The Tuition Bubble

January 20, 2014

By: Kelly Diamond, Publisher

It’s no secret that student loans is the next bubble in line to burst.  Not to say that there aren’t other areas of our economy being manipulated at an unsustainable rate, but nothing puts you on the fast track to collapse like free money!

The housing bubble was a great example.  Banks created loan products for people who couldn’t afford them, requiring they put NO skin in the game, and even financing them over 100% to pay for the closing costs of their loan!  They were offering interest only loans for non-investors, and lending to those with dubious credit… not to say that a credit score is everything, but when their debt-to-income ratio is tragic and they have no money down, then it’s significant.

These loans were backed by the “quasi-governmental” entities known as Freddie Mac and Fannie Mae.  Student loans are backed by a similar entity called Sally Mae. 

Huge hike in cost, no hike in utility

In fact, I dare say, the utility of a college degree has diminished significantly in the United States.  It used to be high school diplomas were sufficient in securing individuals with a good job.  Now, a high school diploma might only mean that you qualify for “catch-up” classes in a university so that you can actually keep up in the regular ones!

But with more getting this once-rare and coveted certification, its worth in the marketplace has reduced.  Never mind some of the worthless degrees coming out of universities these days…  “48% of working college graduates are underemployed,” according to Business Insider.  The unseen part of this statistic is that 48% HAVE four-year degrees, but are holding occupations that don’t require that much education.  In fact, many jobs out there require experience and perhaps a credential that can be attained for a fraction of the price of a four-year university in a fraction of the time.

There are people who are actually offering individuals STIPENDS to LEAVE university and start working!  Peter Thiel of PayPal annually offers hundreds of thousands of dollars to university students to start a business or get their innovations off the ground.

Mike Rowe, host of “Dirty Jobs” on the Discovery Channel, has a huge campaign to get more people into trade schools, and diverge from their four-year plans.

Healthcare Example

I was at my son’s therapy center, and I saw a notice on the wall that their rates for sessions went up from $100 to $125 in 2014.  Interestingly, there is no new, better, seasoned faculty.  They don’t sell tangible goods that might be affected by the cost of freight or commodities like a grocery store might.  Even a cost of living increase would only amount to nothing more than 5% to 6%… not 25%!

What changed then?  The undying cynic in me says, Obamacare.  Everyone has insurance, which means everyone can afford $125 sessions because their copay will only likely be $25 to $30 anyway.   So the premium in cost isn’t attributable to an increase in quality or quantity.  Nor is it attributable to scarcity.  It’s attributable to the availability of money.

Imagine what sessions would cost if insurance companies didn’t cover such things.  People who needed their services would have to pay for all the sessions out of pocket.  At $125 a pop, I assure you, your clinic would not be seeing a whole lot of people on any sort of regular basis.  BUT, at $50 each, you would.  That might be more than the copay and less than what insurance companies will pay, but that’s what the undistorted value of the sessions would net out to be.

Take that same example and apply it to university.  Same stale-ass tenured professors pontificating their intellectual gobbledygook.  Same library with the air conditioner on the fritz.  Same tables and chairs.  Same disgusting mystery food in the cafeterias.  Same sandpaper carpet in the 10X10 dorm rooms you’re meant to share with another person.  And your books are still more expensive than buying a brand new Lamborghini.  But this year, there’s a 30% hike in tuition.  And that’s for a state school… and its residents!  HUH?  This happened to my own alma mater, the University of California back in 2009.  And it’s gone up another 15% since then!  

Here’s some underhanded good news though from the Daily Californian: they won’t be raising their tuition this year.  PHEW!  That’s because they are getting $146 MILLION in additional STATE funding.  Everyone gets to enjoy the tuition hikes at University of California now!  Kum-ba-yaaaaaaah!!!!  The bad news is, UC was asking for nearly $121 MILLION MORE than what the governor offered. 

What’s the Prognosis?

Here are a few things to consider from Bloomberg Businessweek:

“Outstanding student debt topped $1 trillion in the third quarter of 2013, and the share of loans delinquent 90 days or more rose to 11.8 percent, according to the Federal Reserve Bank of New York.”

