Sunday, August 04, 2013

The Student Loan Bubble

Students are offered college tuition loans guaranteed by the Federal government. Some students have anywhere from 150k to 300K in loans.  If the student pays it off in 10 years, that’s about $1,820 to $3,640 a month for 10 years.  When they graduate, they will need an 80 to 100K beginning wage job. If they can’t find one, there will be 12 to 24k of interest accrual each year that payments aren’t made. This interest turns into principle when added to the loan, so a 150k amortized over 7 years at 8 percent with no payments made turns into $257,000.  And if we calculate the same for 300K, you get a new loan amount of $514,000.  If you are unable to find a job, just the monthly maintenance to keep the loan amount from increasing is $960 a month on the 150K loan—double that for the $300K loan.

Now picture how the economics work for an institution of higher learning.  They need students that can afford a 2 to 4 year degree.  They are not promising jobs, they are promising an education to get you a better job (this is the most important sentence, and nobody really comprehends it-- a college degree does not mean more pay, it implies it).  With a lot of two year schools, the education received wouldn’t buy a cup of coffee, but the dollars the student spent are real.  The school needs students, and a lot of ”would be students” don’t have the dollars to attend.  Here is where the school will offer services, free of charge, to help you finance your education with them.
Don’t be surprised to read about the divorced mother of two who signs up for the 2 year dental technician course for $12,000,  graduates only to find out she can’t get a job with her new training. She still has the 2 kids and now in addition, 12K in school debts.  If she’s flipping hamburgers, her hours will probably be cut because of Obamacare, and her wages will be garnished to pay off the student loan. FYI,  that trade school is still turning out dental technicians by the 100's ---financing is in place for your future degree.

Our youth has been told  that  a college education guarantees a better paying job.  Students with large student loans will have to look at the bottom line before they accept a job—it might not pay all the bills.  There is always the chance your girlfriend will have just as much debt as you do. 20 years ago, the consensus was  a person with a college degree would earn a half million more than the guy without one  (I sure hope that amount has increased somewhat).

The choice for a graduating senior in High School is obvious; flip hamburgers, or get that college loan and go to college. The real irony, is that you get the loan, and the education, and then you learn how to flip hamburgers for the rest of your life.  Not every college degree is in demand. Plus you might not want to work in Butte Montana or in Detroit Michigan.
The student debt bubble could be deflated if Congress would allow students to file for bankruptcy on the ridiculous amounts loaned to them.  It’s a noble gesture to offer everyone the money to pursue a college education. It’s insanity to think that most will have the opportunity let alone the desire to pay it back.   The underwriters of these loans are turning our kids into indentured servants. If you can’t afford something you do without---what if the government offered guaranteed loans on lottery ticket purchases?  I'd love to have sold the guy that thought up the student loan program a toll bridge or two.

We saw how free money caused a real estate bubble.  When that bubble collapsed, bankruptcy was a way out of a bad mistake.  Right now, the student loan bubble is fueling the economy ---1 trillion dollars’ worth of consumption so far and Congress is still pumping air into it. Can we count on these college grads to be consumers when they graduate?  Will they be too busy paying back their loans or fighting to keep their wages from being  garnished?  
Everyone at the age of 20 has dreams of success and wealth. The rest of the world will play on those dreams, they are a vulnerability. Two kids a wife and a house payment are a reality,  and there isn’t much room for a large student loan.  The more bills you have, the less you sleep at night. A college education could become your worst nightmare.  We can be very sincere when we say;  “The road to hell is paved with good intensions.”   Another 10 years of these super fantastic student loans, and one will  need a Master's Degree to get a job cleaning toilets or a PhD to flip hamburgers.

As a post script, you can always move to Australia and forget about the debt. Being broke and having a new start will work miracles on your state of mind and you'll sleep a lot better. Now might be the time to invest in surfing posters about Australia and New Zealand for the dorm room.  However, it wouldn't surprise me to see them distributed free of charge, with a visa application for the Down Under, printed on the back side. No "go figure" on this one, we saw it coming and did nothing.


Anonymous said...

How about the success of the American dream...

Jim, not all is perfect, but unless you can live on mars, the u.s. is the best option on earth, please think about that...

continue to write and have influence in improving the system but every once in while give some respect to the greatest country in world...where do you live...

Anonymous said...

no country is perfect but damn we have it good in the u.s. or else why you sticking around??? your condo in shanghai not good enough?

Sackerson said...

Hi Jim: re Australia and starting broke, have a look at this!

dearieme said...

We've lived in Oz and NZ. I can recommend both. Oz is especially good if you don't mind mozzies and venomous creatures.

Jim in San Marcos said...

Hi Anon 1:19

The Titanic was the greatest ship ever built. You don't want your life boat seat, its ok with me.

The article had nothing to do with the greatness of this country. It had to do with the idioticy of our Congress.

A majority of these student loans will never be repaid. The money that paid for these loans came from taxes paid by people that never had the chance to go to college.

These students will be chased by bill collectors until they die. Even their Social Security is garnishable as well as their estate.

Anonymous said...

