Monday, December 16, 2013

Time To Pop The Student Loan Bubble

One topic snatching headlines every so often is the ongoing student loan bubble (or lack thereof, according to conventional wisdom, the same conventional wisdom that missed the real estate bubble and corresponding crash in 2008). For so long we've heard that college is key if you want to make it in life, and while that may very well be true in some cases, the undue burden that student loans have put on us over the past two decades has begged the question - is college even worth it?

We've all heard the statistics trotted out every time someone wants to reinforce the importance of a college education - "You'll make $1m more in your lifetime over someone with just a college degree." "You can't get a good job without a college degree." I totally agree on the former and totally disagree on the latter (which I will flesh out shortly). The person will then shake their head with a smug, self-satisfied look on their face like they just dropped a truth-bomb on you. They themselves are probably at least twenty years older than you, but had significantly less student debt to pay back. They probably have a really good degree that they were able to parlay into a great job at a great company that they stayed at their whole life. God bless them, they've had a nice run. But that's not the over-arching reality in 2013 for us young-ins (of which category I'm leaving in the next few years).

The student loan bubble is out of control. Tuition costs (which I will use interchangeably with 'student loans' throughout this post since I believe them to be intrinsically linked, so just deal) are out of control. The student loan industry is about $1 trillion as of 2011. When compared against 1990 consumer price index (CPI), the Moody's ratings agency has listed tuition costs as having TRIPLED in the last 25 years. Since 2008 alone, tuition costs have been increasing 2/3x the rate of inflation (which according to the government is between 2-3% each year). But noooo, of course there's no bubble. This is all normal. It's basic supply and demand. Everyone's getting college degrees (the new 'high school degree'), so you need to pay to play. Why is this happening? What is the driver of these high costs? One simple answer - GOVERNMENT.

The main culprit of the student loan/tuition cost bubble is our wonderful government. To be fair, this process has been unfolding over the past 30 years, under both Democratic and Republican leadership, so both are guilty. Much like the real estate bubble, we have been socially engineered to 1) own a house and 2) obtain a college degree. The two most expensive propositions in our lifetimes. We've been shamed into thinking renting and not going to college is a bad thing. At the top of the list of guilty parties is a government that continuously feeds the college beast. Stafford Loans, Pell Grants (which have nearly doubled since 2009), Perkins Loans, and more - in total, government shelled out $112 billion in student loan subsidies in 2012, an ever increasing number. There's two rules of thumb with government involvement - 1) when government gets involved, costs go up, and 2) if you subsidize something, you get more of it. Insert government into the student loan process and voila - you get more in student loan subsidies and a corresponding bubble. Methinks this smacks of the same attitude that got us into the real estate bubble - people who had no business owning homes were given the false impression that they could take on the large mortgage. And when shit hit the fan in 2008, these people found themselves with ballooning interest rates and an underwater mortgage that they simply walked away from. Well guess what's going to happen when the student loan bubble bursts? People will stop paying, ask for frequent deferrals and forbearances, and, in a less dramatic fashion than the housing bubble, costs should and will stabilize. The goal of this post is to make it a soft landing as opposed to a crash landing.

As it stands right now, government keeps loaning out subsidies because it's good business - after all, recovery rates on these tend to be between 105%-122% when interest is included. Government keeps the profit. The party in control gets to politicize the always looming 'rate increases' each June/July where the threats of doubling the rate to 7-8% seems to be an annual false alarm, and then at the last second everyone agrees to leave rates as is. Plus there's the perception of America as a global leader in college education when millions of high school seniors decide to go on to higher education - when in reality, the brightest international students engage in 'brain drain' and take their talents back to their countries of origin and set up shop there.

Now that government has created the bubble and artificial demand by providing easy access to credit for college purposes, the schools are getting into the act too. How many schools have you visited that were undergoing massive expansions with lavish campus centers, new dorms, state of the art classrooms, futuristic athletic facilities, and astro-turf fields that get used for five years and then scrapped in favor of new projects? On a semi-related note, what about these overpriced textbooks that never get cracked? Forced to get the latest edition that adds about ten pages of verbal diarrhea for $110? And if you go to sell it back at the end of the semester it's suddenly only worth $40? Only to reappear the following September selling at $70? Everything about college is a racket - the only thing not going up is keg and six pack prices. For that we are eternally grateful. I understand that colleges are all competing to attract students, but shouldn't they bear more responsibility for churning out deeply indebted entry level workers who are unable to find jobs instead of building exquisite and showy facilities? Or is that onus on the student for pursuing college in the first place? Is it a chicken and the egg scenario? What about the fact that 15-20% of students actually land jobs in the field of their major? That implies 80-85% of college majors are wasted!