“The U.S. Department of Education releases default rates on federal student loans once a year, and only for borrowers who haven’t made the required payments for at least 270 consecutive days during the two- and three-year periods after they graduate or drop out. The default rates don’t include students who get extensions on their loans, which can be another sign that borrowers are under stress. The Education Department’s calculations also don’t cover private loans, which account for about 15 percent of the market.”

“The share of 25-year-old Americans with student debt increased to 43 percent in 2012 from 25 percent in 2003, while the average loan balance rose 91 percent, to $20,326 from $10,649, New York Fed data show.”

What does this tell us?  Well, the information available or tracked which could give any indication of how such a bubble has and can further affect the economy are rather limited.  But it is clear that the debt burdens individuals are incurring are lofty and skyrocketing.  People are either delinquent or defaulting because the amount of money they are paying back and the rates at which they are paying them back are ridiculous. 

When I say ridiculous, I don’t mean, “Let’s make a law that fixes rates and tuition”, I’m saying they are assuming more debt than they have any right to!  I’m sorry, but if you’re studying to be a computer engineer, chances are, you are going to see a return on your investment.  If you are majoring in Women’s Studies with a minor in Esperanto then chances are, you’re destined for a life in some cause driven non-profit… and that is exactly what your ass is going to be: cause driven with NO profit to pay back your loan.

The problem with this increasing burden is that things are slowing down… people are putting off buying cars, buying houses, having families. 

Still, in addition to the obvious price-gauging tied to university tuitions, a few other things are at play.  People are still buying into the notion that a degree from a four year university means something.  Not as much as a trade does, I can tell you that.  It used to be, you needed a bachelor’s degree in order to get into marketing.  Now you need to be fluent in writing computer code to build a website and/or have a nice portfolio in graphic design.  You can intern your way into learning SEO and social media management.  STILL cheaper than a four-year degree in Psychology!

Also, universities are charging the same for all degrees when we know full well that not all majors are created equal.  Majoring in Business Finance or Computer Science says “Return on Investment” a LOT louder than Sociology or Anthropology.  So the former might be getting a deal while the latter are getting ripped off.  Doesn’t matter because their tuition is identical. 

And finally, the lenders aren’t demonstrating that they’ve learned a damn thing.  If I’m looking for a small business loan, I have to be in business for 6 months; provide a marketing and business plan which give three, five, and ten year goals; offer collateral as well as demonstrate that my company is profitable… I mean the list is considerable to get a small business loan.

What burden does a would-be college student have to meet?  Parental co-signers?  Do you know what you want to major in?  Nope.  What do you want to be or do?  Not really, no.  Do you have any general interests?  Hacky sack and Ultimate Frisbee mainly.  How do you plan to pay this back?  Cuz I’ll have a degree and graduate to make six figures in four years with this paper in hand!

How irresponsible can you be?!

What will become of our economy when that bubble bursts?  A few things are being discussed.  Politicians want the youth vote… so there is talk about bail-outs for university students… on the taxpayer dime of course.  But we didn’t bail out the homeowners who defaulted on their homes… so perhaps that’s not really as viable a possibility as I might want to think.

Stagflation is my guess.  Stagflation is when the economy experiences stagnant economic growth, high unemployment and high inflation.  How can you have high inflation and high unemployment?  Free money, that’s how.  I anticipate that while there may not be a bailout for those who default, there will be another form of socialization that will have producers jacking up their prices simply because they are being paid from the seemingly bottomless largess rather than the debilitated private sector.

What does this mean for the private sector individuals who are far more responsible than the borrowers and lenders?  Any fiat US currency you hold will soon hold more value on a roll next to a toilet, than it will in your wallet.  You probably already knew that the value of the USD is nothing more than a house of cards.  The burst of another significant bubble will only expedite the collapse of said house.

The bubble is coming.  With politicians dangling university as a virtual human right, there’s no prospect of this changing.  But the adverse effects are already manifesting themselves in a slower cycle of graduates doing the typical post-graduate stuff… like buying cars and houses and starting families.  The defaults and delinquencies are on the rise… and colleges aren’t trimming any of their fat.  (The university paper pushers STAY!  And every retiree will get their lifetime of unicorn and glitter benefits!)

Get your money OUT of the USD!  There are so many better and far more stable stores of wealth than the USD… find them… diversify your holdings… internationalize your assets…