How the Banking Industry has Created a Bubble in the Student Loan Market and Inflated Prices in Education by 500 Percent since the 1980s. The $500 Billion Student Loan Market.
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The dream of going to college is deeply ingrained in our society. Education is usually a political win in any campaign and few will ever argue with this topic when it is brought up. As with many things in our current financial system creating a market where banks can enter into the fold has hyper inflated the price of higher education. Think of housing, autos, and every other banking activity and prices are likely to bubble up and burst if they are allowed to finance the activity. Yet educational costs remain high and defaults in the $500+ billion student loan market are now showing cracks like many areas of our economy. Is there a bubble in higher education?
First, I started to question the massive surge in college cost when I saw a report from one of the too big to fail banks, Wells Fargo, showing that by 2027 the cost to attend a private four-year college will cost nearly $400,000:
Source: Wells Fargo
Now the above embedded inflation assumes that we will have inflation at a consistent pace. As we have seen in the last year, it is possible to have periods of deflation in massive bubbles. Home prices have fallen and so have wages so it would be interesting to see how college costs can rise all the while people having less money to finance their education.
Now some would argue that everything goes up in price so the rise in college prices is merely a reflection of this. This is not true. The premium to go to college is outstripping virtually every other category of consumer prices:
Since the early 1980s college tuition and fees have surged nearly 500 percent while the median family income has gone up by approximately 150 percent. Now anyone that has experience with the current college system understands how expensive things have gotten. One of the primary push to higher prices is the involvement of securitization and the banking industry pushing out loans.
The student loan market is enormous. With over $500 billion in loans this is a large market that few even consider. The biggest chunk of this market is the FFEL program which is the Federal Family Education Loan Program. In the past, there was little to fear from this market since student loan defaults were relatively tiny. Yet just like Fannie Mae and Freddie Mac propping up the entire housing market in the U.S., the FFEL program props up the entire student loan market. This program provides lenders a guarantee from the U.S. government of 97% and a fix yield on the student loan. No wonder why this is such an enormous money pit for banks. Of course, you see above that the corporatocracy is also involved in this market. But just like the housing market, Wall Street and the government have worked together to inflated the cost of education just like it did with housing.
How does the banking sector inflate the cost with the government? Simple. Think of the down payment with housing. When most lenders required 20 percent down, home prices were actually more sensitive to actual incomes in the economy because people had to save some money to actually purchase a home. As down payments dwindled down to nothing, anyone with the mere desire to buy a home did and thus pushed housing prices to astronomical levels. Of course, once the bust hit the taxpayers were left dealing with the mess. With education the same thing may occur. In fact, for many students going to college is a zero down proposition:
Now the government will back a good portion of the debt but for the remainder, the private market is more than happy to step in to give you that money. Since education is such a vital tool for future professional growth, few will question the actual cost especially if they don’t see it on the front end. Plus, the big banking giants love any other loan class that they can bundle into asset backed securities:
Now it would be one thing if banks were lending their own money but here they are dishing out billions of dollars and collecting additional fees just like they do with mortgages even though the Federal government backs most of the loans. So why not cut out the middleman with both? Because the corporatocracy owns the government. With such easy access to loans, 75 percent of universities participate in FFEL which amounts to 4,000 schools, many students have access to easy debt. And schools are happy to increase their prices especially the for profit institutions. Nothing wrong with earning a profit but subsidized at the taxpayer’s dime? Many of these paper-mill institutions have heavy sales staff and have strong financial aid specialist to make sure they get their government loans for you (not that you see the money).
The rise in college cost seems exponential:
For one, there is a bubble in higher education costs. One simple rule of thumb is you should never pay more for your college education than you expect to earn your first year out. Now like any fast rule, this is a generalization but if you plan on getting a degree in a liberal arts school and go into debt for over $100,000 and earn $30,000 a year something is wrong. But the banking system and government are more than happy to finance your education but you are on the hook for that debt. But with this economy, more and more students are unable to pay their debts:
Just looking at the chart from Wells Fargo showing private education going to $400,000 is like seeing some of the housing charts a few years ago showing perfect growth in housing prices for multiple decades. The likelihood of that is not realistic unless we hit strong inflation over the next decade. This might happen given the massive amounts of debt we are pumping into the system. Yet that is merely a prediction and not a fact. Do you think analyst back in 1999 expected a lost decade? Of course not. For the past year, we have seen prices collapse in many consumer categories reflecting weaker earning potential. And even a college degree won’t protect everyone in a challenging recession:
Clearly you are better off with a college degree. Yet prospective students need to be smart about what schools they choose and what fields they pursue. The banking system backed by the government is willing to allow you to get into whatever amount of debt for whatever field you want to go after. But like with the housing mess, just because you can get a loan for something doesn’t mean you should. I understand that argument. So why not shut that spigot off? Why have this implicit guarantee like we had with Fannie Mae and Freddie Mac? We all know most of this is backed by the U.S. government (that is the public) so any bubble burst will be borne out by society. When we look at the cost, something will have to give.