By Jesse Colombo (This article is frequently updated)
For many of today’s college students and recent graduates, obtaining a degree means taking on mortgage-like levels of debt without having the house (or much of a job!) to show for it. Like housing in 2005, the institution of college education is firmly in the throes of a bona-fide bubble that will end just as disastrously. College tuition costs are soaring and forcing our nation’s young to bear obscenely high levels of student loan debt, while a ballooning $1 trillion student loan bubble shares a strikingly scary resemblance to the toxic subprime mortgages of six years earlier (and are just as likely to be repaid). As more and more college presidents shamelessly bank $1 million per year and colleges build opulent mega-million dollar stadiums, their graduates struggle to find minimum wage jobs in the worst job market since the Great Depression. You know there’s a crisis when even young law school grads are forced to become topless dancers to support themselves and their crushing student loan bills!
At a time when young college graduates’ starting salaries are dropping like a rock, it’s ironic that the number of colleges and universities charging $50,000 per year has increased 25-fold in the last 3 years. With college tuition costs having risen a stunning 439% since 1982, it’s no surprise that this phenomenon is drawing comparisons with the epic US housing bubble of the last decade. It turns out that college costs have risen far more than housing even rose at its peak, with housing having risen 4x, while college tuition has soared by over 10x, far outpacing the rate of inflation. (link has an excellent chart comparing the housing bubble vs. tuition bubble)
Even more alarming than the rate of tuition growth is the blistering increase in total outstanding student loans, which grew 511% since 1999 to $1 trillion (surpassing total credit card debt for the first time), with today’s average student graduating with 50% more student debt than graduates in 2001. Student loans made by the federal government rose a white-hot 31.9 percent in the 12 months through November 2011. Even Moody’s is warning that student loans may be the next financial bubble to burst, while a recent FICO survey shows that two-thirds of bank risk managers are seriously concerned about the student debt loads held by students in the country. To make matters worse, the student loan bubble is well on track to becoming Subprime Crisis 2.0 as many of the exact same mistakes made during the subprime lending boom are being repeated, such as knowingly offering loans to borrowers who can’t afford them. As recent graduates struggle to stay afloat financially, overall student loan defaults have risen to 8.8 percent, while default rates on “for-profit college” (like University of Phoenix) loans are an astounding 25%. Have we learned anything at all from the housing crisis?
Chart Source: Ritholtz.com
Like the Housing Bubble, the College Bubble is Inflated by Subsidies
As with the housing bubble, government subsidization of higher education has played a very significant role in the formation of the U.S. college bubble. The Higher Education Act of 1965 launched a series of student aid and grant programs that now cost taxpayers over $30 billion a year and, while intending to make education more affordable for students, succeeds in doing the exact opposite as colleges absorb student aid and grant increases by raising their tuition (and their profits) (1, 2, 3). In addition, the excessive ease of obtaining federally-insured mortgage-size student loans, regardless of college major and expected salary, results in higher education institutions charging far higher tuition than would occur in a market-based student-lending system. Colleges attempt to charge their students as much as they can possibly pay through use of student loans. Why should an Art History major be forced to pay the same tuition as a Chemical Engineering major? This is clearly unfair, but what happens when $200,000 federally-insured loans are handed out like candy to students in all majors. Government subsidization of higher education is a lose-lose proposition for both taxpayers and students as it transfers their wealth to already prosperous higher education institutions.
After spending nearly a decade doing everything from agonizing over AP classes and SATs to pulling all-nighters during finals week in college, one would hope that college graduates would finally be able realize the fruits of their sacrifice, but that’s not how the world works for Generation Y. Young college graduates are thrown into a job market that, in addition to nearly 10% overall unemployment, is between two and three times worse for them than it is for older workers. Even among recent college graduates who do have jobs, nearly 30% of them are “underemployed,” working in jobs that don’t require a degree and don’t pay anywhere near the salaries or benefits paid by jobs that require a degree. There are now a total of 17 million underemployed American college graduates, including nearly 320,000 waiters & waitresses and 80,000 bartenders. As today’s young are growing skeptical of the value of Ivy League diplomas, Princeton graduates are finding themselves working in video stores because they can’t start careers. As you can imagine, it is extremely difficult to pay today’s graduates’ record-size student loan bills on a retail salesperson’s salary.
To add insult to injury, the “go to college, make $1 million extra in your lifetime” spiel has now been proven to be a myth. It’s no surprise that today’s “Lost Generation” youth are giving up on the now nearly unattainable American Dream. At some point, young people may just start giving up on the dream of going to college as it has become financially risky and doesn’t provide the increase in living standards that it should, and used to, provide.
