The Student Bubble Loan

imgresPersonal Capital, a company focused on wealth management emailed me asking me if I would share my thoughts on the student loan bubble.  It is only a matter of time before this implodes and there will be a slight tremor felt.

College is expensive.  If you don’t have the privilege of parents who can afford it or given the opportunity to receive a some form of a scholarship then that means borrowing the cash.  College might not be for everyone but the ability to spend four years feeding your brain with knowledge before embarking on your career is a privilege that most should take.  Yet walking away with hundreds of thousands of dollars in debt is not a sensible approach to beginning your adult life. 70% of undergraduates walk away from college with some kind of debt.  That is an insane number.

The expense of college is a combination of many things and I am not sure how they get the prices down but certainly it might help taking the annual funds raised for the bigger and better facility go towards lowering the cost.  In the past state budgets would make up for some of the expensive but that is being taken away.  Wisconsin just shifted over $300m that went towards University of Wisconsin to build a sports arena so they could cover the debt on the state issued bonds.  Yes..that is the type of Governor that Wisconsin voted into power.  Princeton has raised enough capital that any kid who can’t afford going there gets to walk out on the other side debt free.  Now that is impressive.

When kids take out loans the cost of those loans are utterly ridiculous.  Banks and our own federal government are making money on loaning those kids cash.  They shouldn’t.  That alone would change the endless payments kids have to make after college.  What you borrow is not what you borrow but a lot more.  Similar to the mortgages that people take out with a kicker on the interest.  Borrowing for a home should not be the same thing as borrowing for an education.

I know people who have gone back and renegotiated their debt.  At one point some will have to default on their debt and then there will be a few more and at one point I believe there will be a tsunami.  The politicians know this is coming because it has become a topic in the Presidential race.  There is over a trillion dollars in debt outstanding in college loans and the majority of them are held by the Federal Government.  Yes, our government makes money on loaning kids cash to educate themselves.  It will be just like the mortgages that were bundled to people who at one point couldn’t afford to pay their debt instead that was debt for the banks.  Those people who defaulted on their loans had their homes taken away.  You can’t take an education away in fact we should be giving education to everyone and teach people to be better with their finances.

My guess is the federal government will have no choice but to change the system at one point once the tsunami hits.  It is probably then that we will begin to look at that overwhelming debt to send kids to college and fix the system.  We don’t spend enough on educating kids from K-12 which is ridiculous too. Don’t we want the kids in this country to be highly educated no matter what field they choose as adults?  I know I do.

Comments (Archived):

  1. Susan Rubinsky

    This is such a complex issue. I see four major themes:1.) Private universities underwriting the cost for the best students who don’t have the money to pay (eg, Princeton, but also all the Ivy Leagues do this).2.) High cost of state universities with very few scholarship or grant opportunities. 3.) Federally underwritten student loans for students in need.4.) Private loans funding the bulk of student loans at high interest rates with onerous agreements.These themes all illuminate the fact that only the best and brightest or those with family money can leave college debt-free. People who leave college debt-free have a lifelong advantage in terms of earnings and financial health. It is a system that benefits the privileged and the best academics but leaves the rest of our population completely under served.I don’t have time to write more now (deadlines looming) but I’d love to see if a conversation emerges.

    1. Gotham Gal

      it is a system that absolutely is geared towards the best, the brightest and the wealthiest. not so different than the 1800’s

      1. LE

        Agree. But you know there is one huge major difference. The college guides like US News and World Report and the industry that it spawned (along with the SAT’s and college prep). Also the high schools who gear everything toward getting kids into a good school as a feather in their cap.Back in the day there was the IVY League and some other well known colleges that everyone knew were good. But there was not this game of colleges competing with each other as they do now because of rankings and ratings.It’s also the fact that as I have often say “you can only be as honest as your competition”. If the way the game is played other schools are building cozy dorms and rock climbing walls you are forced to do the same. If other schools have nice campuses you need one as well. If you don’t you will lose students. Unless you have just such a big advantage that it doesn’t matter to the student. But most of these schools don’t.

    2. Matt Kruza

      I think the single biggest factor is much of college is simply insanely wasteful and inefficient. We spend broadly $500 billion on college (through all sources, govt, industry grants, tuition, loans etc) so if somehow we agree that 33% is a waste, there is $170 billion to play with, more than eliminating all student loans per year. Life is insanely more complex than the simple redux that I just hand-waived over, but the general point is the reason things are bursting at the seams is we are vastly overpaying for inefficient allocation of resources. This is what happens when you have a sector that has very few market based principles. I am no anyd rand free-market zealot on all things, but when you remove market forces you start to look bloated, ineffecient, and sclerotic (like much of europe and even worse like the old ussr). Education feels very much like those other failed economic experiments. Lets simply eliminate much of the wasteful classes and let people take elective learning as a side hobby or passion, but not at $2000 a class. This idea is anethma to many people and thus will take much consternation and infighting to happen, but its a very compelling high level explanation of the stress on the system.