The default rate is outrageous. Collection Agencies are going to have open season on dead beat student borrowers. There will be a dark cloud over the economy for a very long time.

Jim in San Marcos said...

Hi Sack

If I had seen that link 40 years ago, I wouldn't have my present loving wife and adorable son.

I missed something, I know I could have really enjoyed.

From a joking perspective, I wish I hadn't read your link.

Thank you for your post and take care.

Jim in San Marcos said...

Hi Anon 7:35

Thank you for the link.

I'm not sure how it will end, but those loan collectors earn their wages the hard way.

They have your life time to collect.

Anonymous said...

Devil is in the details...

the "student loan bubble" is for people who majored in psychology and business, if you major in any branch of the sciences, you are doing well.
although i think majority of politician are rats our system is the best.

"congress" gave me money and lent me money to go to college and now i am paying it back and paying dividends to the country who supported me.
your article does have to do with the "greatness" of the u.s. because everything you write has to do with how the u.s. is doing things wrong.
for every wrong we do 10 things right and you are not the only one who misses this.

i am in my 40's and i can tell you, the older generation doesn't get it, they can't understand the evolution of the u.s.
whether it's my 60+ neighbor or you, you guys refuse to understand the "new system".

just think, every time there is a google or qualcomm, they have yearly sales equal to GDP's of counties. when you see the next Microsoft or facebook open up in another country, you'll know we are in trouble but until now we rule the world. and almost every damn person around the world who CAN afford to live in the u.s., chooses to bring their wealth to the u.s.

i used to hear china is doing this and doing that, news flash, 70% of Chinese millionaires have their money in the u.s., why aren't they keeping it in their own country? don't have the link but look it up.

my point is that the u.s. is not perfect, the dollar is not perfect, but when your country and currency smell the least relative to others, you are good.

let the rising tide lift you rather than swimming against the tide. someone like Joseph Oppenheimer gets it and hopefully you will too.

when was your last positive post on this blog??? or does the u.s. only make bad decisions.

anyways, god bless you but you are too negative on the greatest country this earth has ever seen.

Jim in San Marcos said...

Hi Anon 12:12

I’d like to point out that whatever you or I say, neither of us will change our minds, we will just be more emphatic in expressing our beliefs. So let it be, so be it.

The reason I wrote this missive is because I worked my way through college and got a degree with the help of the GI bill and an $8,000 student loan. The bank defaulted my loan when crossed out two lines in the repayment contract. One stated that if the government went bust, I would still owe the money under any new government. The second line was a bankruptcy exclusion that said they were entitled to what they were owed no matter what you settled to pay the others. I didn’t foresee any future problems but in my innocent mind, I figured that if my creditors were going to have to settle for less than what was owed, the loss ought to be shared proportionally.

So after graduation, my monthly student loan payment was $60. My degree was in Journalism and I got one job offer in Colorado. The Colorado paper wanted to start me out at $80 a week and I couldn’t afford to make the student loan payment, pay the rent, my car payment, and have anything left over for fun, so I refused the offer. I wish I had taken the offer because a friend of mine did and was making $180 a week, a year later.

In the last 10 years, I have personally known two divorced women each with two kids that went through the 2 year trade program to get a better job so their kids could have a better life. One had over 12 grand in student loans, all the other divorcee said was that “They could kiss her ass for the money, her kids came first.” Neither one got a job in the field they studied for. The kids eventually paid the price.

There is no real argument over the United States being better than anywhere else, although, I tend to think that New Zealand and Australia are right up there with us. The point about these two countries that eludes you is the fact that a student with massive debt from the US, say a dentist, needs about 180K to set up an office. With 250K in debt, emigrating to Australia, eliminates the debt and allows him a lifestyle he wanted with half the effort. The point not realized is that the debt will not be repaid and Australia gets a new, skilled professional. Great Britain has the same problem with immigrants from India; they use the education system, then move back to India as doctors and then come to the United States to retire.

As for a lack of positive posts, I am at a loss to understand the criticism. All I do on this blog is to try to connect the dots. It in no way implies that I am right. I you want to read about “good news” I’m really not sure where to point you.

dearieme said...

We have another student loan problem in Britain. EU rules require that EU citizens from the continent (or the Irish Republic) have to have the same access to our university courses as our own students, including the right to student loans from the British taxpayer. Then they can graduate and return to their home countries where we have no way of recouping the loans from them. Which idiot government wrote our rules? Blair's I think.

Anonymous said...

Humanity will continue to bungle along until it is no longer extant. All of these issues like economy, student loans, troublesome governments, fiat currencies, wars, etc. etc. we all just have to learn to live with as humanity continues to bungle, experiment, backslide and learn. One's personal life and production, contribution and pleasure is what is most important.

Jim in San Marcos said...

HI dearieme

It sounds like the beginning of an international student exchange program for graduates. Each country gets to import well skilled talent with automatic debt forgiveness.

Like most government programs abuse was not a factor taken into consideration. We know who eats free and who gets handed the bill--the taxpayer. Nothing seems to change much--except we get a little older and have less to spend now.

Anonymous said...

What will happen if the "student loan bubble" meets a "deflationary depression" ?