The $1 trillion Student Loan Market begins to Implode

[bobbyw24]

We seem to have entered an era of perpetual and unshakeable financial bubbles and the next ripe bubble to burst is in the student loan market. Student loan debt has become the fastest growing debt sector throughout the economic recession. Growth at for-profit colleges has been incredible and tactics used at these institutions reflects patterns seen with the subprime mortgage operators. They target low income markets and exploit government backed loans and pump them through local area lenders. It is a bubble of mammoth proportions and it is no surprise that data released by the Department of Education only a few days ago reflects a default pattern reminiscent of the subprime crisis. Default rates on student loans at for-profit institutions are absolutely abysmal. There is no question now that the student loan bubble is now the next market to pop. What will be the consequences of the $1 trillion student loan market contracting?

For-profit student loans the new subprime

http://www.mybudget360.com/one-tril...360/QePx+(My+Budget+360)&utm_content=My+Yahoo

 

[Acala]

And because this is a major entrance point for newly created credit money (ie inflation) the price of education has gone up far faster than the general price level.

 

[sevin]

So will we finally see a correction in the price of tuition? If so, it might be a nice time to go back and learn some new skills.

 

[Seraphim]

Wait until it pops - and then do it.

So will we finally see a correction in the price of tuition? If so, it might be a nice time to go back and learn some new skills.

 

[JVParkour]

How will it work though? Student loan debt is not dis-chargeable in bankruptcy, so what will happen? I guess people would just stop paying, but if the debt is not cleared off the books, then what happens?

 

[Acala]

How will it work though? Student loan debt is not dis-chargeable in bankruptcy, so what will happen? I guess people would just stop paying, but if the debt is not cleared off the books, then what happens?

I think the Federal government pays them off and then has a claim against the student.

 

[-C-]

The Dept of Education bubble is no different than the "Housing Bubble." Meaning, you have thousands of student loans being turned into securities and then being traded based on the monetary stream's performance. This bubble is no where even close to being as big as its going to be, take for instance all of the people who are now going back to graduate school just to compete with the flooded market of 4 year "for profit" degrees. Another two years of debt farming.

Good luck trying to make money off this bubble though...short the dept of education?

 

[MRK]

I've been waiting for the bottom to fall out on this bubble before I get my master's. Who knows how long that will be though, given the feds are prone to throwing more money on the fire to put it out. Hopefully within the next 10 years so I can still get good a return on my investment.

 

[JJonesMBA]

I agree, we could have a repeat of the housing & financial crisis, since Education will also be perceived to be too big to fail, although the $1T market size is much less than the $13T (2006) housing market. If the prices were to fall, we all know what the Fed can do behind the scenes to prop them back up.

My advice to high school students - shop around for the best priced schools, consider alternatives such as study abroad, or even the alternative of on-the-job-training in a particular industry, use good old-fashioned networking to find opportunities, read a few books and discuss them with friends or online social networks (most courses publish their curriculum, and formerly exclusive professors' lectures are becoming outdated by online technology). Save up your money, and work your way through school. That's what our grandparents' generation did before credit cards, and it worked for them.

If the banking industry is any case to follow, small schools may go under and get absorbed by larger institutions. Be a good idea to look at the financial integrity of the schools as well, before investing in any of their 4-year programs.

 

[Zippyjuan]

I've been waiting for the bottom to fall out on this bubble before I get my master's. Who knows how long that will be though, given the feds are prone to throwing more money on the fire to put it out. Hopefully within the next 10 years so I can still get good a return on my investment.

I don't forsee any decline in the cost of education. It has been rising faster than inflation for decades now. The market has shown to be not been shown to reach a point where it gets too expensive to be able to attract enough students either. Demand for education is inelastic- it does not decline as prices rise. It is not what one may consider a "normal" business. If you need to borrow, now is also a good time since interest rates are at or near historical lows so unless you are waiting until you have enough saved to pay cash for your education, things probably won't get any better in the future and will probably get worse as far as affordability goes.

 

[TCE]

I don't forsee any decline in the cost of education. It has been rising faster than inflation for decades now. The market has shown to be not been shown to reach a point where it gets too expensive to be able to attract enough students either. Demand for education is inelastic- it does not decline as prices rise. It is not what one may consider a "normal" business. If you need to borrow, now is also a good time since interest rates are at or near historical lows so unless you are waiting until you have enough saved to pay cash for your education, things probably won't get any better in the future and will probably get worse as far as affordability goes.

Well, enrollment was increasing steadily every year until this year. To expound on this point a bit: Colleges, for the most part, are not-for-profit institutions. There are some that are for-profit, but they are few and far between and the majority of people don't go to those types of schools. The largest schools are the not-for-profit schools, many of them being state schools such as University of Illinois, University of Texas, etc. These schools are controlled by the State Legislatures in terms of tuition and such. If the State Legislatures cut their funding and/or force them to raise rates, they do. So, unless there is a major decline in enrollment at schools, expect the price to continue to soar. If state budget deficits increase, so will tuition to cover the budget holes.

