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Defaults on college & university student loans: The next US economic bubble to burst?

 ”Fears of a bubble in educational spending are not without merit.”

Moody’s Analytics, July 2011

 

This article began as a discussion on LinkedIn among my fellow alumni from Western Governors University.

During the past few years, many people who lost their jobs, or those who were seeing their jobs disappearing, chose education as a means to an end, to either retrain, complete their undergrad that had been left behind, or get an advanced degree.  Simply, to be more employable.  There were others of typical university age that were graduating in the midst of the Great Contraction, and continue to do so.  Many recent undergrads returned to school for their masters, thinking that they will be well prepared once the economy improved.  And perhaps, improving themselves while hunkering down out of “Hurricane Downturn.”

Unfortunately for many recent graduates, those means have not borne fruit and their loans are coming due. If they still are unemployed, they can continue their education as a way to push the student loan forward, perhaps take on more debt for their MBA or PhD.  But, what then?  What if this horrible sideways economy continues until 2020?

This is the reason for several movements to have the US Government forgive or reduce student loans.  In the US, they become repayable after 6 months of graduation.  And, due to changes in bankruptcy laws in recent years, cannot be discharged.  To add insult to injury, Uncle Sam will confiscate salaries and survival funds, such as Social Security, if these loans are not paid.

One such petition reads: “Forgiving the student loan debt of all Americans will have an immediate stimulative effect on our economy. With the stroke of the President’s pen, millions of Americans would suddenly have hundreds, or in some cases, thousands of extra dollars in their pockets each and every month with which to spend on ailing sectors of the economy. As consumer spending increases, businesses will begin to hire, jobs will be created and a new era of innovation, entrepreneurship and prosperity will be ushered in for all.”  Wiping out all $1 Trillion of these debts may be foolhardy, since 85% are not in default using the most recent data, although the number of graduates defaulting has been ballooning since 2008.  Something definitely could be done for the 15+% that are defaulting because they can’t find work, or were “sold” expensive degrees by unscrupulous profiteering private universities, or didn’t complete studies.  Fixing those issues would be relatively easy compared to the real problem of ever-increasing tuition and fees.

Meanwhile, costs for university continue to skyrocket, sometimes upwards of 30% year to year.  And it’s a well-known fact that people need a university degree to make a living wage and have a much better chance of being employed.  In July, Moody’s speculated that “delinquency and failure rates will rise in coming years because many students will be unable to service their loans as income growth falls short of borrowers’ expectations.“  In other words: if you’re wearing a paper hat or living in your parents’ basement, as many recent graduates are today, good luck paying your bill.  The unemployment rate for university graduates is half that of those with only a high school diploma.  But now, with the high cost of tuition, it’s a complete gamble on the part of the student, especially since only half are getting gainfully employed soon after graduation.  It shouldn’t be this way.  Student loans are approved uniformly across all courses of study, not by income levels of graduates or projected financial ability to repay, and often with no regard to the quality of education or amount of successful students at a particular institution.

Unlike in many other countries, there really is no uniformity in US universities, and grade creep is rampant while it devalues degrees.  Nursing students get the same financial aid treatment as a low-paid social worker, even though the nursing student will have little problem getting a well-paying job right out of school (and be able to immediately pay down the loan), while the social worker will certainly not be that lucky, perhaps ever.  Also, some US universities are graduating people today who would have failed 30 years ago, or at other more brain-tasking institutions today.  For example, corporate-owned Ashworth College — not regionally accredited, by the way — actually promotes that every one of their courses has an “open book” course and final exam.  That makes me cringe.  All of my exams at WGU were proctored at registered testing centers, and I was lucky to have a pencil and piece of paper, and maybe a non-programmable calculator, in the room with me.  Private Wall Street-listed “commercial” universities have been pillaging the nation’s student loan coffers for a decade and providing poor education to students who would never pass a more standard rigorous course, and who often drop out.

