Wednesday, May 22, 2013


Like the housing bubble and the internet bubble that preceded it, the higher education bubble will see its false prosperity come to an end in the coming years. Unlike them, it won’t pop with violence that will send the economy into a deadly tailspin. Instead, it will crack and its contents will escape gradually, having a collection of harmful -- and even helpful -- effects on the economy.

This can be said with confidence because we are dealing with an entirely different animal.

The housing and internet bubbles popped so powerfully because there were no controls in place – the bubbles behaved as they should have in a free market.

The student loan industry, on the other hand, is no longer a free or mixed market. Since nearly all loans are issued by the government, it used its power to change the game and protect its interests in 1998 by making it law that student loan borrowers could not declare bankruptcy and absolve themselves of their financial obligation unless they could make a case for undue hardship. This is quite unlike the housing crash when hundreds of thousands of mortgage holders declared bankruptcy and left financial intuitions and taxpayers on the hook for trillions of dollars. So, gone is the possibility of freefall that made the Great Recession so horrific.

Even so, there will be significant financial and fiscal repercussions in the long-term…18 years down the road to be exact.

Today’s students are participating in an outsized educational marketplace fraught with bloated price tags that has started to produce minimal return on investment. A significant portion of the under-35 workforce is claiming underemployment (citing a weak economy), when in reality, they are victims of over-competition (too many college educated workers), and a mix of over-qualification and under-qualification (too many degrees that don’t fit the needs of the economy).

So, how will they ever pay back their student loans? They won’t.  In 2011, the Department of Education launched “Pay As You Earn” (PAYE). Under this program, loan holders will see their payments cap out at 10% of their annual discretionary income and, after 20 years, the loan balance will be forgiven. Come 2031 we will see the first of these forgiven loans hit the US Treasury to the tune of billions of dollars (I wrote about PAYE in 2012. Read the column here:

That harmful effect on our nation’s balance sheet will wane over time, though, because the college boom is setting itself up from a huge drop off in demand over the next few years. As I mentioned in last week’s column, universities are overpriced as a result of students’ easy access to money (government loans). Believing that an unlimited supply of candidates and money exist, the schools are charging what they can get away with. Those days are numbered.

The recession made Americans regain a sense of financial knowhow and they can see that these huge bills for tuition, dorms and books aren’t worth it. That’s why 70% of young Americans enter college, but only 31% of them ever complete a degree – 1 or 2 years is painful enough. One can expect that 70% trial rate to plummet over the next few years.

The fall has likely started. Look at how many colleges are now running campaigns to try to regain some of the money they’ve “lost” or how many are cutting some jobs to adjust to the recent slackening in demand. Those are immediate adjustments. Long term efforts will see falling or stagnant tuitions, downsized colleges, and massive cost-cutting across the board, making tens of thousands of faculty, staff, and support unemployed across the US.

That’s a bad thing, right? For them it is, but there will be a positive effect on the economy. As I wrote in 2010 (, Generations X and Y are a whole decade behind in their attainment of the rewards of adulthood (like a home and children), because they have to pay off their student loans. Take away that burden, and they can, at a reasonable age, buy things that they normally wouldn’t under the burden of student loans. While higher education might suffer, retail, housing, automotive, and other industries will get a shot in the arm. In this case, the economy won’t miss a beat and might actually improve as the bubble cracks.

The next 5 years (and then again 18 years out) should prove interesting as we watch a decline in higher education and the rewards and pain that come from it.        

Gasport resident Bob Confer also writes for the New American magazine at Follow him on Twitter @bobconfer 

This column originally appeared in the 27 May 2013 Greater Niagara Newspapers

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