Crossing the student debt point of no return – for-profit colleges have default rates now rivaling subprime mortgage debt. $1 trillion in student loan debt on the horizon while college graduate wages fall for the decade.

The student loan market is back in the news as it makes its unrelenting march to the $1 trillion mark.  This crippling figure comes in the face of a decade of lost wages for middle class Americans.  Just like the housing bubble people were supplementing a disappearing middle class with more debt.  The allure of housing was that never in our history have we seen national home prices fall, until they did in dramatic fashion.  The same cultural nostalgia for education in every respect has created a zombie higher education system that is now expanding like the mortgage markets at the height of the housing bubble.  Why?  For-profit schools have largely lured in countless Americans into a system that has provided very little economic gains for students while enriching these Wall Street listed companies.  It should come as no surprise that the highest default rates stem from the for-profit system and most of these loans are federal loans.  In 2010 there were $100 billion in student loan originations, the highest ever in the midst of the deepest recession since the Great Depression.

Student loan debt only segment of household debt expanding

The Federal Reserve tracks federally backed student loan debt and the figures are astounding.  The only sector of household debt that has expanded in manic fashion during this recession is with student loans:

debt growth by sectors

Every sector has taken a hit including:

-Home equity revolving debt

-Automobile loans

-Credit card debt

-Other debt

Yet there goes student loan debt saddling countless students with back breaking debt.  Make no mistake, much of the for-profits are growing simply because of the government:

“(USA Today) For profit-schools. The highest default rates are at for-profit schools that tend to serve lower-income students and offer courses online. The University of Phoenix, the nation’s largest, got 88% of its revenue from federal programs last year, most of it from student loans.”

This is absolutely nonsense and shows how the coupling of Wall Street and the government have simply turned education into another commodity to water down and gamble on.  Like the multiple card game tables in Las Vegas higher education is the hottest game in town.  The increase in tuition has surpassed virtually every other category in our economy:

tuition-cpi-college

Source:  Moody’s

How is this even possible when incomes are falling?  Similar to the housing market, people are going into debt.  Of course education has value and is important.  Yet there is a big difference graduating with $10,000 in student loan debt with an engineering degree from a state school versus coming out with $50,000 in debt from a for-profit studying some non-marketable skill.  The for-profits lobby our government which is beholden to big money interest and this shell game continues.  The default rates for these institutions now rival that of subprime debt:

subprime-debt-college-debt

Source:  RortyBomb

“(Department of Education) The U.S. Department of Education today released the official FY 2009 national student loan cohort default rate, which has risen to 8.8 percent, up from 7.0 percent in FY 2008. The cohort default rates increased for all sectors: from 6.0 percent to 7.2 percent for public institutions, from 4.0 percent to 4.6 percent for private institutions, and from 11.6 percent to 15 percent at for-profit schools.”

While the stock market has gone absolutely nowhere spinning its wheels in the economic mud for over a decade these for-profit schools have done extremely well:

for profit gains

Yet it isn’t only the for-profits that are benefitting from this massive bubble.  You have many private institutions saddling students with large amounts of debt and sending them off into a market with fewer job opportunities.  Some argue and point to the lower unemployment of college graduates.  Okay, but you need to remember we are looking at people that graduated before this entire bubble in higher education started (and also landed jobs in better times).  The bubble really went nuts starting in 2000.  Yet if we look at the earnings potential during the bubble years we see a very troubling picture:

earnings-of-college-grads-and-cost-of-college

Source:  BusinessWeek

Since 2000, in real terms college costs are now up by 23%

Since 2000, in real terms real pay for college graduates is down by 11%

Does it make sense to pay more for something that isn’t seeing a growing rate of return?  Part of this is the mixing of paper-mill graduates with students overall.  We have heard countless stories of people going to for-profits only to land minimum wage jobs once they graduate.  Just like the subprime debacle, many of these people will remain silent and the market will pretend nothing is wrong.  That is until the default rates start soaring like they are today and then it is game over.