With all this in mind, these petition movements may have some merit, especially if the entire higher education system can be somehow returned to what it was decades ago: effective and affordable.  Some people on my alumni forum said that it would be unfair to them if they have paid back their loans while others are given a pass; some say they did so under financial duress… and one risked being killed in combat!  Others said they felt the personal responsibility to pay back the loan as agreed.  One alumnus said he joined the Army and went on a tour in Afghanistan, dodging bullets, to pay off his debt.  Potentially losing his life under enemy fire obviously was his only recourse as he saw it.

During this Great Contraction, folks who hand their keys back to the bank for their cars and houses get penalized on their credit rating for a maximum of 10 years, whether it was greed or financial foolishness on their part, or they lost their jobs. But they don’t get penalized forever.  And the banks don’t take their Social Security away, like Uncle Sam does for people unable to pay back student loans.  Is that fair?

The US has the highest public university tuition and related costs in OECD countries by far.  That is grossly unfair, too.  When a Canadian can get arguably the same quality undergrad education (at world-class and highly-rated McGill University, for example) as taught at some of the best US Ivy League schools, and for around $4,500 per semester (half that of a typical state school), and many Europeans got their education for close to nothing (Luxembourg charges $280 per semester, for example), there is something deeply wrong with the US system.  US education was very affordable 30 years ago.  Not now.  Today, millions of US students leave university with a massive amount of debt, and now cannot find jobs.  2/3 of US undergrads have college debt, and their average debt was $24,000 in 2008… and that is quickly increasing as states reduce funding to colleges and universities, forcing tuitions to rise, sometimes dramatically.

Zac Bissonnette, a senior at the University of Massachusetts and author of the new book Debt-Free U: How I Paid for an Outstanding College Education Without Loans, Scholarships or Mooching Off My Parents, agrees that there’s plenty of blame to go around:  “it takes a village to screw up that bad.  I support the personal responsibility argument, but if you’re 18 and the first person in your family to go to college, how can people absolve the college or the lender of responsibility?”

As Laura Rowly wrote in Is the College Debt Bubble Ready to Explode? (Yahoo Finance, December 2010):

While the housing collapse’s impact was wide-ranging — wreaking havoc on a multitude of industries and market participants — the primary losers in this debacle are the borrowers. Lenders can’t repossess a college degree, and changes to the bankruptcy law in 1984 and 2005 mean borrowers can’t charge off their obligations the way they can shed credit-card, mortgage or even gambling debt when they file for bankruptcy. Just 29 of the 72,000 borrowers in bankruptcy in 2008 were able to prove ‘undue hardship’ and have their student loans discharged. 

In Canada (and in many other countries), these debts can be eliminated in bankruptcy, and that has not damaged the country’s financial viability. 

But, that said, an undergraduate degree is the bare minimum needed for any kind of success in the New Normal, or you risk making 25% less in real money than your non-college-degreed parents did.  Tamara Draut of Demos spelled this out succinctly recently on Yahoo’s Daily Ticker:

As reported on Canadian national TV news this week, students in Canada are up in arms about the latest hike in tuition fees: Statistics Canada said the average annual tuition fee for undergraduate students is $5,366 for 2011-12, up 4.3% from last year.  Most students in the US would love that “increase.” Canadian undergrad tuition is already about 1/2 of what the average public US state school charges for an in-state resident. Many US tuitions have spiked upwards of 30% year to year (source: Public college tuitions spike 15%, even 30%: CNN). Of course, average US private universities’ tuitions are often much higher.

Most US student debt has not been acquired by mature professionally-employed business students who likely have more financial capability to pay it off, and which make up much of the WGU student body.  Most is held by young people who believed (and were told by Washington in the last decade) that the good life will go on forever and that they needed a university education to succeed in life.  Many students at WGU are pursuing a teaching degree (albeit at around $6,000 per year, a bargain in the US); those students will graduate:

  1. with the worst job prospects for teachers ever seen and,
  2. pursuing one of the lowest-paid professions in the US even during the best of times.

