Student Loan Bubble

Via Zero Hedge:

A key reason why a preponderance of the population is fascinated with the student loan market is that as USA Today reported in a landmark piece last year, it is now bigger than ever the credit card market. And as the monthly consumer debt update from the Fed reminds us, the primary source of funding is none other than the US government. To many, this market has become the biggest credit bubble in America. Why do we make a big deal out of this? Because as Bloomberg reported last night, we now have prima facie evidence that the student loan market is not only an epic bubble, but it is also the next subprime! To wit: "Vince Sampson, president, Education Finance Council, said during a panel at the IMN ABS East Conference in Miami Monday that lenders are no longer pushing loans to people who can’t afford them." Re-read the last sentence as many times as necessary for it to sink in. Yes: just like before lenders were "pushing loans to people who can't afford them" which became the reason for the subprime bubble which has since spread to prime, but was missing the actual confirmation from authorities of just this action, this time around we have actual confirmation that student loans are being actually peddled to people who can not afford them. And with the government a primary source of lending, we will be lucky if tears is all this ends in.

When you mess with pricing signals and resource allocation, you get bubbles.  And one could easily argue that OWS is as much about the student loan bubble bursting as about Wall Street.

I must say that I never had a ton of sympathy for home buyers who were supposedly "lured" into taking on loans they could not afford.  The ultimate cost for most of them was the loss of a home that, if the credit had not been extended, they would never have had anyway.  US law protects our other assets from home purchase failures, and while we have to sit in the credit penalty box for a while after mortgage default or bankruptcy, most people are able to recover in a few years.

Student loans are entirely different.  In large part because the government is the largest lender via Sallie Mae, student loans cannot be discharged via bankruptcy.  You can be 80 years old and still have your social security checks garnished to pay back your student loans.   You can more easily discharge credit card debt run up buying lap dances in topless bars than you can student loans. There is absolutely no way to escape a mistake, which is all the more draconian given that most folks who are borrowing are in their early twenties or even their teens.

I can see it now, the pious folks in power trying to foist this bubble off on some nameless loan originators.  Well, this is a problem we all caused.  The government, as a long-standing policy, has pushed college and student lending.  Private lenders have marketed these loans aggressively.  Colleges have jacked costs up into the stratosphere, in large part because student loans disconnected consumers from the immediate true costs.  And nearly everyone in any leadership position have pushed kids to go to college, irregardless of whether their course of study made even a lick of sense vis a vis their ability to earn back the costs later in the job market.

Public service note:  Their are, to my knowledge, five colleges that will provide up to 100% financial aid in the form of grants, such that a student can graduate debt free:  Princeton, Harvard, Yale, Stanford, Amherst.  These are obviously really hard schools to get into.   I don't think a single one has a double digit percentage admissions rate.  But these are the top schools that hopefully establish trends.

I am thrilled my alma mater is on the list.  For years I have argued that they were approach severe diminishing returns from spending tens of millions of dollars to improve educational quality another 0.25%.   If an institution is really going to live by the liberal arts college philosophy -- that a liberal arts education makes one a better human being irregardless of whether the course of study is easily monetized after graduation -- then it better have a way for students who want to join the Peace Corp or run for the state legislature to graduate without a debt load than only a Wall Street job can pay off.

By the way, my other proposal for Princeton has been this:  rather than increasing the educational quality 1% more to the existing students, why not bring Ivy League education to 3x as many students.  I have always wondered why a school like Princeton doesn't buy a bunch of cheap land in Arizona and build a western campus for another 10,000 kids.

My son and I spent the last year touring colleges.  One common denominator of all the good and great private colleges:  they are all over 100 years old.  Rice was probably the newest, when a rich guy toured the great colleges of the world and thought he could do as well, and started Rice  (Stanford is older but has a sort of similar origin story).  Where are the new schools?  The number of kids with the qualifications and desire to go to a top private college have skyrocketed, and tuition have risen far more than inflation, but there is no new supply coming on the market.  Why is that?

  • Matt

    "I have always wondered why a school like Princeton doesn’t buy a bunch of cheap land in Arizona and build a western campus for another 10,000 kids."

    Because their single-digit acceptance rate is their most important competitive advantage. Some would say their only competitive advantage. About the only credible people left who'd dispute that notion are the ones who point to the networking advantages offered by hanging out for 4 years on the same campus as X other members of the class of students who could and did get into Princeton. Note that this advantage (whatever it may or may not be worth) _also_ disappears if they open a huge state-U-sized campus located somewhere distant from their main one.

