We almost all feel the incredible rise in college costs, especially for private colleges. How is this possible in the information age?! Where practically everything is a mouse click away, tuition should be getting cheaper, not more expensive.
The problem is, higher education is stuck in the past… refusing to let go of the baby-boomer hey days.
Colleges and universities traditionally spent enormous amounts of money on sprawling campuses with beautiful buildings and landscaping.
Teachers and faculties aren’t cheap as most require master’s or Ph.D. degrees and there are only so many of those… and then they get tenure and endless benefits.
These high and rising costs collided with the largest generation in history… a group of people who increasingly saw college as the ticket to upward mobility and wealth.
And just look what’s happened to the middle class…
Instead of becoming steadily richer, the middle class is struggling.
Rather than facing the highest-inflation sector of our economy — yes, higher than even health care by a long margin — the education system and the government did what they always do: come up with a way to keep the bubble going.
Their reasoning was (and still is): If students could get government-backed loans, then they could afford to pay the higher and higher fees demanded for their education.
Never mind that their parents can’t pay for their kids’ four years at college.
Never mind how those students would repay the loans after school.
Never mind the financial noose being roped around these kids’ necks.
So now we have a student loan bubble…
Like we need another damn bubble! I think I’ll become a bubble terrorist. There seems to be no other way to stop the endless creation of bubbles since the 1990s. But I digress…
Back at the beginning of 2003, student loans totaled just $240 billion. Since then, they’ve shot straight up. By the third quarter of 2013, they were over $1 trillion. And there’s no sign of this trend abating yet.
How could there be? Fewer and fewer students can afford tertiary education without loans.
Sure, the student loan bubble isn’t as big as the mortgage bubble that swelled up to around $11 trillion before it burst with the subprime crisis. But it is yet another trigger that will hit our economy.
We are now more in debt than we were before the last bubble peaked in 2007, and the demographic trends are about to get worse, not better… and around the world, not just here.
When this bubble and all the other bubbles burst, we’re in for a hammering.
How will this bubble burst?
The same way the subprime crisis unfolded…
Home prices kept going down (as I forecast they would back in late 2005), even before the overall economy peaked in late 2007. Then delinquencies started rising.
Today, unemployment rates for recent college graduates are at 6% and rising. They went from 3.5% in 2007 to 7.2% in 2011.
Also, when higher percentages of people get degrees, there’s more competition among them for the top 20% managerial, professional, and technical jobs. So it’s no surprise that underemployment of recent college grads is at a whopping 45% (a number that has gyrated between 35% and 45% since 1990).
It seems to me we’ve been cranking out too many college grads for a long time.
And now the death blow: delinquencies are accelerating.
The chart below shows the delinquency rates (over 90 days) for student loans, and it ain’t pretty…
When you look at this chart, remember that the riskiest consumer loans tend to be credit cards, with delinquency rates of 0.8%.
Student loans started with higher delinquency rates of 6% between 2005 and 2013. Then they moved up to 7.5% by 2008 and accelerated more after that. The most extreme acceleration began in the second quarter of 2012. Now, student loan delinquencies are at almost 12%.
This pattern of delinquencies clearly follows a bubble trajectory.
Rates this high guarantee that this student loan bubble is going to burst, just like the subprime crisis.
The question is: Why should you care? The student loan bubble is relatively small compared to our other debt bubbles.
You should care because our young people already have high unemployment rates. They’re living in a time when the Federal debt is escalating like no time in history and entitlements for aging baby boomers are utterly unaffordable for decades to come.
And it’s the young who’ll end up footing the rising bills.
Maybe they’ll revolt or become debt and entitlement terrorists! There’s always that hope.
We should also care because these young people, who have loans with an average balance of $29,400, are less likely to be able to buy a house. Those that are defaulting will almost certainly not buy a house.
Many may feel (like the Japanese) that they can’t afford to get married or have kids.
How is our economy supposed to grow, let alone boom, under such circumstances? It’s not. Clearly.
When the student loan bubble eventually bursts, it won’t be the trigger that sparks chaos around the world… but it’ll most definitely be one of the straws that could break the camel’s back.
P.S. For details on what I believe will be the trigger for the big crash this year, watch this interview.
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Ahead of the Curve with Adam O’Dell
At the center of the student loan bubble story are two publically-traded companies. Apollo Education Group (Nasdaq: APOL) is the parent company of the for-profit online educator, University of Phoenix. And Sallie Mae (Nasdaq: SLM) is the private lender with intimate ties to federal student loans programs.