When will *this* bubble burst?

As student debt recently surpassed the $1 trillion mark, the delinquency rate on student loans has also exceeded that of any other type of consumer loan – including credit cards and car loans. Even worse, chances are that many will default, even though there are now more options for debt relief than ever. Private loans offer choices that include forebearance, deferment, and reductions in monthly payments; federal loans offer some additional options for the employed, unemployed, students, and military. Unfortunately, for those who decide to default anyway, the consequences can be severe. The government can garnish wages, as well as Social Security disability and retirement income. The loans are unaffected by bankruptcy, and charges for collection can reach 20%. Lenders even get first dibs on any lottery winnings. And, just like any other loan, defaulting can damage credit scores, affecting the borrower’s ability to get future loans.

 

So, how did it get so bad? After all, student loans are just loans, right? Well, not really. Unlike other types of loans, there’s no collateral involved (an education can’t be repossessed) and loans aren’t given out based on creditworthiness or ability to repay. Beyond that, tuition has skyrocketed to a level at which the higher projected earnings of having a degree are all but wiped out by the burden of the debt incurred, to the point that many debate the value of having a college degree. What money schools do have often times is not given to those who need it the most – for example, it is sometimes used to lure higher-paying students rather than low-income ones. In fact, financial aid is like a legal form of price discrimination – a method of lowering the price of admission to what someone is willing to pay, so that everyone pays different amounts for the same education.

Several ideas have been proposed to help the “industry” (which involves mainly schools and the federal government) revamp their operations. Most obvious is to bring down the cost of higher education to a reasonable level, which can be done partly by online learning and automation (eg. recorded or online lectures for intro classes). Also, make the schools somehow feel the burden of loan default, which may encourage them to offer more aid as grants rather than loans – or to come up with better ways of financing education. Disclosure might also prevent some from overleveraging their finances if, for example, they knew what the projected payback from their degree is, or if they were better informed on how much of their aid package was actually from loans. Finally, come up with better terms for the overburdened, such as income-based payments and writing off additional debt after a specific repayment period.

It seems strange to think of higher education in business terms, but ultimately most of us are in it for some form of financial gain. What are your thoughts on student loans and the high level of delinquency? Is the value of higher education (financially) worth the cost anymore? How can institutions adjust their operations to reduce the risk of default?

http://www.businessweek.com/articles/2012-11-28/the-needless-tragedy-of-student-loan-defaults

8 thoughts on “When will *this* bubble burst?

  1. The value of a college education is invaluable, and with the marketplace the way it is today, a college degree is essential in becoming a contributing part of society. Sure there are specific examples of people who excelled in life without going to college (i.e. Bill Gates), but for the most part, if you didn’t go to college you will struggle finding a career that allows you to grow. Because of this principle, the demand for a college education becomes relatively inelastic with respect to tuition costs. Exacerbating the student debt issue is the ease of which student loan funds can be obtained, with loans being handed out essentially no matter your repayment ability or schooling choice. The ease of obtaining college funds, combined with the in-elasticity of tuition costs, has produced skyrocketing costs of education, and effectively created a bubble. The solution however, is not to simply withdraw oneself from the education system, as a degree has become necessary in obtaining even the most entry level of white collar jobs. The solution to curb the bubble is to restrict access to student loans and create a process that incentivizes students into studying high demand industries. Introduce programs that give female engineering majors a discounted rate if they finish their degree in engineering at a public institution. Perhaps a program that includes loan forgiveness to students who teach in inner city schools (I know programs like this exist, but expand them). Rather than giving each student a blank check, steer students into obtaining more “creditworthy” degrees and jobs, while still providing student loan access to those who wish to study areas that are in less “demanded” degrees.

  2. The formula is simple; students are spending expensive money to acquire a diploma or title that no longer is worth spending on. The millennials often have opted for careers that may have had abundance in the past but which are saturated by the time these same students graduate or even while them are half way through their universities.
    Like bad stock market management practice, students buy into their courses when the market is already at its peak, attracted by high the illusion of high salaries and quick promotions to the top, with minimum or no effort. The reality is that the same as a free market, student majors become commodities very quickly and they all endup competing on a “zero profit” market.
    I have recently tried to hire engineers for many months now and found out that not many engineers are graduating these days while there is an abundance of law, economy, finance, marketing graduating students.
    Salaries for newly hired employees fresh from the university have risen considerably month after month as a way to attract talent or even to attract anyone with an engineering diploma.
    I believe president Obama “hit the nail on the head” when said that it is extremely important to attract students to the science and technology fields that will keep the country abreast in technological and scientific development which is what for the most part maintains the middle class in the US.

