As the housing bubble expanded, it was common to hear the media pound the table praising the benefits of owning a home. “It’s the most important investment in your life. It’s the American Dream. After all, it’s land and they’re not making it anymore.” You don’t hear that so much these days. A home isn’t an investment. Its primary purpose is a functional material good. Sitting on it isn’t going to gain you a small fortune while you upgrade to a bigger house every few years.
If you said in 2005 this was poor reasoning, you’d be called a heretic. The average Joe has little perception of what’s a sure thing and what’s overvalued. A bubble doesn’t really become dangerous until it receives mainstream attention, attracting middle and low income people. You know how this ends. Banks get bailouts and everyone else gets more debt than they can ever hope to pay.
The consistent message sent to the middle class over the last 30 or 40 years has been, “give your money to Wall Street.” The narratives that seemed so logical five years ago aren’t gone; when corruption isn’t exposed and prosecuted, it merely migrates. Today, regular Americans have bought into a new Wall Street scam, another sacred cow that seems so solid that doing anything else with your money just seems stupid — getting a college education at any cost.
The College Cabal
“It’s the most important investment in your life. College debt is good debt. Private and government loans are there to help.” Sound familiar? Since the housing market is likely to stay low for a while, new debt will be created in other areas. School loans and car loans being the most common for the average American.
Peter Thiel, hedge fund manager and co-founder of PayPal, describes the education bubble as the nation’s largest and says that America’s schools are being purposefully disingenuous.
“A true bubble is when something is overvalued and intensely believed… Education may be the only thing people still believe in in the United States. To question education is really dangerous. It is the absolute taboo. It’s like telling the world there’s no Santa Claus… It’s what you’ve been told all your life, and its how schools rationalize a quarter of a million dollars in debt.”
Today, there is more student loan debt than there is credit card debt! At a time when government subsidy is at an all time high and new technologies like the internet make mass schooling possible, every single person in the nation should be able to receive a college education free or at virtually no cost, but that was never the intent. Like the corrupt banks on Wall Street who receive bailouts, much of the money received by the colleges through the state is lent right back to the Federal Government rather than investing that money in the students. Bob Samuels, president of the American Federation of Teachers said:
“[The] main strategy is basically to blame the state for everything, while they try to privatize the university. And a very telling moment came. After the UC’s (University of California’s) budget was cut by the state, the UC turned around and lent $200 million to the state. And people said, how can you lend $200 million to the state while you’re giving faculty furloughs and while you’re raising student fees and while you’re cutting classes? And he said, “When we lend money to the state, we make a profit from interest. But when we spend money just on teachers’ salaries, that money just disappears.” So, from his perspective, instruction is a losing proposition, and the university should just try to get out of the business of basically teaching students and hiring faculty…
What happened about 1980 was that states started to cut their funding of higher education, and so universities looked for other ways of making money, and so they concentrated on raising funds and doing research, and especially research funded by corporations and the federal government. And so, basically now at a lot of universities, instruction only represents about ten percent of the budget, and so it’s a minor aspect of the universities.”
Schools seeing themselves less like teaching institutions and more like banks or corporate research firms inevitably results in them acting like those institutions. Acting like banks includes the same loan and debt based schemes, bubble creation and soon, demands for bailouts from the government as they overextend themselves. This has also occurred at the same time that Colleges and Universities have dramatically increased their campaign donations to political candidates, especially Democrats.
Paying For It
Bubbles are primarily a problem for the middle and lower class. They are encouraged to over extend themselves as the value for particular products are pushed in the boom years. When the mainstream realizes the irrationality of massive debts with no way to pay for them, colleges will see fewer enrollments, putting their entire business model in jeopardy.
The newly indebted are the most seriously affected by the subsequent collapse. Some students have bought into the belief that future earnings will help them manage massive debts that average about $25,000, but often exceed $100,000. Just like a home owner with a house that is worth less than the value of the loan, students will suffer the most when college degrees undergo a period of devaluation.
Meanwhile, students will be stuck with the debt. Even a relatively small loan of $25,000 can be a burden on new graduates. Over 10 years it would require monthly payments of about $300 and would incur an additional $10,000 over the life of the loan. Considering the increasingly high youth unemployment and the nation’s stagnant wages, these cost put significant pressures on recent grads.
Certainly these students will never see a bailout from the government, but what about the schools? What happens when economic conditions cause enrollment to drop? Many colleges are over leveraged themselves and a drop in revenues would cause many to fail. Would US politicians allow so many generously contributing schools to fail nationwide?
Just like in the housing and financial markets, a bailout may stall a sudden collapse, but it fails to solve the underlying problems that caused the bubble to inflate in the first place. Over valued, high priced education will continue to be the norm, while Americans are forced to continue to contribute to the cabal. And if you need further proof that student loans are a high value enterprise for those in power, remember that since 2005, it is very difficult (essentially impossible) for student loans to be absolved in a bankruptcy filing.
The Bubble Burst
The good news is that prices can’t continue to rise forever. Mathematics prevents that from happening. The bad news is this will have an immediate and devastating effect on American colleges around the country. Just like the housing market, many schools haven’t hedged themselves against a downturn in student enrollment and when enough students say, “No more, this is way too expensive.” The dam will break. This coupled with an inability to pay outrageous loan debts will destroy the bottom line of schools, eventually priming them for a bailout by the government.
Last month’s Atlantic article titled, “The Debt Crisis at American Colleges” is worth reading as well. It states:
“Fully two-thirds of our undergraduates have gone into debt, many from middle class families, who in the past paid for much of college from savings. The College Board likes to say that the average debt is ‘only’ $27,650. What the Board doesn’t say is that when personal circumstances go wrong, as can happen in a recession, interest, late payment penalties, and other charges can bring the tab up to $100,000. Those going on to graduate school, as upwards of half will, can end up facing twice that…
The next subprime crisis will come from defaults on student debts, starting with for-profit colleges and rising to the Ivy League. The parallels with housing are striking. In both, the written warnings aren’t understood, especially on penalties and interest rates. And in both, it’s assumed that what’s being bought will rise in value, in one case the real estate, in the other the salaries which will accrue with a degree. One bubble has burst; the second is already losing air.”
The Atlantic also notes that the Banks essentially wrote the student loan laws and even if you go into bankruptcy, student loans cannot be dispelled, entering you into a kind of permanent and inescapable slavery.
“So even if you file for bankruptcy, the payments continue due. Hence these stern word from Barmak Nassirian of the American Association of College Registrars and Admissions Officers. ‘You will be hounded for life,’ he warns. ‘They will garnish your wages. They will intercept your tax refunds. You become ineligible for federal employment.’ He adds that any professional license can be revoked and Social Security checks docked when you retire. We can’t think of any other statute with such sadistic provisions.”
The solution is simple for those entering college, Community College first, then transfer to an inexpensive four year school. Holding a part time job at the same time is essential and living at home while attending classes can cut living costs in half. The other alternative is foreign schools, which are much less expensive then the government subsidized US schools.
Further Reading
An interesting student loan infographic, available here
Financial Armageddon – Another Disaster in the Making
Counter Punch – Economic Roadkill
The Atlantic – The Debt Crisis at American Colleges
