Monday, October 8, 2012

The higher education bubble continues to inflate

Just as the housing crisis was fueled by government demands that banks make it easier for buyers to get a mortgage (e.g., no down payments, floating interest rates, interest-only mortgages, stated income), now we have the emerging student loan/higher education crisis that is being fueled by government demands that students have easier access to credit to finance their education. I'm not the first to discover this, of course, as it's been actively discussed for years. But I will offer a few charts which shed some light on the subject.



In the first chart, we see that student loans started growing explosively in early 2009, after being essentially unchanged for the previous eight years. All of the increase in student loans since the end of 2008, $385 billion, was issued by the federal government, which has now essentially co-opted the entire student lending industry. Private lending in the student loan market has not increased at all over this this same period. The government has taken over and the mandate is to increase loans no matter what. Student loans are the only part of consumer credit that has expanded post-recession. Consumers in aggregate are deleveraging, but students are leveraging up, and many in a big way. As a percent of consumer credit, student loans are exploding skywards: up from 4% at the end of 2008 to 18% today.

This will inevitably end in tears for taxpayers, as well as for the students who have taken on onerous levels of debt. Colleges and universities will also suffer, since federal largesse in the form of a flood of new loans has enabled education costs to reach levels that are way out of line with the rest of the economy. Sooner or later, when the student loan plug is finally pulled, colleges and universities will find themselves forced to undergo the same painful restructuring and cost-cutting that has devastated the residential construction sector for the past six years.

16 comments:

brodero said...

So how can people afford to go to Medical School?? If we need more primary care doctors why
would anyone go into that field if their debt is 150,000 to 200,000 and counting?

brodero said...

Off the subject...

Don't tell Jack...Gallup US Employment Poll set a new low today at 7.5% http://www.gallup.com/poll/125639/Gallup-Daily-Workforce.aspx

Public Library said...

Ironically, a major beneficiary of this largesse is for-profit colleges dishing out crummy degrees.

The fallout will probably not be of Lehman-esque grandeur. However, it could seriously hamper future growth on the margin as prime working age adults struggle to get ahead 5-10 years from now.

William said...
This comment has been removed by the author.
William said...

@ Public Library

This is not ironic at all. Smart investors look at where the Government is spending money i.e Kennedy's announcement of placing a man on the moon, War on Terror, Medicare Part D pharmacy entitlement, etc.

Presently a Republican goal is to privatize primary education with the use of government paid vouchers. Federal government support for education is already in the $10 of billions so it is a good way make it a part of the private sector and for investors to make money.

Pay attention to the announcement of such new programs by President Romney. There are profits to be made.

randy said...

"why would anyone go into that field [medicine]?"

Good question. Especially when you consider how much doctors feel threatened by ObamaCare. My own daughter is a college freshman... no loans, just enormous checks written by dad. She is considering medicine. A few doctor friends of ours have said discouraging things because of ObamaCare. I'll concede they probably don't really know how it will affect them. It's not easy becoming a doctor, or being a successful doctor, but I don't think doctors understand how hard it is to make a similar income doing anything else.

Anyway... back to who can afford it. Kids with wealthy parents, and immigrants that got their degree in India (or China, S. Korea, Mexico, etc) and get their residency in the US.

William said...

Physicians incomes exploded after Medicare and Medicaid became law in the late 1960s. You are quite correct that physicians now think their high income is normal. They expect it and their expenses are based upon those expectations.

Perhaps she should consider Dentistry or Veterinary Medicine. Veterinarians are sub-specialized now and are doing procedures on animals which once were only done on humans. And owners have come to expect high quality care including treatment for animal diabetes, cancer, etc.

Dentistry has the added benefit of not being dependent on hospitals and not being required to have hospital privileges and meeting all the requirements of insurance companies and Medicare. These pre-admission requirements are driving physician offices crazy.

William said...

I have recently started reading Dr. Ed Yardini's Blog. He often echos Scott's discussion and charts but has some of his own. He made these points today:

"The really good news in Friday’s BLS report was that aggregate weekly hours in private industries rose 0.4% during September to 3.85 billion hours, the highest since November 2008. In addition average hourly earnings rose 0.3%. As a result, our Earned Income Proxy, which is highly correlated with the private sector’s wages and salaries in personal income, jumped 0.7% to a record high. This augurs well for the holiday shopping season."

http://blog.yardeni.com/

brodero said...

Look at year over change in the Gallup poll on Consumer Spending specifically the 14 day moving average...

Dr William J McKibbin said...

The Federal government should only be providing guaranteed financial loans to students studying science, technology, engineering, and mathematics (STEM) -- everything else should be ineligible for Federally guaranteed student loans...

William said...

Dr William J McKibbin

You make a good point. Maybe we could added teachers and medical specialties like nurses, physical therapy, etc. Positions or jobs we need - not Psychology FGS.

Benjamin said...

Great post.

But! If you want to talk about housing, then you have to talk about the home mortgage interest tax deduction, one of the largest federal market intrusions.

Oh, let's change the topic....

Carmen Johnson said...

thanks

Gloeschi said...

Seems Scott is finally latching on to the idea consumer credit is driven by student loans only (up $24bn in August alone). Good for him.
Would have been interesting to learn if the strong increase over recent years is driven simply by an increase in demand for financing by students (as parents cannot write checks anymore) or by lack of jobs (students would face unemployment if they didn't enroll). Also keen to learn if rules for getting loans have changed at all.

Grant Case said...

Actually, I would disagree with your thesis. Being in retail banking I saw exactly what happened and why that line stayed static for eight years and then started moving in 2009. The chart you are missing is TOTAL consumer credit. The need for student lending didn't just magically begin anew in 2009, it was always there it just took the form of another

From 2002 to 2009 also coincided with the largest growth in Home Equity loans we saw in the last 30 years. It was very simple, you could borrow against a HELOC and get a tax shield on the money you were paying for your education. After 2009, HELOC lending plunged dramatically because A. tougher requirements and B. lots of folks underwater on their home. However, Mom and Dad still needed to pay Junior's college tuition so if you can't do it through HELOC, you do it through a Federal and PLUS loans.

Henry H said...

It seems that the student loan growth returned to the original trend, before the HELOC and refinance boom. If there is a higher education bubble, it started decades ago.