Seems to me like schools will push a ton of core curriculum with bullshit courses that you wouldn't dream of taking were they not mandatory. For what? To say I'm more cultured? How about if you are a biology major, you shouldn't be forced to take Greek Civilization courses (which I actually enjoyed, by the way). What if you are a business major, can you opt-out of the Religious Studies class that mentions Jesus five times the whole semester even though you are at a Jesuit institution? I speak from experience. I went to a private four year Jesuit school in Connecticut that ended up educating three of the four children in my family. I majored in Marketing but have worked in the Finance field for the past ten years I've been out of school. I started out with $120k in expected expenses, minus $40k in accumulated grants, leaving a sizable $80k to pay off. My wife had one semester of school to pay for once she graduated (we got married two weeks later), and we conceived three months into our marriage, and she entered retirement a year later to stay home with our children. That of course was a choice, and she will most likely go back to work at some point. Not blaming college on that one. But to pay back a shitload of debt on a major that I chose of my own free will, applied to marketing jobs, didn't get them, and ended up pivoting to Finance (my minor)? Bad choice of a major on my part? Inability to connect and network with appropriate parties? At least Marketing fell under the 'Business' umbrella, and Finance was a hedge in the event Marketing didn't work out for me. I knew I wanted some type of Business degree, because I wasn't some pie-in-the-sky dreamer who thought I'd find my ideal job in whatever field I set my mind to. How many others are in a similar spot? And could it have been avoided if I had a different strategy? Blame at this point rests with government for subsidizing it, universities for taking the money and not churning out quality and relevant majors that align with the needs of the job market, and the student who doesn't know what they want out of life, let alone college. How do we align all three?

1. College isn't for everyone - identify candidates earlier on in the game. Weed out those who wouldn't thrive in a four-year school.

This is gonna hurt, I know that. But it helps weed out those that aren't serious about college. Don't look at this from a 'who can afford it and who can't afford it' perspective, look at it from the standpoint of the prospective student. Parents, student, and HS guidance counselors should meet and determine the best course of action for Little Johnny, preferably half way through high school. If Little Johnny showed a proclivity to constantly lose focus, need extra attention, flunk classes, not apply himself, slack off, pass in homework late, then perhaps college isn't for him. Let's save ourselves the heartbreak of a crippling student loan and ask HIM what he wants to do with his life. Offer life skills classes in high school that prepare students for the real world. If that commitment of time, money, and focus is too much, then start to float an alternative plan. Please note, what I say above is not to disparage those that don't go on to college - everyone has different reasons why they don't go, and that's ok. To the emotional knee-jerk buffoons who don't have discernment - I'm not implying those that don't go to college are slackers. Get it through your coconut brains. But outside of 'it costs too much' (which is 100% accurate), and getting useless majors (more on this later), you can look back on some college friends and say "You were better off skipping these last four years if (job x) was going to be what you did with your career. You are the bubble-blowers that we can weed out and correspondingly begin to get this student loan bubble to deflate a little bit." According to a Northeastern study conducted by the Center for Labor Market Studies, 36% of recent college grads with degrees were working in jobs THAT DON'T REQUIRE A DEGREE (up from 30% in 2008). Call it a crappy job market, or call it jobs that they want to actually be in, but that is the reality.

How about more vocational schools for those not moving on to higher education? Find a trade that can still be lucrative - just because you don't have a college degree doesn't mean you are resigned to working jobs you don't want the rest of your life. Get an apprenticeship (equivalent of a corporate bitch-tern...sorry...intern). Become a mechanic, healthcare technician, programmer, get certified in specific areas of expertise that don't require college degrees. I've come across quite a few people in my lifetime who were wildly successful without a college degree. We need to back off this idea that the only path to a successful life is through an overpriced college and debilitating loans that we pay off into our 40's. How about our high schools teach more 'real world' classes on entrepreneurialship (is that even a word?) and how to manage your expenses when you are an adult? What is wrong with channeling and cultivating an entrepreneurial spirit for those not moving on to higher education? Hello, future small business owners! If you get a chance, try to pick up the book 'The Millionaire Next Door' by Thomas Stanley and William Danko. It uses extensive research to show that the wildly successful, eeeeeevil rich people that liberals always bitch about aren't just CEO's, executives, doctors, surgeons or lawyers, but they are the everyday small business owners that excelled at something, had a vision, and put heart and soul into making their small business flourish and thrive. You can't put heart and soul into a corporate job. You get a paycheck every two weeks and there is stability. Small business owners run on grit and sheer determination, because they are not guaranteed anything unless they hustle. A four-year degree isn't a prerequisite to make that happen. Plus - who is the driver of job creation? The ivory tower exec running a corporate leviathan or the small business owner who is close to his/her expenses and knows the ins and outs of his/her business? Hint - it's the small business owner. Food for thought.