How many of these WGU-educated teachers (or teachers without jobs) have a lot of school debt, I wonder, or will have trouble paying it off on their meager salaries if and when they find a job? As one alumnus pointed out, there are some programs in place for all or some student debt forgiveness when they meet certain conditions, such as agreeing to spend several years teaching in a certain demographic.  But “teaching in a certain demographic” might require the purchase of a bulletproof vest.

Now, students that started attending university prior to the recession have graduated, are woefully underemployed, perhaps flipping burgers, with their bachelor or masters degrees (if they’re working at all), and this reality will continue for perhaps a decade (if you listen to economists, and not Washington).  The last recession never really ended.  This is like no other in US history.  With real estate in the toilet for the next decade (see: Japan), along with high employment expected for the long term, jolts are needed for the economy to even begin to attempt a recovery.

Higher education, like real estate and infrastructure, has been mismanaged in America for 2 decades or more. It’s nothing a Band-Aid will fix. It, like many things, needs to be completely gutted and started anew.

One alumnus mused:

“Why is it OK for my graduate federal student loans to be at a 6.8% when my car loan is at 2%? Sure, they can repossess the car, but isn’t my education and potential a guarantee I should be able to pay, therefore allowing me to get a decent rate? You would think so…”  Yes, you would. “All I am saying is that if corporations and the super rich are spared tax hikes because supposedly they boost the economy, all of us middle class idiots who took student loans at insane rates should be given a break, either through tax breaks or reduced interest rates. We are the ones supporting the economy, and not the rich. All that they do is get richer on our backs.”

The US economy needs a reset, and reducing or eliminating student loans for the middle class should arguably be part of that. High tuitions and the resulting student loans are dragging down the newly-educated or re-educated people who will drive the New Economy.  This same group of young people, and out-of-work professionals, are in a real Depression.  Not a downturn.  Not a recession.  One doesn’t need to look very far to find commentary on “depression-like” symptoms affecting formerly vibrant parts of the middle class, which are quickly joining the poverty ranks: “Depression-era levels of employment” affecting the young without a bachelor degree, and blue-collar workers losing their livelihoods.

This is a Depression, but not in the same sense as it was in the 1930s, just like this globally-interweaved economy is very different from it was during the Great Depression.  Economists will tell you this extended downturn is like no other in history, that what worked before to fix things won’t work now, and the poverty levels are increasing by former members of the middle class joining the ranks of impoverished.  I suspect we will see a series of economic recessions this decade followed by slight but non-sustaining upticks.  The US is in for a long, slow slog through a Sargasso Sea of an extended recessionary period of a decade or longer unless there is real structural change unseen in modern times… Change that Washington is unwilling or unable to make, partially due to the system of government.

The private sector is not creating jobs. US-based multinational corporations are holding onto their immense profits and spending only where there is potential growth; i.e. not America.  Small business is not spending.  Consumers are not consuming; in fact, they are deleveraging.  American companies will not bring jobs back here, period, unless there is renewed demand.  Publicly-traded companies don’t work for Americans. They work for shareholders.  So, they will go where demand is being generated.  There has been zero net job growth here in a decade.  Poverty is increasing, and alarmingly among children and young adults.

We are spending twice as much per student in public school than we did in the 70s (adjusted for inflation), but our students and workforce are dumber. There are fewer high school and university graduates. SAT scores continue to deteriorate.

That America of yesteryear is over. Unregulated capitalism killed it.  Stick a fork in it.

Fundamental changes in America need to be made, in education, in everything. Government gridlock is not helping. And there is no way for it to get things done in this emergency.  Unlike the British parliamentary system where one guy can effectively call the shots (or get booted out in the next election if he screws up), the US political system is really not suited for emergencies.  And, boy, have we got one.

The reset button needs to be pushed. America: Control-ALT-Delete.  Things need to be paid for: the new Medicare drug plan (a GOP idea brought in under George W. Bush) is not funded.  The global military presence is not funded.  The $8 billion per year TSA is not funded.  All take money from the general fund, and combined, add extensively to the deficit each year. So, why shouldn’t education be made affordable via federal support? It’s a pittance compared to those other unfunded programs.

