The truth about the college debt bubble
By Joe Simonds
Retirement Income Network
For those of you that have read and commented on my previous articles regarding America’s addiction to debt and bubbles, I have another one that will surely create some anger and confusion.
As a parent of a child just shy of one year old, I certainly fall in the crowd of Americans that are concerned about the future costs of a higher education. Even for the fortunate few of you that might find yourself in the “one percent" crowd, the future of college tuition costs seem frightening. For the average American parent, there is no way they could ever afford to send their children to private school or to a nice, out of state college - not unless they are prepared to take out hefty federal or private loans in hopes that it pays off in the long run.
Just like high school prepares our youth for dealing with the transition to college, this article will attempt to prepare and educate you about what is really going on behind the scenes with college tuitions. In fact, I will expose the true culprit tobr /> these out of control and unanswered college costs in this article. I have a feeling you won’t be too surprise once I lay it all out.
Now even though there is a huge emphasis on Europe and our escalating debt/deficit today, one of the biggest bubbles inflating here in America is the cost of college. A recent book written by Campus Consultants Founder Kal Chany titled, “Paying for College Without Going Broke," took careful measures to estimate the cost of college 18 years from today. The numbers that Kal came up with were mind-numbing.
For private universities, the cost could be as much as $134,000 per year 18 years from now. And that is just the tuition costs! If your child plans on sleeping anywhere besides a tent where they'll eat fried beans over a fire, you can add at least another $20,000 to those costs per year. (Considering inflation and the future costs of food and hospitality 18 years from now, that $20,000 is very conservative). For an in-state public university, the annual tuition costs could be as high as $41,000 18 years from now. And for out-of-state public school tuition, the number could be slightly above $100,000 per year!
If you are anything like me, this probably conjures up anger, confusion and leaves you wondering how in the heck am I ever going to retire if I have to spend millions on my children’s education (assuming three kids who all want private schools). I mean, how can education costs be increasing at 10 percent each year if the Fed is being even remotely honest with us on our low 2 percent inflation numbers? Are the professors all making $1 million a year these days? Are these kids getting a better education than generations before that could merit these crazy costs?
< br> Considering the land and buildings are already paid for at most state universities(think the big donors who get their names on the university buildings), and the fact that they still make the students pay for the expensive books, computers, housing, food, etc, just where is this money going? Why hasn’t this been attacked with outrage from both parents and students all over the country? Finally, a few journalists decided to do some digging, and both CNBC and Fox have aired documentaries this year on the controversial student debts. The documentaries featured story after story about students who have recently graduated with hundreds of thousands of dollars in student loans that now seem insurmountable. And those were the students lucky enough to actually land a job.
For many of the young adults they interviewed, the story was even more sobering. They were out of school with no job, and in their hand was a piece of paper (in their case a degree that had been useless thus far) that cost them $250,000 in total debt as well as a fresh resume with no job experience.
After watching these sad souls succumb to the fact they will be in debt for the rest of their life, both the CNBC and the Fox show did reveal some interesting news. Both of these documentaries came up exposing the same culprit that is responsible for causing these high tuition costs: the government. What’s more, just wait until you see all of the similarities between the housing bubble and this college bubble that our own government helped create.
Just as our lovely government officials created the largest housing collapse in history by proposing (and helping to make possible) the idea that every American deserves to own a home, the same idiotic thinking has turned into finding ways to give every American the ability to attend any college they want to."
Please don't get me wrong; I think every American should have the opportunity to receive a higher education if they so desire. One of our country’s founding principles is that “All men are created equal.” However, that only applies to every American being born with the same rights and opportunities to do as much or as little with their life as they can. It never said anything about all men havingthe same job, or all men having the right to the same 5 bedroom/4 bath home, or the same education.
Some young adults thrive at community college or trade schools. Some need the extra attention of small class sizes at private school. On the other hand, some people just aren't college material but still succeed very well in the real world. When will we realize that not every American is entitled to receive an equal education, home or life? There is a reason that only one family at a time lives in the White House. If we are all truly equal and entitled to the same thing as the person next to us, then I propose we all should move into the White House together. Sounds preposterous, I know, but not as preposterous as believing that every American deserves to own a home, drive a nice car and attend the nicest college. Life is not intended to be fair and equal. If it were, why would any person ever work for anyone but themselves, in charge of their own multi-million dollar company.
So, how is all of this our very own government’s fault, you ask? You see, the problem lies within the ease of the loans that the government has made possible. Here is what has transpired: The government, through the U.S. Department of Education, has created a $150 billion student aid fund to assist any and all American citizens that want to pursue a higher education. I realize that nothing in that statement sounds bad on the surface. However, they have basically created access to this fund so that any person that can prove they have paid their bills on time for 90 consecutive days (what a joke), has a Social Security number, and doesn’t have a felony, can basically get a loan for any college that they can get accepted into. Does any of this sound familiar in comparison to the joke of getting a home mortgage loan back in 2003-2006? Basically, if you could spell your name and sign on the dotted line, you would buy the home of your dreams that you could never afford. Everyone else is doing it, so why shouldn’t I treat myself?
So instead of a student who really should be attending a local state college based on their personal and family’s financial situation, the government has made it entirely possible for them to go to a college that they can't afford and really have no business attending. And by applying the simple laws of supply and demand, we see the students who are now buying more than they can really afford have put more of a demand on these nicer schools, which in turn equals rising costs. And just like the housing bubble was created because everyone was buying a new home, the same rule applies here. Everyone is going to college, and although that sound good on paper, in reality, it is a huge financial bubble. It is the exact same principle that enabled housing prices to double and even triple in such a short time. This student loan scandal is a one gigantic bubble no different from the housing bubble.