    Their whole selling proposition is the Princeton brand as a signalling tool. And opening a huge satellite campus for a bunch more students would fatally undermine the signalling value of that brand. To the extent there's non-signalling value to be had from four years of the Princeton experience (as distinct from 4 years at some no-account state U), it's also value of a sort that doesn't scale well with volume. Which means all that remains is the value of the education itself. Which might very well be nonzero...but it certainly isn't sufficiently greater than the education that an equivalently-motivated student could get at a state university for a very tiny fraction of the price of Princeton.

    Ironically, the whole grants-only financial aid thing is another form of value that Princeton offers, and yet hasn't built into their public brand identity in any kind of meaningful way. Given what most universities put their graduates through financially these days, an ironclad, backed-by-numbers promise that even at worst, a Princeton student will leave Princeton no worse off than when he arrived is something that ought to be worth rather a lot.

  • http://www.whiterockkitchens.com Mike

    The reason for no new schools: accreditation.

    It is very hard to get. It is one of the most effective cartel enforcement mechanisms ever designed.

    Accreditation is designed to make all the schools the same.

    Once someone can get around accreditation, higher education will change dramatically.

    I've move to Mauritius where I'm working for a private for profit business school (I previously worked for a private university in Texas) and we are attempting this very thing here. Our target market is India.

    If we can get this working here, we'll be in the U.S. as fast as we can.

    If you have sway with Princeton, convince them to let their accreditation expire. I think that would be huge.

    But, no accreditation means no federal money.

  • stan

    Davidson College was the first school to eliminate loans as part of financial aid packages.

  • http://www.joshourisman.com Josh

    I'm fairly sure that my own alma mater, Carleton College (also a private, liberal arts school that is over 100 years old), will provide 100% financial aid given a demonstrated need. As I understand it, their policy is that anyone who is accepted will be able to attend regardless of their financial situation.

  • http://www.joshourisman.com Josh

    Minor point, but: I'm fairly sure that my own alma mater, Carleton College (also a private, liberal arts school that is over 100 years old), will provide 100% financial aid given a demonstrated need. As I understand it, their policy is that anyone who is accepted will be able to attend regardless of their financial situation.

  • rif

    Olin College is new and, judging from the students and instructors I've met, it's absolutely outstanding.

  • John

    I understand the pride you feel in Princeton's ability to offer need blind admissions. It's nice to think that one's ability to pay should not determine who may access such institutions. But how these institutions have achieved this is not straightforward. If it were the result of endowment earnings sufficient to pay for the schools' operations and charge a reasonable tuition rate to those who can pay, it would be one thing. But I believe need blind admissions has been achieved, where it has been, by raising the stated tuition to some notionally high number that few can afford, taking this from those few who can, and using the revenue to enable a need blind policy.

    Education is surely different than other consumer goods. But it's worth thinking through what it is about education that makes such a redistribution scheme acceptable. (If you believe it is, I don't.) We wouldn't accept it if an unassailable cartel of car dealers, managed by leftist ideologues and utopians, viewed transportation as a universal good that all should have access to and decided to charge an absurdly high notional amount for cars, adjusting the true cost among their customers based on their income.

    I would like to know to what degree endowments enable need blind admissions, and how much greater stated full-freight tuition costs are than the cost of delivering services. Alas, while these institutions continue to suction donations from their alumni, they offer no transparency that would enable donors to understand why these funds are required and what they are subsidizing. This should stop. These institutions should offer transparency to donors at least as thorough as that required of public companies. I'd love to see the equivalent of a 10K before cutting a check to my alma mater. I'm sure I'd have a few questions about the worthiness of the cause relative to competing charities.

  • http://www.insuranceclaimshelpforyou.com/fraudindicators.html Jake

    I wonder if what qualifies the "great" schools to be great is less about actual performance than it is about tradition. In other words, because they've been around a long time and people have talked about them being great for generations, they have become synonymous with greatness in the mind of the public. New schools haven't yet had the necessary time to earn greatness in the public perception, but might do so if they maintain top tier status for the requisite time.

    This might explain why some of the newer "greats" are considered somewhat lesser than the Harvards, Yales, Princeton's, etc. Rice and Stanford, while thought of as excellent institutions, don't carry the same cachet as the Ivy League schools.

    Thanks for the shout out to Rice, my alma mater, by the way!

  • me

    Word of caution, the value of an Ivy League education is dependent on the subject chosen and what you strive for - in my job, I encounter quite a few graduates from universities from around the world. A lot of the Stanford and Yale CS graduates we get are great at talking the talk but are worthless where the actual engineering is concerned. On the flipside, all the folks we imported from the former eastern block countries are fabulously qualified.

  • GoneWithTheWind

    I can understand a doctor or a lawyer graduating with $100,000 or more in loans because they can reasonably expect to be able to pay it off. I cannot understand anyone graduating with a degree in ethenic studies, history, etc. with the same size loan that realistically expects they can easily pay it off. Perhaps the loans should not be available to students taking basket weaving courses.

