One of the most popular (although I feel not popular enough, considering the importance of the subject matter) articles of BoomBustBlog 2012 was my pieces on the near uselessness of the US education system - How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery. The accompanying graphic easily encapsulates a material portion of the piece, basically illustrating how the public school system serves as a mass indoctrination machine which has close to nothing in common with true education, knowledge dissemination, creativity or value creation.
The post secondary and private school systems are simply continuations of the same, but worse yet, charge exorbitant fees for said injustice. Many poor victim either saves up a half lifetime of savings or worse yet goes into insolvency skirting debt to purchase a so-called education (which as described above is nothing of the sort) that is represented buy a piece of paper known as a diploma that is literally not worth the paper it is written on.
For those who think that I'm exaggerating, assume a $40k per year tuition for a 4 year business management degree, purchased with money borrowed at 6% (from our dear government guaranteed lenders (SLM, et. al.), deferred for and average of 2 years. An oversimplified straight calculation puts you roughly $178,000 in debt upon graduation for a piece of paper that would fetch you roughly $43,000 per year. Reference ehow.com:
In July 2009, people who hold a bachelor's of science (BS) in business management averaged $39,551 during their first year of employment and $43,022 for the first one to four years. A professional with a BS in business management typically averaged $78,669 once they reached 20 years of employment.
Read more: Average Salaries for a Bachelor's Business Degree | eHow.com http://www.ehow.com/facts_5240719_average-salaries-bachelor_s-business-degree.html#ixzz2Gw6sriN5
If I'm not mistaken, wages have dropped on a inflation adjusted basis since then, but I digress. Using the figures above you would have just about broken even over an 8 year period, save a few common sense facts.
- Taxes: Yes, you'd have to subtract local, state and federal taxes from said monies... At roughly 35% (bound to go up after we finish this cliff nonsense), we're now talking $27,964 average over four years. That puts you in the hole to the tune of roughly $12,035 per year you spent on that degree.
- Debt service: Oh, yeah! Since you borrowed the money you'd probably would have to pay it back, but since you also have to work and pay rent (you can forget a mortgage at these income levels) you'd be paying back the minimum levels and scraping to do so. You'd better hope and pray you don't live in Manhattan or downtown Brooklyn too!
- Oppurtunity costs: Yes, you could have used those four years and $176,000 to do something else maybe a tad bit more productive.
So, on the fifth year following your freshman orientation, assuming you studies well, you would have laid out $176,000 facing annual debt service of about $12,000 or so - offset by a net income stream of roughly $28,000. The $16,000 per year positive cash flow (assuming you didn't need food, shelter, clothing, transportation or anything else) would give you about 12 years or so to pay off the debt and break even. I'm not even goint to run the math on the ROI, so let's just pick something outrageously generous like 8% (remember, this is over a 16 year period).
To wit, let's compare some other basic investments - that is assuming someone besides your school and your lender actually consider your academic mis-education an actual investment.
The NASDAQ composite returned 98% over the last for years. Dumping the money in the NAZ comp would have brought you close to doubling it - although you would not have had access to all of the funds at once for a lump sum investment, a roughly 50% gain looks likely. Now, you would have gained 4 years of simplistic (as in index watching) experience as compared to your competitor's fancy schmancy 4 year degree, yet you would had nearly a quarter million in cash, as well as roughly $70,000 in equity while he would have had $173,000 in debt, interest payments due immediately and the hope of finding a job with which his trusty diploma would surely help him, right? If you had a small financial business, who would you hire? The fool or the entrepreneurial investor???
Suppose you Interned for free with Apple, Google or Facebook while simply leaving the monies in the bank at .25% interest? You would have had a superior education and only been in the hole for $16,000, as well as having $160,000 in cash to play with. How about starting your own business? Invested in commercial real estae? Scalping Greek bonds post bailout? You see, there are so very few who compare getting a diploma or getting a loan for a diploma with other investments because they are brainwashed to believe this is the way to get ahead in life. It is not! It's the way to get educator entities and banks ahead in life, as you become a debt slave.
What makes this truly ironic is that anyone who truly received a real business admin, management or finance education would be able to run these rudimentary calculations and thought processes themselves which would result in the invalidation of the actual degree to which they are seeking, alas... I digress...
Why the student loan bubble is worse than the subprime bubble
Zerohedge has run an interesting series of the student loan bubble in the recent past, hence I will not rehash what has already been done in such exquisite detail. For those who have not been following, this is the case in a nutshell...
Student loan delinquencies break the 20% mark as total student debt tops a trillion dollars, rivaling and likely surpassing the subprime debt debacle.
This is how the Fed described this "anomaly":
Outstanding student loan debt now stands at $956 billion, an increase of $42 billion since last quarter. However, of the $42 billion, $23 billion is new debt while the remaining $19 billion is attributed to previously defaulted student loans that have been updated on credit reports this quarter. As a result, the percent of student loan balances 90+ days delinquent increased to 11 percent this quarter.
oh and this from footnote 2:
As explained in a Liberty Street Economics blog post, these delinquency rates for student loans are likely to understate actual delinquency rates because almost half of these loans are currently in deferment, in grace periods or in forbearance and therefore temporarily not in the repayment cycle. This implies that among loans in the repayment cycle delinquency rates are roughly twice as high.
And more from ZH:Over $120B in student loans currently in default. For private private institutions lead the way with a 22% default rate.
Today's public school system diploma, post secondary diploma, and for the most part, many if not most graduate degrees and PhDs are a waste of good ink and (relatively) valuable paper. This paper is quite similar to the MBS and sovereign debt paper which I have written so presciently and accurately on over the last 6 years (see Asset securitization crisis and Pan-European Sovereign Debt Crisis). The crises from these essentially depreciating assets stemmed from the piling of excessive debt on top of assets with fictional value. Trust me, I can see these things clearly, as can anyone who takes an objective view. When have we had instances similar to this Student Loan Bubble (or Stubble)? When I made a small fortune shorting...
- The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear?
- The warning of Lehman Brothers before anyone had a clue!!! (February through May 2008): Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008 (It would appear that Lehman’s hedges are paying off for them. The have the most CMBS and RMBS as a percent of tangible equity on the street following BSC.
- The fall of commercial real estate in general (September of 2007) and the collapse of General Growth Properties [nation's 2nd largest mall owner] in particular (November 2007): The Commercial Real Estate Crash Cometh, and I know who is leading the way!
I can go on for a while (particularly on RE and sovereign debt), but I feel you've got the point. The pattern is inevitable. There is a true business opportunity here, for many college graduates couldn't earn their way out of a wet paper bag, and many of those that could are squandered by toiling away in a system of derivatives of derivatives based upon synthetic products (think of mortgage CDO cubed traders) which are merely shadows of social constructs, versus the inception, design, production and sales of real, value creating, tangible (as well as intangible) assets, products and services.
My next article on this topic will show how I am positioning myself and others to capitalize on this education bubble burst on both the short side and the long side. In the mean time and in between time, subscribers can glean my view of one of the big private post secondary educators who is having a problem with volatile earnings that are probably going to get worse.
Education Co. 1-3-2013