  2. Stephen Jury

    Private loans do NOT fund the bulk of student loans. The government is by a large factor, the biggest student loan lender in the US. 40% of the governments assets are student loans on which according to the Treasury, they made $1 billion last year. This is a big business and they are unlikely to change it.One problem is the ridiculous notion that everyone has to be college educated. This is simply not true. We need to stop this fallacy. Fortunately the private sector is intervening. I recently met with Philips Conoco who in the Houston area, take kids straight from high school and train them to be welders. At age 19-20 they are making $150k per year with no student debt.The other problem is education is a business. The cost of a 4 year education has risen 65% since 2000.This needs to change.You are correct that it works for the privileged. It creates more of a wealth divide and hurts the poor.

    1. Gotham Gal

      $1B last year. Wow.They probably made more in the insurance business as a back end for FEMA. Not pretty.

    2. Matt Kruza

      Agree not everyone needs to go to school. And i like what philips is doing. The apprenticeship model makes a lot more sense broadly. I definitely think the 150k is exaggerated tho… average welders make 39k a year.. still great at 20 with no debt.. but one outlier (and I even doubt that one made 150k) are not likely to be true.

      1. JLM

        .You are way off on what a welder can make in the Oil Patch.There is a huge difference between “burning a stick” and doing precise, high quality, pressure vessel (pipes and tanks), exotic welding. I can teach you to weld in 5 minutes but not to weld stainless with an exotic tip.As an example, had Keystone XL been built likely every weld would have been a full penetration, beveled edge, Xrayed weld. Those are very good jobs.JLMwww.themusingsofthebigredca…

        1. Matt Kruza

          No way paying close to 150k for a 19 year old.. higher than 40k sure, but near 150k nope. Still my point holds on using realistic numbers. if he had said 70-80k i would maybe buy it. Why the need to exagerate? hurts the point..

          1. JLM

            .I am not fixated on the age and I have no data to suggest anything one way or another so I will bow out of the age issue.In two years a kid can become sufficiently capable as a welder that he could work in a process environment on exotic metals and with exotic welding techniques. It would take 24 months to get that first job in a process environment. This would also require schooling and a certificate which verifies skill levels.A welder who can do simple structural welding — red iron in the construction business – can easily make $25-30/hour. The question is is there rally a job? In ATX, today, there are plenty of such jobs.The Oil Patch is a lot more complicated than structural welding. In the pressure vessel and exotic metals arena, you cannot have a sixteenth of an inch fissure. These welds have to be perfect and Xrayed.JLMwww.themusingsofthebigredca…

  3. jason wright

    in the UK it’s becoming more common for students to declare personal bankruptcy after finishing their education to free themselves of their debts.’education’ has become a bit of a racket here, and it’s getting worse. the corporates have moved in to feed (Kaplan and the rest), and overseas students (paying full fees) have swamped British universities and pushed out British kids from poorer backgrounds. The average student debt here is presently only around $65-70k, and historically that is the high water mark, but it’s continuing to rise. some of the degrees are near worthless.

  4. pointsnfigures

    Wisconsin’s governor has been totally awesome for that state. The cost of an education at the University of Wisconsin has remained the same because he froze the cost of tuition until 2017.… After 2017, it goes up with the rate of inflation, which we know right now is next to nothing. Education quality from K-12 and at the university system have gotten better since he has been governor. Public union employees do not like him.Agree that college debt is a huge problem. It’s also heavily government regulated. I was invested in a company that provided transparency to college cost is a supply/demand problem. It’s incredibly arduous to become an accredited college. How many universities have been built in the last ten years? Supply is constricted. On the demand side, the US government subsidies for college have increased tremendously over the last 16 years increasing the supply of students that want to go. The opening of China, the breakdown of the Iron Curtain, and the desire from Middle East students to come to America to get a college degree has also increased. Increased demand drives up price.Another thing is happening that is more recent. Because there is almost limitless supply of money for college, it morphs into a 3rd party paying system. Think health care. Since the consumer doesn’t feel the full brunt of the cost until after they graduate-they probably consume too much.

    1. LE

      I honestly don’t think it’s a supply problem at all. Starting new colleges doesn’t solve the brand and reputation problem that having a noname degree gives you in most fields. There is a supply problem in certain professional schools but in at least one (medicine) the issue isn’t building more medical schools but in the medical students having residency slots which is controlled by Hospitals and attending Physicians. Not enough staff to keep and eye on them and train them. Simply pumping out more medical students without residency programs (as I have been told) won’t solve getting more trained Doctors..

  5. laurie kalmanson

    A generation ago, summer job money was a meaningful portion of college expenses; now it’s nothing. Related; unpaid internships in expensive cities as gates closed to many.