  • Hank

    I enjoy reading your site, but please scarp "irregardless" from your vocabulary. It is not a word, and doesn't make sense. Sorry to be "that guy" about grammar, but that error really grinds my gears!

  • Hank

    I enjoy reading your site, but please scrap "irregardless" from your vocabulary. It is not a word, and doesn't make sense. Sorry to be "that guy" about grammar, but that error really grinds my gears!

  • DrTorch

    I agree that the OWS is more about the higher ed bubble than Wall Street. That's what the news media should be reporting. (Oh wait, journalists don't like to own up to the fact that they were duped too. Nevermind).

    I'm curious what the median age is for US universities. Seems like the majority are 100+ years old. (Even ASU is well over 100 years old. Of course it is one of the permier universities in Maricopa County). I don't think that's a good metric. Maybe 200 years old is the new 100 years old.

  • John Moore

    I just checked my alma maters. University of Kansas offers scholarships that appear large enough to cover full costs, although they aren't advertised as that. UCLA does not appear to, except perhaps in "restricted" scholarships (targeted at minorities, certain majors, etc). When I went to KU, they had a scholarship program based on academic merit that would cover full costs on a needs basis (I got nothing but the monthly meetings with notables, and a certificate). It no longer reaches close to full cost.

    I suspect there are a lot of colleges with decend aid programs.

  • caseyboy

    Great post and excellent reader feedback. Like most things when the government intervenes the economic market balancing dynamics get distorted.

  • Ted Rado

    Where are the parents and and academic advisors of these people who run up a big debt studying economically useless subjects? It is nice to study things of personal interest if you have a rich father, but if you will have to earn a living after graduation, you need to study something for which there is some earning potential.

    I had a friend who advised his kids that if they studied something that would not lead to a decent income, they should take 18 hours of accounting on the side. They can then get a job in some business enterprise.

    I am sure we could all tell endless stories of acquaintences who majored in liberal arts, poli sci, sociology, drama, etc. who never earned a dime in that field. What a waste of time, talent, and academic resources.

    The OWS crowd have themselves to blame. However, it is human nature to point the finger at someone else for our own bad decisions and shortcomings.

  • Plungerman

    Just as well our host did not name his alma mater (at least here) since he uses the word "irregardless" twice in this post alone. Uh,rah!

  • Slocum

    "Because their single-digit acceptance rate is their most important competitive advantage. Some would say their only competitive advantage"

    Exactly. There's no good evidence that elite schools provide superior instruction. Expanding their capacity would mean becoming less selective and hurting their elite brand. And why no new elite schools? There can be only 10 schools in the top 10.

  • Smock Puppet, Piloting The Economic Seas Betwixt Scilla and Charybdis

    >> Where are the new schools? The number of kids with the qualifications and desire to go to a top private college have skyrocketed, and tuition have risen far more than inflation, but there is no new supply coming on the market.

    This role has been taken over by state-run colleges, for the most part. Look at all the best "new" colleges originating (in FACT, not in officially specified and often greatly inflated time frame) the last 100 years. The Cali SUS. The University of FL... All top-notch schools, a rung or so below some of the Ivy Leaguers but that's often in reputation only, not in actual quality of education or the overall "college experience".

    Not to suggest I necessarily approve, but that's what's happened.

  • Smock Puppet, Piloting The Economic Seas Betwixt Scilla and Charybdis

    >>> Seems like the majority are 100+ years old. (Even ASU is well over 100 years old. Of course it is one of the permier universities in Maricopa County).

    Heh, you need to always look close at these numbers, they're usually rather artificial.

    The University of Florida claims 1853 as its date of inception, but that's pretty much total BS. It gets this by claiming lineage from a Seminary school that had little or nothing to do with the modern university, even in concept. A much better consideration would be: what's the build date of the oldest building existing on the campus? While you might lose a few years to some building that got gutted years ago, it's unusual for a university to actually tear down an entire structure -- usually they just re-purpose the buildings. By this reasoning the University of Florida dates to around 1905. I'm sure there may be exceptions when campus space is tight and limited, but usually this seems to be a good rule of thumb.

    While I haven't really investigated, it appears that Harvard did much the same thing with its date-of-origin, from what I've read between the lines. I believe its actual "date of inception" would/should be updated by about 75 to 100 years. I have no doubt this is pretty much SOP for universities, public and private.

  • ParatrooperJJ

    It takes that long to get into the billion dollar endowment club.

  • Allen

    For a formal paper, sure, irregardless is not a word. But language isn't static. At some point, weather or not the Oxford gang wants it to be, irregardless becomes a word. Fight the power! :)