Some even question the $1 trillion figure that will be passed this year but this sounds about right given the Richmond Fed wrote about this last year:
richmond fed article

Source:  Richmond Fed

After you combine all the federal loans, private bank loans, and private institution loans you can see how this is getting out of hand.  $100 billion in student loan debt was taken on in 2010.  How much has been pumped out in 2011?  Did we not learn anything from the housing bubble?  Maybe we did but the banks and the government is more than happy to fleece the public until something is radically changed.

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7 Comments on this post

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  1. JS81 said:

    Went to a big public school, was forced to stay for an an extra 3 semesters to accommodate the 101 courses the universities require these days in order to keep students on the rolls that much longer, graduated with $50K in debt and turned loose on a job market that’s practically non-existent. :(

    October 20th, 2011 at 4:03 pm
  2. expatriot said:

    A trillion’s just the starting point. Colleges will keep charging more because they can. Would be students whether in the ghetto or suburbs will see a bleak future in a depressed economy, be told they can get school for free with extra money on the side and they’ll jump at it. I know kids who have bought cars with student loan money. Think about it, a trillion is a shit load of money so the students must be getting more than were being told. A lot of people make a career out of getting student loans. A lot of them survive on it. The real dumb ones go to law school. It’s a scam and the scum bags are the colleges and loan departments not to mention the u.s. government which encourages this shit. At the end of the day the student is f*ed until he dies or pays off the loan. It will haunt him the rest of his life. It’s jacked up when a girl goes to college to become somebody and the somebody she ends up becoming is a call girl just to pay off her debt. What a great f*ing country we live in!

    October 20th, 2011 at 11:26 pm
  3. julie said:

    This is truly disturbing. The diploma mills should be forced to carry warnings like cigarette packages, i.e., DEGREE BASICALLY WORTHLESS-MAY CAUSE LIFELONG DEBT THAT CANNOT BE DISCHARGED UNDER ANY CIRCUMSTANCES EXCEPT FOR MAJOR DISABILITY.

    I wonder if, when the massive loan defaulting begins, the government will be forced to change bankruptcy laws?

    October 21st, 2011 at 10:51 am
  4. compass rose said:

    I have long thought that basic financial literacy should be part of the SAT.

    October 21st, 2011 at 11:46 am
  5. Draken Korin said:

    As a former finance profession­al, I tell you YES, the system is predatory, rigged against the middle and working classes, and the time is now to collapse it.

    Wide-scale DEBTORS’ REVOLT — DEFAULT-EN­-MASSE is the answer, or at least part of it.

    The fact remains that the black hole of debt will destroy the working and middle classes. These “contracts­” are not inviolable things; they were made during a *different era*, a *different economy*, and the ability to pay them back has evaporated­. Therefore, cancel student and other types of predatory debt, or the revolt en-masse will occur, and soon.

    The momentum grows. Join us. Walk away from your debt instruments and help speed up the desirable collapse of the predatory banking system. Rebuild from there, under fair rules – responsible capitalism that recognizes the need for a economically strong workforce and middle class.

    DEBTORS’ REVOLT – DEFAULT EN MASSE. The critical mass is closer than you think.

    October 21st, 2011 at 6:10 pm
  6. peter said:

    This is just another example of the greed with our Wall Street Bankers. When you blame the various bubbles that have been created you must understand non of this coud have taken place without our Govt. assisting the gangsters. Our system has developed faults that has lead us to where we are now. Corruption exist in every enterprize.
    We have been let down by our Govt. to protect us against the creation of these bubbles. The money monsters will never stop accumulation more at the expense of others.

    October 22nd, 2011 at 5:09 am
  7. Amy said:

    Could you please update the Earnings vs Cost graph with 2011 numbers? I’m curious how it’s looked since 2008. Thanks.

    November 4th, 2011 at 7:50 am

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