2. Get rid of exotic majors that can't fill classrooms and engage in market research to determine what kind of majors are needed in the here and now. 

What made America exceptional and innovative over the years was rugged individualism and a well-oiled capitalist system (not perfect, of course) that dictated winners and losers. Those with the right amount of drive, hard work, luck and rudimentary education would win, and those who were lazy, out of touch, and tending to rest on their laurels would lose. So it goes in the job market here in 2013. We are in the prolonged 'Great Recession' (which I think will be rebranded as the 'Second Depression' within the next two years), and numerous fields that used to be successful paths to job security are no longer thriving.  Lumber, building supplies, luxury goods, non-automobile manufacturers are all on the downswing due to the the shitty economy since 2008. So if you know that, pick your major accordingly. If you want to choose a major that's easy but not lucrative, take accountability for your decision and live with the consequences. I'm intentionally being vague about garbage majors because I don't want to offend anyone (I have three readers after all, wouldn't want to piss them off or its back to TMZ and Us Weekly toilet reading as an alternative to the Trousered Apes blog!). If each university had a mini-job market department that assessed popular jobs, overall demand (not likely to DRASTICALLY change over the course of a 2-3 year period), they can promote themselves as adroit specialty schools and attract the right target market. Going the 'specialty' approach means less buildings to maintain, less professors to employ, and less overall demand across the board for college since there is less administrative and physical overhead. Relevant, specialized majors get matched up with relevant, specialized jobs and there is less 'waste' of a degree.

Here are some recent unemployment numbers for various majors, according to a Georgetown Public Policy Institute study. As the jobless rate has slowly decreased in the year since the study was conducted, assume slightly lower rates as of December 2013:

Architecture - 12%
Arts - 10%
Computers/Math - 9%
Social Science - 10%
Humanities/Liberal Arts - 9%
Business - 7%

Is demand slipping in some categories? What are the 5-10 year trends? Give college students guidance along the way and educate them to the pitfalls of picking a shitty major.

Full study here:

This would be a fundamental game-changer if schools could show how nimble and versatile they were. Time will tell.

3. Carve up the core curriculum. Rebrand the colleges to go straight to the courses you want to take. 

Another game-changer - get rid of the needless courses we don't want to take. I knew I was going to be a Business major of some sort when I went off to college in August 1999. Spare me the music, art, history, spanish, ancient civilization, and diversity courses. Not that they were bad, but they are $3k a pop plus textbooks and I don't need to be studying them. I repeat - I don't need to be studying them. Give me Economics, Business 101, Accounting, Marketing, Investments, more Investments, Financial Institutions, let me weasel my way out of a Derivatives course and then let me finish with a capstone International Management course. Game. Set. Match. Give me my degree and I will find a job, with less debt to worry about when I am gainfully employed and my six month payment stay of execution is over. This ALSO means that colleges can cut down on staff, buildings, other administrative costs. Let the Art school take the Art students. Let an Accounting school take the CPA-wannabes. Let the Lesbian Hebrew studies school take all the Lesbian Hebrew studies students. What? There's no demand for it? THEN PICK ANOTHER FUCKING MAJOR and stop wasting your parents'/your money!

I think this item is self-explanatory and probably the most popular among the 2.4 people reading this post.

4. Once the above three items are done, government can slowly start to cut student loan subsidies. 

If and only if the aforementioned ideas take shape, government can stop throwing money at the bottomless pit that is student loans. Does this big shakeout mean less people overall will go to college? Maybe, maybe not. Will it create a new generation of entrepreneurial superstars that say 'screw college, I know I'm good at xxx and I can become profitable at xxx without an expensive and perhaps useless college degree'? You bet your ass. Will it slow the rate of increase and even deflate some of the ever-increasing tuition costs? There's a good chance of that. Imagine a country with more innovation, more small businesses providing specialization (and correspondingly, jobs), less wasted degrees, less student loan debt hanging over our heads, the marketplace deciding which majors are bound for the trash heap, and a more enriching college experience? It may sound like a pipe dream, but the possibilities are endless. I'd love to hear your comments and feel free to poke holes in the analysis!!!! Ad-hominem attacks and insults encouraged!!!!

Crazy Christmas 2013 Brag Post coming later this week. Stay tuned.

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