  3. Not to go all political, but I think at least part of the answer is raising taxes so that the “state” schools continue to be affordable for in-state students. When I went to University of Illinois as a freshman 8 years ago, all-in it was about $18,000/year for in-state students (regular tuition, normal housing/dorms). My youngest two sisters are in the college hunt at the moment (senior and junior in high school respectively), and University of Illinois is now $35,000/year … only eight years later. That’s a 95% increase! In 8 years while household incomes were not only stagnant, but decreasing because of the economy. I would like to say college education is invaluable, and in many ways it is, but at some point it is going to become prohibitively expensive, even for the middle/upper-middle class.

  4. I think one of the important facts that is lost by politicians when they look at higher education policy is that over the long term, a higher educated citizen returns a considerably higher level of tax income to a government than one that is lacking in education. Additionally, these higher levels of education enable citizens to create the new forces of economic growth that benefits a country as a whole. Ideally, a country would love to send everyone to a higher institution of learning on the taxpayer dime but this simply is not realistic. While it would eliminate the pressure of student loans and allow for faster household creation, this would also possibly lead to individuals going only to certain fields that may be popular but unpromising in producing a future benefit to the society.

    I think that in the end, the education framework in the US will need to start to adopt the policies of other countries in the developing and industrialized world. A perfect example of this would be moving towards a model that is being used in Germany. In this model, there are different levels available to students based upon their testing scores. Those that are demonstrated to be at a higher level are given the options to go to the best schools. Another idea for our government to consider is offering free higher level educations to qualified students willing to go into fields such as engineering, the hard sciences, etc. These fields will provide the country an investment in its future productivity and competitiveness while also working to reduce some of the stresses on students which would induce them to go into fields promising higher starting salaries simply chosen to allow them to survive financially after graduation.

  5. Higher education is priceless and should be sought after. Unfortunately this decades Master’s degree was last decade’s Bachelor’s degree. Having that being said, student loans are vicious and take advantage of those that can’t afford what it takes to ‘have an easier lifestyle’ per say. DePaul University could definitely cut back on athletics as an alteration to their operations. Reason being, the student body does not attend the games, alumni are scarce to attend and ultimately, I feel that it saps money from the school endlessly. While I do understand that many students that are athletes can’t afford this education, I simply want to convey that ‘fancy hotels’ and long distance plane trips across country should be cut from the budget. Some of our tuition dollars are spent on feeding, clothing, and housing those athletes leaving the rest of us to fend for ourselves. It just is not right.

  6. Over the past several decades, student loan debt has undoubtedly seen rises in delinquency rates, most notably during the most recent financial downturn. However, over the past couple years, the market has actually been viewing student loan debt as becoming less risky, albeit from very high levels associated with the financial crisis. I work for a financial valuation firm, and we do a lot of valuations on securities made up of pools of student loan debt held my corporations. Over the past 9 months I have been working there, the valuations on these securities have been rising and transaction volumes have increased. This trend indicates that people are generally feeling a little better about the future prospects of the underlying pools of student loan debt. A lot of this is probably due to lower interest rates and an improving employment picture.

    I believe that whether or not one’s education is worth the cost largely depends on the quality of that education. Much of the very toxic student loan debt can be accounted for by for-profit education institutions like University of Phoenix and Devry University. There have been recent hearings to decide whether or not these “universities” have misled students into thinking an education from these schools will ultimately lead to gainful employment. Many students have recently graduated from these schools with a small fortune in student loan debt and a degree that is worth next to nothing. Instead of universities acting to decrease delinquencies of student loan debt, I think congress needs to pass legislation that will prohibit these for-profit universities from preying on people that are merely trying to improve themselves by going back to school. A decrease in delinquencies will ultimately lead to lower interest rates for students due to the decreasing risks to potential lenders, which will ultimately make education more affordable for those who want it.

  7. I agree with the previous comments. Education is invaluable and it is extremely upsetting to see how much our education is here in the U.S. compared to other countries. I truly believe that their is a limit to how much of our education we should be paying for. I can’t imagine how much it will be 10-20 yrs from now (house payment?).

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