    1. Gotham Gal

      Very true

  6. JLM

    .The first problem is the cost of education. It is absurd. Today, the basics are all capable of being taught and learned remotely. There is almost no reason to have physical plant to teach much of what is done.The advent of complete remote learning MBA programs from quality schools (look at UNC — Chapel Hill, MBA program as an example) is a boon. Yet, they charge the same tuition as if the student was on campus. That’s nuts.The Carolina program is, in many ways, superior to being on campus plus no parking problems. It uses a lovely Adobe remote learning bit of software that is just perfect for the purpose.The second big problem is students entering programs which do not have realistic job prospects which can provide a job of sufficient income to pay back any debt. I usually use “poets” as my rant point but it could be any major which does not provide realistic job prospects.The third consideration is AP (advanced placement). A high school senior can get AP credit for one full year of college. This is a huge savings.The fourth consideration is the transferability of community college credits. There is no reason for an engineering student to take Calculus I at Rice University when he could take it at Austin Community College. Not all subject but the basic ones.Last, we just need to be honest — we are forcing people into college for social reasons. There is a huge demand for technically trained workers who do not need a 4-year college degree. If you go to a tech/vocational school in Texas and learn how to work on modern A/C units, you can make $100K if you are willing to work overtime and on weekends.We need to train people for jobs and we need to safeguard jobs for our workers. We need to train people for jobs which will make them taxpayers.Colleges will have to totally rethink how they deliver education.JLMwww.themusingsofthebigredca…

    1. LE

      Today, the basics are all capable of being taught and learned remotely. There is almost no reason to have physical plant to teach much of what is done.You’d have to duplicate the social serendipity aspects of going to school. For example Phil Sugar lived on campus during college and he was in a fraternity. I went to the same college but lived at home and wasn’t a member of a fraternity. Our experiences were totally different and I suspect he gained a great deal (as did others) from people that he met and knowing of the types of things they were doing. I didn’t. I was only exposed to things I already knew about, not the things that others who lived on campus ended up doing or got excited about. The classes were the same of course. Bottom line it’s not only about the education and what you learn. It’s about people that you meet.There is a huge demand for technically trained workers who do not need a 4-year college degree. If you go to a tech/vocational school in Texas and learn how to work on modern A/C units, you can make $100K if you are willing to work overtime and on weekends.I agree 100% on that. Perhaps rather than calling it “social” reasons it’s better to say it has something to do with the fact that people who aren’t in “suits” type jobs aren’t respected as much. You know all of those losers who get to dress up to work at a stupid bank branch everyday because it makes them feel important to be a professional. That’s the crock of shit that needs to be reversed.The love of college dates back I think to when there was a definite difference in what college could do for someone and how the media generally views academics and being well spoken and highly educated as being more important than it is. You know the same reason they hate a guy like Trump because he just sounds so unclassy and unsophisticated in the way he presents himself. (Even if he didn’t offend in the ways he did they still wouldn’t like him because he is uncouth).Hey look nothing is going to change about the way the world sees certain professions. I am sure my brother in law the opera singer thinks he ranks way above in life on the pecking order of the working world than a wedding singer making 4 times the money with a 4 year backlog of work (brother in law has to grind it out constantly to find new gigs and he is actually pretty good. There is just not a great deal of demand for opera).

  7. LE

    Yet walking away with hundreds of thousands of dollars in debt is not a sensible approach to beginning your adult life. 70% of undergraduates walk away from college with some kind of debt.The problem isn’t totally the hundreds of thousands of debt but the fact that the academic majors and careers that kids are choosing have no clear path to pay back those loans. You know doing what they love or think they will love vs. making a practical choice which guess what is possible to do in many cases. Choose a realistic major.The idea of having to pay for an education (at low interest rates) over 20 or even 30 years when you will use that education over that time just seems wrong because it is a new concept (because of the high cost). If you buy a house it is expensive and you pay for it over time because you use it over time. Ditto for machinery in a business (I have experience with that concept which used to totally freak out my Dad when I was younger because he never bought machines, only inventory).Another defect is the idea that everyone has to go away to college. While it’s a great idea you have to factor in the cost of living at college just like everything else. I went to Wharton but I lived at home and commuted. I felt lucky just to be able to go there. (In today’s dollars my tuition was about 16k per year). While I am sure it would have been a better experience to live there, it wasn’t something that my parents wanted me to do. Also I worked during college so it wasn’t about playing around and having a good time anyway. It was about getting an education. It’s simply not the same today at least not for suburban kids. That said my parents worked hard to be able to pay for that education. It’s not a given that everyone gets to be able to do things if they don’t have the money or if their family doesn’t have the money. It might take a generation or two and it might be your kids, not you who gets the good life. (My dad came here with nothing but worked and was able to pay for my college back then..)

  8. LK

    I echo the comments regarding the complexity of the issue. It’s also important to look at the data split between undergrad and grad debt. Undergrad class of 2015 average debt was $35K/student, the highest average ever, but similar in principal amount to a car loan. Graduate student debt, on the other hand, is where you see many of the high numbers—–over 15% of graduates have greater than $100K in debt, where relatively few undergrads attain six figure debt. As a grad student you can take out an unlimited amount from govt programs, so no surprise there are some eye-popping numbers here.

  9. TanyaMonteiro

    Something must be wrong here, how can such an important and vital topic not have one comment?

    1. Gotham Gal