What I find to be worrisome, and that others around the world roll their eyes skyward about, is that Americans want unsustainable low taxes and lots of benefits.  US taxes are effectively at their lowest in 60 years.  But, you get what you pay for: dramatically increasing university tuitions, quickly disintegrating infrastructure, deteriorating public education (and schools), competing countries building high-speed rail and better highways and ports that attract businesses, almost no state-industry R&D partnerships (as in Germany, which is today figuring out the next generations of technology, as they know the Chinese will be copying our current state of-the-art-stuff), and a myriad of others that only increased taxes can fund. Brazil is building the biggest port on the planet to trade with, yes, China.

State-provided education, or where it is at least been made affordable by state involvement, has proven to be a huge positive for the ongoing health of western societies where it is available… just like the collection of enough taxes to maintain and improve infrastructure keeps a country viable.  The US is nowhere near that today.  It will take $2 Trillion (with a T) to simply fix what we have today — stuff we should have been maintaining all along with higher taxes.

The first step is to eliminate debt for people the least able to afford it.  Perhaps not, as the petitioners want, to eliminate it all for everyone.  But reduce it to a manageable amount, or delay it — with no interest added — until affected people are back at work,  making a living wage and are able to pay.  Perhaps use the average in-state public university’s tuition as a baseline to financially help only those who elected to go to accredited universities.  Got suckered by an expensive for-profit university’s salesperson, went out-of-state or to a pricey Ivy League college with $200K of debt? Then the government will help you only up to that in-state benchmark and no more.  All this would be a first step in overhauling education to an affordable level.  If WGU can do it for $3,000 per semester, get Bill and Melinda Gates’ blessing and funding, and provide a rigorous learning environment, why can’t others make education affordable and effective, too?

Moody’s says that expensive colleges will burden American students for decades, while not attending at all will hurt US’ competitiveness.  The answer, to anyone who can operate a $5 calculator, is much cheaper and effective tuition that is currently not widely available anywhere in the country.

At the very least, the government must again make student debt dischargeable in bankruptcy and not confiscate Social Security, salaries and other benefits from those who can least afford it.  The government created much of this mess due to no or lax regulation.  The government must clean it up.

UPDATE November 29, 2012: The Economist writes in its December 1 article Not What It Used To BeAmerican universities represent declining value for money to their students:

There is growing anxiety in America about higher education. A degree has always been considered the key to a good job. But rising fees and increasing student debt, combined with shrinking financial and educational returns, are undermining at least the perception that university is a good investment.

The Economist article is certainly worth reading.

UPDATE May 18, 2013: The evidence that the $Trillion+ outstanding student loan bill is dragging the US economy down mounts. This from the May 12 NY Times: “Student Debt and the Crushing of the American Dream” 

The crisis that is about to break out involves student debt and how we finance higher education. Like the housing crisis that preceded it, this crisis is intimately connected to America’s soaring inequality, and how, as Americans on the bottom rungs of the ladder strive to climb up, they are inevitably pulled down — some to a point even lower than where they began.

UPDATE February 2, 2014: CNBC calls the accelerating $1.2 Trillion of outstanding debt a “Bubble Ready To Pop:”

With the $1.2 trillion student loan crisis accelerating, President Barack Obama gave a nod in his State of the Union speech to the millions of young Americans starting their adult lives in crushing debt but offered no new proposals for relief… Although the economy has been improving, the student loan situation keeps getting worse, exacerbated by skyrocketing tuition and still-high youth unemployment. Outstanding student loans have approached $1.2 trillion, according to a May 2013 estimate by the Consumer Financial Protection Bureau, up from about $1 trillion at the end of 2011.

We are obviously heading down a disastrous road that many in America’s capital identified years ago. If I, a marketing guy and part-time blog scribbler, saw the oncoming train light in tunnel almost two years ago, they did, too.  Just as they did prior to the Great Contraction, both Democrats and Republicans are sitting on their hands.

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