Now if schools were privatized and the market steered the price...

 

[dannno]

I don't forsee any decline in the cost of education. It has been rising faster than inflation for decades now. The market has shown to be not been shown to reach a point where it gets too expensive to be able to attract enough students either. Demand for education is inelastic- it does not decline as prices rise. It is not what one may consider a "normal" business. If you need to borrow, now is also a good time since interest rates are at or near historical lows so unless you are waiting until you have enough saved to pay cash for your education, things probably won't get any better in the future and will probably get worse as far as affordability goes.

The reason prices have gone up is because of government guaranteed loans and government financial aid.

The demand is there to pay higher prices because the money is given out.

 

[TCE]

The reason prices have gone up is because of government guaranteed loans and government financial aid.

The demand is there to pay higher prices because the money is given out.

Most of the big ones are state-run entities as well. Why not raise tuition a few thousand dollars at the University of Illinois as opposed to raising taxes? Actually, in Illinois, the Democrats did both, but that's another story.

 

[The Free Hornet]

Very little money pays for education itself. Take my hypothetical university...

Assuming you had 200 students each taking 5 courses (15 credit hours or 3 one-hour classes per day) with 20 students each. This would require 10 professors if each had a 5-course load (it is a teaching university, mind you). Let's also assume each prof gets $100,000 in salary and teaches in one of three trailers. Each trailer holds 10 classes per day. The trailer costs $2000/month (rent + utilities) and it fits everybody, comfortably enough for the 1-hour class. As the owner/president of this school, I get $200,000. What would tuition be per quarter (this is school for rising professionals, we don't take summers off)?

3 months trailer cost: 3 X $2000 x 3 months = $18,000
professors: 10 x $25,000 (1/4th of $100,000) = $250,000
my salary: $50,000 (1/4th of $200,000) = $50,000
total = $318,000
cost per student per quarter = $318,000/200 = $1590

If it takes 12 quarters to get a 4-year degree (which we cut down to 3 years by working summers): $19,080 for BA/BS/CPA

Books and a lot of other stuff would be extra but you would have profs that earn $100,000 and work a so-so schedule (3-hours classroom time on average per day).

There are other expenses and my math is likely off, but this is why it used to be possible to work your way through school.

When the education bubble pops, it is not so much that the loans don't get payed back, rather it is the price of education will fall dramatically and scores of administrators, research profs (writing another paper on Hamlet or some arcane BS), security/janitors/cafeteria works will find themselves out of work or having to lower salary expectations.

Education and health care costs have increased with every subsidy, loan guarantee, or entitlement that government could come up with. Oddly, it is government licensing - which Ron Paul opposes - that drives both health care and educational costs. The economy is like this game and the people winning either work directly for the government or are in a preferred industry like education or healthcare. If the game stops, I would expect massive deflation of these costs which is good. We're broke.

This is one thing that worries me about the price of gold. It can be $1800/oz because people can afford to pay that much. What happens if dollars start to dry up?

 

[QE Is Theft]

This is one thing that worries me about the price of gold. It can be $1800/oz because people can afford to pay that much. What happens if dollars start to dry up?

Gold should do well regardless of whether or not we have deflation or inflation.

Marc Faber says this is the case, and Gold did do fairly well during the Great Depression.

 

[heavenlyboy34]

Considering that there will be many more grads than available jobs in the foreseeable future, I expect the unemployment rate for 20-30 somethings to continue upwards. Also expect those same unemployed kids to get onto the welfare/food stamp rolls.

 

[BlueFloyd]

So will we finally see a correction in the price of tuition? If so, it might be a nice time to go back and learn some new skills.

Like gardening and how to load a rifle.

 

[MRK]

I don't forsee any decline in the cost of education. It has been rising faster than inflation for decades now. The market has shown to be not been shown to reach a point where it gets too expensive to be able to attract enough students either. Demand for education is inelastic- it does not decline as prices rise. It is not what one may consider a "normal" business. If you need to borrow, now is also a good time since interest rates are at or near historical lows so unless you are waiting until you have enough saved to pay cash for your education, things probably won't get any better in the future and will probably get worse as far as affordability goes.

Thank you for laying out all these facts Zippy.

But I somewhat disagree with you on the inelasticity of demand, demand being the willingness and ability to pay. The fact that I am waiting for prices to decline shows that demand for education is at least not perfectly inelastic.

I am currently renting, and short of a mortgage on a very modest house that I can pay off within a few years I do not intend to take out any more loans. So by the time I have the cash to pay for another degree, interest rates for student loans may well have risen, which I am hoping will lower demand at least somewhat, and with it the price of education. I know that demand for education is still strongly inelastic, but it will be interesting to see just how strong it is a few years down the road.

 

[osan]

So will we finally see a correction in the price of tuition? If so, it might be a nice time to go back and learn some new skills.

Good question, though I would not hold my breath waiting for it. These days, though, you never know.

 

[libertybrewcity]

Is it hypocritical to be against guaranteed student loans and then have student loans myself?