Monday, October 3, 2016

The college bubble is ready to burst

The bursting of the housing bubble was the unquestioned cause of the Great Recession. After years of unprecedented growth in the housing market that saw home ownership and home values rise dramatically, the collective bad decisions of homebuyers, banks, and government finally caught up to the economy at large.

The supply of easy money that led to the ersatz prosperity –- financial institutions foolishly gave, and government foolishly backed, mortgages for almost everyone, despite the risk – proved to be the bane of the same. It didn’t take some homeowners long to figure out that easy money really wasn’t so easy; their exorbitant mortgage payments weren’t sustainable, especially if the slightest hiccup appeared in their personal finances – such as the small scale recession that pre-dated the heart of the Great Recession. With their family budgets hit hard, they had to choose between paying for their mortgages or their survivability (food, utilities, and transportation). That choice not being so difficult, they defaulted on their loans. Housing prices plummeted and the financial sector suffered immensely.

Our economy still hasn’t fully recovered 8 years later (household incomes are still below their 1999 peak!) and likely won’t before the decade closes. If the ship is ever righted to the heights that we remember, it won’t be long before another bubble is ready to burst.

On the horizon is one that has numerous characteristics eerily similar to the housing markets’ -- the college bubble.

Easy access to money defines the modern college experience. Such is to be expected when you consider the federal government has been one of the largest lenders in the college loan market. From 1965 to 2010, it issued subsidies to lending institutions to fund their student loans while assuming all the risk. In 2010, Congress acted to eliminate the middle man and now the government deals directly with the debtors.

So, whether being the lender indirectly or directly, Uncle Sam has always demanded and/or strived to give out funds ad nauseam under that wanton desire to be benevolent that drives Big Government, especially since government has what is believed to be unlimited backing (the taxpayers and Federal Reserve) to make good on bad lending decisions. The federal government currently backs 90% of new student loans. 

With the ability to borrow the capital necessary to fund their degrees, Americans have taken to the classroom in numbers. In 1965, at the start of the government’s lending efforts, only 23 percent of the middle class had received any education beyond the twelfth grade. Now, more than 3 in 10 have a degree, while a whopping 70 percent of young Americans enter college within 2 years of their high school graduation. 20 million Americans attend college every year. Just like it seemed as if everyone in 2006 was a homeowner (prior to the bursting of the housing bubble), it seems like everyone is college student.

And, just like construction firms, realtors, resellers and the like fed off of a freewheeling mortgage market at the turn of the century, driving up housing prices (it was not uncommon to see 80% to 150% increases across the country from 2000 to 2006), universities are capitalizing on the freewheeling student loans and the widely-held misconception that everyone needs a college education (which minimizes the value of vocational skills and the trades). Knowing that everyone – the poor, middle class, and rich – all have access to funds and will buy their product, they are charging what they want and whatever the market can bear.

Because of these factors, education costs have grown at a rate beyond inflation. Tuition and fees at public and private universities in New York State have risen by a whopping 50 percent since 2005. Student loan debt in New York grew to $82 billion last year, up from “just” $39 billion 10 years earlier. The average college graduate here owes $32,000 in student loans.

It’s not a problem unique to the Empire State, either. Student loan has debt has tripled across the country over the past decade, surpassing $1.2 trillion. In a moribund economy, it has been difficult for workers to pay that back: Nearly 7 million Americans have gone at least a year without making a payment on their federal student loans.

As it was with housing in the Great Recession, the financing of and demand for higher education isn’t a sustainable economic model – easy money creates more demand, but said easy money ultimately creates unaffordability, less demand, default and a badly damaged economy.

It won’t be long before this college bubble bursts…and bursts badly.

From the 03 October 2016 Greater Niagara Newspapers

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