As the “blame the victim” crowd chastises today’s unemployed and underemployed young graduates for not having studied the sciences, healthcare or some other “useful” field, reality shows that there simply isn’t anywhere to turn. Despite all of the hype about scientist shortages, the real “science achievement gap” is caused by a lack of science job opportunities as even PhD. scientists are having surprising difficulty in this job market. The healthcare field has been presented in the mainstream as a practical career utopia, yet medical technicians can’t find entry-level jobs, nor can nurses as colleges are now graduating so many nurses that a glut has formed (“Bye-bye nursing shortage!”). Surely pharmacists will always be in demand, as “people will always need medicine,” right? Wrong. Young pharmacists face a glutted field as young people rush to pharmacy school in hopes of entering one of the few remaining careers that pay a middle-class wage. Surely law school must be a safe bet in our highly litigious society?! Tell that to the law school graduates with $250,000 in student loans who can barely find legal temp work while others are forced to become topless dancers or sign up for food stamps to survive as the legal field is now the nation’s most difficult industry to get a job in according to the ABA.
No proper bubble is ever without its shameless profiteers and the college bubble certainly doesn’t disappoint in this regard. Like modern-day Marie Antoinettes, college presidents take a “Let Them Eat Cake” attitude while collecting record multimillion dollar salaries (1, 2) as they continue to hike tuition costs on the backs of their future unemployed and underemployed graduates. Other college faculty are seeing jaw-dropping increases in their already luxurious compensation, such as the 30 percent jump in six-figure salary staffers between 2007-2010 (and almost 50% increase in those earning over $200,000!) in the University System of Georgia, to name just one fairly typical example. In a world where college football coaches can make over $5 million per year, colleges are foisting the burden of soaring athletics department costs onto their students.
College presidents might make even Marie Antoinette blush with their extravagant Versailles-like vanity projects, such as UC Berkeley’s $321 million football stadium upgrade that’s being built during the university’s worst budget crisis in history! Lest you think UC Berkeley is an isolated case, the University of North Texas recently decided that it simply had to have a new $79 million football stadium. While Ohio State spent a lofty $243.8 million on 1,266 construction projects in 2010, Tarant County College of Fort Worth, TX just built a $192 million facility, paying more that three times what it should have cost (“Who cares if we overpay? It’s only the students’ money!”) The fact of the matter is that colleges are overspending on outrageously frivolous projects, binging on debt and sticking their students with the bill. Is it any surprise that college costs are soaring?
It is obvious that the institution of higher education has completely devolved into a classic bubble and will suffer the same fate as every bubble before it – a massive and much-deserved, excess-punishing pop. When students and their parents wisen up to the blatant scam that college has become, expect college attendance rates to fall significantly as students pursue college alternatives such as vocational schools, skilled trades or simply bypass college altogether to enter the workforce after high school. The remaining students who are still determined to go to college will be far more likely to attend cheaper state universities and community colleges instead of pricey private schools.
As the U.S. economy enters its fourth year of nearly 10% unemployment and middle-class wage-paying jobs relentlessly continue being sent overseas, expect student loan default rates to keep trending higher and higher, eventually popping the $1 trillion student loan bubble. The inevitable popping of the student loan bubble will cause catastrophic losses for financial institutions and the US Federal government and will make obtaining conventional size student loans nearly impossible. When faced with the reality of their product’s sharply reduced value in our society, plunging attendance rates and students who can’t get student loans, the higher education industry will have no other choice but to drastically downsize until it is much smaller than its current size. Expect to see mass higher education job layoffs, slashed salaries and benefits, colleges merging or consolidating, while many colleges will simply be forced to close their doors. Such is the fate of those who have something good but allow rampant greed to take over.
(Note: While the U.S. College and Higher Education Bubble isn’t an asset bubble like stock or real estate bubbles, it is a bubble-like phenomenon with very similar risks and implications as asset bubbles. The crucial components of all bubbles are present in the US College Bubble: a highly convincing and partially-legitimate boom story, soaring prices and profits, decreasing affordability, a highly overpriced/overvalued product, blatant profiteering, a “gold rush” mentality, extrapolation of the boom’s growth far into the future and debt-fueled overinvestment/overexpansion. The end result will be similar to what asset bubbles experience when prices become overvalued and unaffordable: prices will be forced down to realistic levels again and large-scale industry downsizing will occur, resulting in massive capital losses.)
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