for the first time you have competition of sorts and schools are adding all kinds of amenities to attract students and justify their fees. Why because the money is "Guaranteed" If Pot Head Pete & Slutty Sally default then you and I are on the hook so where is the incentive for schools to operate lean and mean?

So now we move to "Direct Lending" where the guarantees are gone but you as borrower are on the hook as the debt can't be discharged in Bankruptcy. Now Pot Head Pete & Slutty Sally are really screwed as that $100k plus debt will dog them until they die. They could literally be 80 years old and have part of their Social Security garnished by the lender.

If any of this is sounding similar to the housing bubble then you've been paying attention. Will it burst? I think it will. I just hope it waits a few years because if it hits near term what's left of our economy will be in the crapper.

 

[Ms Tree]

It is possible that with out guaranteed lending that the price of an education may drop. I doubt it would drop all that much. I believe that without guaranteed lending the economically less fortunate would end up not being able to afford a good or top rate education. That does not benefit society.

I believe every qualified student should be guaranteed an education. Cost should not be part of the equation that determines who goes and who does not. As I mentioned earlier, community service would be one way for the people to get pay back on the grant/loan. I would like to see the schools on the hook for money as well. Perhaps then they will start charging more/less for professions that make more/less. In other words, if a teachers average salary is $10 and a doctors average salary is $100 the cost of an education for either profession should not be the same. Getting trained as a teacher would be less expensive than training for a doctor.

 

[SparrowHawk]

It is possible that with out guaranteed lending that the price of an education may drop. I doubt it would drop all that much. I believe that without guaranteed lending the economically less fortunate would end up not being able to afford a good or top rate education. That does not benefit society.

I believe every qualified student should be guaranteed an education. Cost should not be part of the equation that determines who goes and who does not. As I mentioned earlier, community service would be one way for the people to get pay back on the grant/loan. I would like to see the schools on the hook for money as well. Perhaps then they will start charging more/less for professions that make more/less. In other words, if a teachers average salary is $10 and a doctors average salary is $100 the cost of an education for either profession should not be the same. Getting trained as a teacher would be less expensive than training for a doctor.

I've seen estimates in the 60 to 70 percent range as a projected cost reduction. But something tells me those numbers were in publication that is very Neo-Con in it's views and you know I despise Neo-Cons almost as much as Obama.

I believe that everyone should have the OPPORTUNITY to achieve all they can. Life holds no guarantees and something you bust your assets to accomplish such as an MBA has more value to you as an individual. The thing that made America great was the fact that you could come here and stake your claim and work very hard and achieve wealth, acclaim, whatever your goals were the USA offered the best chance for you. We prospered as individuals and as a nation when we were left to our own devices free from government. Our standard of living has declined steadily as the amount of Government interference into our daily lives grew. Cause & Effect I think so.

We have a path in this country to a completely free college education. It's called an Academic Scholarship. When you excel at something you get rewarded. Some get partial scholarships, then they have this thing called working your way through college. When you EARN a degree it has more value. When I was a Sales Manager and I was looking for reps I had two groups I recruited heavily from. One was College grads who either worked their way through or had Academic Scholarships. The other group was Single Mothers with business experience as for them failure truly was not an option. Army Rangers make good Sales Reps too but that's a story for another time.

Life is nothing more than a series of annoying choices. I decided to party from 17 to 22 and pissed away a golden opportunity to get a free education. As a result I ended up working twice as hard to get where I am. In every peer group I've worked since 1985 I was the only one who never went to college and most have MBA's. I'm pretty proud of how far I got and I know with an education I might just have ended up on Mahogany Row at some company. However I made my choices and i am where I am because of it. No one is to blame except me.

 

[Ms Tree]

I believe things may have changed from when you and I went to school.

I work with a woman. She is in her early 20's. Going to UTA full time is running $5k plus books. She lives on her own. Being an undergrad she has limited experience and training. She is making about $11 an hour. Drives a used car, has to pay rent, food and utilities. How is she supposed to come up with an extra $12-$15k a year?

 

[Veritas]

That kid from south central, the barrio or the back hills of Kentucky could be the person who cures cancer or develops a new energy source. Very sad and very short sighted.

Most private schools have fairly generous financial aid programs. The kids from South Central, Harlem, the barrio and Appalachia will get scholarships and grants.

It is the middle class that is hurting. The last time that my college student and I completed the FAFSA, our family's Expected Family Contribution (EFC) was calculated to more than 50% of our take home pay. Yeah, sure. The school gave us a small grant and a work study program, we liquidated some investments and borrowed some more. In the end it will be worth it.

 

[Kev3188]

The influx of students due to "Easy Money" that was guaranteed to be paid to the university did exactly what Welfare does to many. It made higher education wasteful.

The influx of students was also helped by the shift from a manufacturing (and to a lesser extent, the trades) economy to a financial/information one. Gone are the days when someone could work in a factory and live comfortably. Add to that an entire generation of kids watching "Wall Street," and you had a land rush for shiny MBA's. Who wanted to be a plumber when you could be the next Gordon Gecko?

Throw in the fact that we now have to few students chasing open seats and for the first time you have competition of sorts and schools are adding all kinds of amenities to attract students and justify their fees.

The schools where I live have 1-2 year waits for certain programs...

 

[SparrowHawk]

The influx of students was also helped by the shift from a manufacturing (and to a lesser extent, the trades) economy to a financial/information one. Gone are the days when someone could work in a factory and live comfortably. Add to that an entire generation of kids watching "Wall Street," and you had a land rush for shiny MBA's. Who wanted to be a plumber when you could be the next Gordon Gecko?

Yes Kev, the days of 40 Yrs at Beth Steel, a watch and a pension are likely gone forever for many reasons one that is often overlooked is automation. The number of jobs automated out of existence is almost equal to the number of jobs sent off shore. NAFTA, CAFTA and the like grew jobs, just not in the sectors that were high wage like manufacturing.

As a result of the land rush you refer to we now have a shortage of skilled welders. Even if we decide to "Drill Baby Drill" who is going to weld it all together? Young kids generally don't want to get their hands dirty. Beside does he really want to take a job in the oil fields of some god forsaken place like Prudhoe Bay in order to pay for that shiny new and now Worthless MBA?

I can not fathom graduating college with a 6 figure debt hanging over my head

The schools where I live have 1-2 year waits for certain programs...

I bet they do! The key word in your comment is "Certain Programs". IMO colleges are out of touch with reality and in some cases I think they live in the 1950's not in the present. Others are far more market driven. The other side of this is the for profit schools and accreditation organizations that make it possible (for a fee) to become a CPFM (Certified Parking Facility Manager). What's next? A MJT (Masters in Janitorial Technology)