And just like the millions of Americans who were forced into foreclosure and lost their house, the story of higher education will end in similar tragedy. When it finally implodes, the government will spin the entire situation and point fingers in every direction, just like they did in 2008 with the bursting of the housing bubble. The media will all say that they saw this coming and that it was easy to predict.
The universities that have benefited from these huge windfalls of money will get a brief black eye, but will not be forced to come out of pocket for a dollar. And the middle class American will be the one who ends up being hurt the worst, just like they were with the housing crisis. I assume that everyone reading this recalls the government’s answer to the housing problem with the “Mortgage Forgiveness Debt Relief Act.” This was a government creation designed to appease the majority and at the same time let the government save some face by bailing out the poor. People like myself, who bought a home that I could afford, made an honest living and kept paying my monthly mortgage (per the contract that I signed), got absolutely nothing but a house that went down in value. All because they were law-abiding, middle class citizens.
I should have known better. And for gosh sakes, if you can afford to keep paying your mortgage, why should the government help you out? However, the poor were fooled and tricked by the evil bankers and didn’t have the financial wherewithal to make a proper decision. So some people, like my neighbor, purposely stopped paying his bills for over nine months and saved the cash that would have gone to the mortgage (he, of course, signed the same kind of contract I did). Even though he was employed and didn’t deserve it, my neighbor ended up getting a bailout in the form of a reduced mortgage payment and a reduction in his total loan. Throughout, my neighbor had the same income and same job as he did the day he bought the house. He could clearly afford it but chose not to. I don’t hold a grudge. It is what it is. I played by the rules and he played the system. As I mentioned before, life wasn’t meant to be fair.
So the exact same thing that happened with the housing bubble will happen with this student load debt bubble after it pops. I am 99 percent certain that the government will create even more debt with some sort of “Student Loan Forgiveness Program” in the next 10 years. In fact, it will probably be much sooner than that, and here is how it will play out. The poor and the unemployed will get bailed out and most likely stay poor and unemployed. Their only saving grace is that their student debts will be either reduced or eliminated, and they will still have a college diploma.
The ultra-rich weren’t taking out loans to begin with, so that leaves the middle class to once again get stuck with the bill - with one big exception. These loans aren't as easy to walk away from like your bank loan on a home. In most cases, the federal loans stick with you for life and can even be "inherited" to your parents if they were crazy enough to co-sign the loan.
To sum up, the middle class adults that really should have been going to these nicer schools are being forced to pay higher costs than normal right now so that everyone can attend the school of their choice. Young adults who actually go out and become employed will not receive a bailout because clearly, if you have a job then you must be able to pay the debt you signed up for. Sound familiar?
And when this bubble bursts, the same students who paid way more than their education was worth will be forced to keep paying their debt off, and will probably even see the interest rates and taxes go up in order to pay for the poor and unemployed who walk away with the exact same degrees, plus a bailout. We will have an entire generation of middle class, hard-working Americans who have a nice degree but are forever burdened with school debt. Once they start a family and have children, the ability to pay off these loans (that are increasing each year with interest) will seem insurmountable. And even though the stats that an average student comes into the real world today with 9 percent unemployment and $26,000 of debt sound bad, it is so much worse. Just as the government fudges the unemployment numbers by not counting people who are unemployed but have given up looking for a job (my opinion is that these people should count twice because they are even a bigger burden on society, the school debt numbers are no different. You see, the numbers that get reported only include federal loans. They conveniently leave out private debt which more than doubles (and can even triple) the average debt numbers that we see.
So, the average debt of $26,000 that each young adult graduates with is really closer to $50,000 to $75,000. Will there ever be an end in sight for these escalading prices?
I would be willing to bet that my children never see college costs even close to what was estimated above. In fact, even though I know many of you will read this and think I am crazy, I would be willing to bet that my children will have a lower cost of college than those of today. The housing prices that everyone thought would go up forever ended up collapsing in a bubble, and it will be no different with the school loan bubble that we are building. It is only a matter of time, and it won't take 18 years to explode. Nothing these colleges are doing or providing justify the out of control prices and they will come back down in due time.
There were a handful of economists in 2005 that predicted housing would be 25 percent cheaper in 2010 than it was in 2006, and we all laughed at them. Today, they are considered brilliant (except for the fact they underestimated).
Don’t be fooled by another huge bubble and follow the masses to slaughter. In certain areas of Florida, houses were in a fire sale and would be bought up within hours of going on the market. People would gladly pay $250,000 for a house that only a few years ago was valued at $100,000. Today, that same home in Florida is for sale at $70,000, surrounded by other foreclosures, and no one wants to buy it.
Wake up and see what is going on around you.
In conclusion, the looming school debt bubble is growing each and every year. The question isn’t if it will pop, but when it will pop. If you are one of the fortunate (or unfortunate depending on how you look at it) people that have children graduating high school in the next couple of years, then I would encourage you to help them to either find some scholarships or attend schools that fit their budget. History has proven that you do not want to be a middle class American with a large amount debt when a bubble bursts. There will be millions of Americans who attend great schools and built up substantial debts getting their degrees that will be haunted for decades to come. And unless you are poor or unemployed, you will be held responsible for these debts. And to add insult to injury, you will also be taxed more so your success can cover the bad debts of others.
Welcome to America, where the maxim “Every man is created equal,” has somehow been lost in translation. You would think with all of the money we are giving these schools, they could teach our kids some history.