Monday, August 22, 2011

The next credit crisis -- in education?

From The Atlantic comes a chart showing an incredible rise in the level of student debt over the past decade or so. The total outstanding debt among US students has grown by a factor of more than five over this period.

 Daniel Indiviglio brings out the crucial point to appreciating just how explosive this rise has been. The figure shows two curves, red for student loan debt, blue for overall household debt. The latter itself went through a rather explosive growth from 1999-2008, yet doesn't come close to matching the rate of growth in student loans:
See that blue line for all other debt but student loans? This wasn't just any average period in history for household debt. This period included the inflation of a housing bubble so gigantic that it caused the financial sector to collapse and led to the worst recession since the Great Depression. But that other debt growth? It's dwarfed by student loan growth.

How does the housing bubble debt compare? If you add together mortgages and revolving home equity, then from the first quarter of 1999 to when housing-related debt peaked in the third quarter of 2008, the sum increased from $3.28 trillion to $9.98 trillion. Over this period, housing-related debt had increased threefold. Meanwhile, over the entire period shown on the chart, the balance of student loans grew by more than 6x. The growth of student loans has been twice as steep.
The number of students has remained more or less constant over the same period. Indiviglio goes on to ponder what happens when the bubble bursts, but there isn't an obvious endgame.

The disturbing thing is what lies behind this sudden expansion; it isn't the high-minded aim to make education possible to ever more people but the chance to make an easy profit on loans guaranteed by the US government. An earlier article in The Atlantic documented fast rises in tuition as universities aim to suck up their share of the easy credit, and of course there's been an explosion in for-profit college companies such as the Education Management Corporation. That company appears to be to the education bubble what Countrywide was to the housing bubble -- a facilitator pushing clients into loans regardless of need, solely to make a profit. As the New York Times recently reported, the Justice Department has joined in a suit against Education Management Corporation, charging it with defrauding the government " illegally paying recruiters based on the number of students they enrolled." Get 'em signed up regardless of need or ability to pay. Sound familiar?

As the NYT article noted,
For-profit schools enroll about 12 percent of the nation’s higher-education students yet receive about a quarter of all federal student aid; their students account for almost half of all defaults. In general, these institutions get more than 80 percent of their revenues from federal student aid. 
Good money to be made here, apparently. So you may not be surprised to hear who's behind the Education Management Corporation. According to the NYT, it is 40% owned by Goldman Sachs.


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  2. I have recently become concerned about the ever-increasing barriers that our society places in the path of our youth who hope to enter 'the good life' of adult North American society. This is just one more that I had not thought of yet.

    Part of the problem is 'creeping credentialism', a process that requires ever higher educational levels to perform ever-more-mundane tasks. It's a type of insurance. We have replaced the 'let the buyer beware' advice with 'let the seller have credentials'.

    Part of the problem is producing 'general purpose' students in the early educational programs to 'keep the options open', causing delayed specialization, causing higher costs.

    Part of the problem is the recent exporting of 'middle class' manufacturing jobs out-out-of-country, leaving a bimodal distribution of minimum-wage and professional jobs available to our youth. Parents, of course, aim their offspring at the top end. I suspect that, nevertheless, a large proportion of university and college graduates are doomed to occupy the low-end jobs. Payment of student debt will be difficult for these.

    One last point. I think the educational system implicitly, and fraudulently, promises these students that there will be enough jobs to go around. Students trust the adults (e.g. guidance counsellors) who steer them into costly programs. But there is a massive mismatch between supply and demand for high-end graduates. The 'educational system' has zero accountability, and does not take any responsibility for creating or amplifying this problem.

    We are dreaming a dream that was born in the 1950s, and is no longer relevant today. As a result, we are failing to prepare our youth for today's world. Because we like the old dream, we are betraying the trust of our children, promising the good life, when we know many will end up in poverty and bare subsistence.

  3. Today we can watch the real crisis cause by high cost of college education. Every day student loan debt becomes the bigger problem. It's hard to understand how such an essential thing like higher education can be so unaffordable? Despite all the alternatives I think that most of students have just 2 ways: saving money or applying for student loans. The choice is especially hard for low and middle income students whose families can't provide them financial support. They hope to get a well-paid job after graduation but quite often an income is not enough to make payments so they use no fax payday loans to pay off their college loans and it takes a long time to get out of debt.

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  5. Well the red line showing the graph is predicting the rise in the US student’s debt and that is fair enough to understand the inflation.
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  7. So that is apparent by this graph that there is increased student loan trend all over the world and that shows that higher education students dilemmas.
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  10. Student debt is rising every year. Student debt has become a major issue in this country and for students around the world. College costs, as well as graduate school costs, have gone up faster than inflation. Now and then students start the student loan process. So, it’s good to know how much students will qualify for if they need them. Students might turn for payday loans online to ease their financial burden. Student loans can be explored to help students pay college expenses without raising their debt ratio.

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