Rising Tuition + Student Loans = Education Bubble
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Rising Tuition + Student Loans = Education Bubble

iStockphoto/The Fiscal Times

For all the moralizing about American consumer debt by both parties, no one dares call higher education a bad investment. Yet the average college senior in 2009 graduated with $24,000 in outstanding loans according to the Project On Student Debt. Last August, student loans surpassed credit cards as the nation’s single largest source of debt, edging ever closer to $1 trillion. The nearly axiomatic good of a university degree in American society has allowed a higher education bubble to expand to the point of bursting.

Since 1978, the price of tuition at US colleges has increased more than 900 percent, 650 points above inflation. To put that number in perspective, housing prices, the bubble that nearly burst the US economy, increased only fifty points above the Consumer Price Index during those years. But while college applicants’ faith in the value of higher education has only increased, employers’ has declined. According to Richard Rothstein at The Economic Policy Institute, wages for college-educated workers outside of the inflated finance industry have stagnated or diminished. What kind of incentives motivate lenders to continue awarding six-figure sums to teenagers facing both the worst youth unemployment rate in decades and an increasingly competitive global workforce?

During the expansion of the housing bubble, lenders felt protected because they could repackage risky loans as mortgage-backed securities, which sold briskly to a market that believed housing prices could only increase. The education sector still has its equivalent: the Student Loan Asset-Backed Security (SLABS).

$2.67 trillion
Total Student Loan Asset-Backed Securities (SLABS)
in circulation at their apex

SLABS were invented by Sallie Mae in the early ’90s, and their trading grew as part of the larger asset-backed security wave that peaked in 2007. In 1990, there were $75.6 million of these securities in circulation; at their apex, the total stood at $2.67 trillion.  But while trading in securities backed by credit cards, auto loans, and home equity is down 50 percent or more across the board, SLABS have not suffered the same sort of drop. SLABS are still considered safe investments—the kind financial advisors market to pension funds and the elderly.

With the secondary market in such good shape, primary lenders have been eager to help students with out-of-control costs. In addition to the knowledge that they can move these loans off their balance sheets quickly, they have had another reason not to worry: federal guarantees. Under the just-ended Federal Family Education Loan Program (FFELP), the US Treasury backed private loans to college students. This meant that even if the secondary market collapsed and there were an anomalous wave of defaults, the federal government had already built a lender bailout into the law. And if that weren’t enough, in May 2008 President Bush signed the Ensuring Continued Access to Student Loans Act, which authorized the Department of Education to purchase FFELP loans outright if secondary demand dipped. In 2010, as a cost-offset attached to health reform legislation, President Obama ended the FFELP, but not before it had grown to a $60 billion-a-year operation.

$800 billion
Outstanding student debt.
The Federal Government is on the hook for almost all of it.

The loans and costs are caught in the kind of dangerous loop that occurs when lending becomes both profitable and seemingly risk-free: high and increasing college costs mean students need to take out more loans, more loans mean more securities lenders can package and sell, more selling means lenders can offer more loans with the capital they raise, which means colleges can continue to raise costs. The result is over $800 billion in outstanding student debt, over 30 percent of it securitized, and the federal government directly or indirectly on the hook for almost all of it.

While the debt numbers for four-year programs look risky, for-profit two-year schools have apocalyptic figures: 96 percent of their students take on debt and within fifteen years, 40 percent are in default. A Government Accountability Office sting operation in which agents posed as applicants found all fifteen institutions they approached engaged in deceptive practices and four in straight-up fraud. For-profits were found to have paid their admissions officers on commission, falsely claimed accreditation, underrepresented costs, and encouraged applicants to lie on federal financial aid forms. For-profit degree programs were found to be more expensive than the nonprofit alternatives nearly every time.

40 percent
Amount of total outstanding debt in active repayment.
The other 60 percent rest is in deferment of default.

SLABS are still a better investment than most housing-backed securities ever were. The worst-case scenario seems to involve the federal government paying for students to go to college, and aside from the enrichment of the parasitic private lenders and speculators, this might not look too bad if you believe in big government, free education, or even Keynesian fiscal stimulus. But until now, we have only examined one side of the exchange. When students agree to take out a loan, the fairness of the deal is premised on the value for the student of their borrowed dollars. If an 18-year-old takes out $200,000 in loans, he or she better be not only getting the full value, but investing it well too.

While housing prices are based on what competing buyers are willing to pay, postsecondary education’s price is supposedly linked to its costs (with the exception of the for-profits). But the rapid growth in tuition is mystifying in value terms; no one could argue convincingly the quality of instruction or the market value of a degree has increased ten-fold in the past four decades

First, where the money hasn’t gone: instruction. As Marc Bousquet, a leading researcher into the changing structures of higher education, wrote in How The University Works

You are likely to be taught by someone who has started a degree but not finished it...may never publish in the field she is teaching... and does not plan to be working at your institution three years from now.

Highly represented among the new precarious teachers are graduate students; with so much available debt, universities can force graduate student workers to scrape by on sub-minimum-wage, making them a great source of cheap instructional labor. Rather than producing a better-trained, more professional teaching corps, increased tuition and debt have enabled the opposite.

Top-level administrators and financial managers pull down six- and seven-figure salaries, more on par with industry counterparts than their fellow faculty members.

If overfed teachers aren’t the causes or beneficiaries of increased tuition (as they’ve been depicted of late), then perhaps it’s worth looking up the food chain. Formerly, administrators were more or less teachers with added responsibilities; nowadays, they function more like standard corporate managers—and they’re paid like them too. Even at nonprofit schools, top-level administrators and financial managers pull down six- and seven-figure salaries, more on par with their industry counterparts than with their fellow faculty members. And while the proportion of tenure-track teaching faculty has dwindled, the number of managers has skyrocketed in both relative and absolute terms. If current trends continue, the Department of Education estimates that by 2014 there will be more administrators than instructors at American four-year nonprofit colleges.

When you hire corporate managers, you get managed like a corporation, and the race for tuition dollars and grants from government and private partnerships has become the driving objective of the contemporary university administration. The goal for large state universities and elite private colleges alike has ceased to be (if it ever was) building well-educated citizens. Now we have, in Bousquet’s words, “the entrepreneurial urges, vanity, and hobbyhorses of administrators: Digitize the curriculum! Build the best pool/golf course/stadium in the state!... These expensive projects are all part of another cycle: corporate universities must be competitive in recruiting students who may become rich alumni, so they have to spend on attractive extras, which means they need more revenue, so they need more students paying higher tuition.

Student debt is an exceptionally punishing kind to have. Not only is it inescapable through bankruptcy, but student loans have no expiration date and collectors can garnish wages, social security payments, and even unemployment benefits. When a borrower defaults and the guaranty agency collects from the federal government, the agency gets a cut of whatever it’s able to recover from then on (even though they have already been compensated for the losses), giving agencies a financial incentive to dog former students to the grave.

If tuition has increased astronomically and the portion of money spent on instruction and student services has fallen, if the (at very least comparative) market value of a degree has dipped and most students can no longer afford to enjoy college as a period of intellectual adventure, then at least one more thing is clear: higher education, for-profit or not, has increasingly become a scam.

Related Links:
Is There a Higher Education Bubble? (The Chronicle of Higher Education) 
Peter Thiel: We’re in a Bubble and It’s Not the Internet. It’s Higher Education. (TechCrunch) 
Don’t Blame Pell for the Cost of College (Huffington Post) 

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