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How To Profit From The Impending Bursting Of The Education Bubble, pt 1 - A Bubble Bigger Than Subprime

Reggie Middleton's picture




 

 

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...

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.

file iconEducation Co. 1-3-2013

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Thu, 01/03/2013 - 17:32 | 3120082 BlueCheeseBandit
BlueCheeseBandit's picture

At this rate, were all in jail in 10 years. Don't think thats a sustainable model.

Peak jail.

Thu, 01/03/2013 - 23:39 | 3121060 Freddie
Freddie's picture

Dude - we all have been in jail for the past 4+ years and don't expect to ever be paroled at this point.

Thu, 01/03/2013 - 21:22 | 3120737 Dingleberry
Dingleberry's picture

Don't pay your income tax and see what happens.

Why don't you ask Wesley Snipes.

As for defaulting on student loans, only someone that has no experience in this area would suggest not paying. Unlike unsecured debt like credit cards n' shit, student loans compound exponentially due to rate increases and fees. Unlike credit cards, there is no reason to negotiate on the part of the lenders. If you don't pay now....you will pay much more later.....if not then, ok.....EVEN MORE LATER. THink you are getting you social security check? income tax return? Know what it's lke to live with a shitty credit score? Try getting a job or renting a place or buying a car.  There are a few anecdotal stories out there about some kid beating the system. But for every one of those there are a thousand of horror stories.

THis shit sucks. But unless the system changes (fat chance the bankers are going to allow that), this is reality. All else is "hope n' change, bitchez".

Thu, 01/03/2013 - 21:30 | 3120758 akak
akak's picture

What the Hell does one's credit history have to do with getting a job or renting a place? 

Are you suggesting that there are employers and renters arrogant and intrusive enough to demand such personal (and irrelevant) information ---- and those stupid and spineless enough to actually supply it to them?

Fri, 01/04/2013 - 01:41 | 3121203 IrritableBowels
IrritableBowels's picture

Yes.

Thu, 01/03/2013 - 17:21 | 3120031 BlueCheeseBandit
BlueCheeseBandit's picture

To those doubting the education bubble will burst:

Even if u think anywhere close to 100% of outstanding loans will be repaid (because a law on the books saying so means it will really happen), don't u think at some point ppl stop going to college and look at alternative career paths, or at least put it off until prospects for post-grad employment improve? The last few years haven't given me a high regard for the intelligence of my fellow Americans, but one would think the lemmings would stop going off the cliff eventually.

My point is that all the current education system needs to implode is a drop in enrollment. In fact, the existing debt bubble is only indirectly relevant, insofar as it makes ppl skeptical about incurring educational debt themselves. The schools aren't the creditors. They've gotten theirs already.

Thu, 01/03/2013 - 18:39 | 3120268 duo
duo's picture

yup.  NO college.  Learn to run one of those $500K 5-axis milling machines for $13/hr, much more complicated than the manual one your father worked with for $30/hour in 1980.

Fri, 01/04/2013 - 05:18 | 3121355 S5936
S5936's picture

I think the plumbers butt just might make a comeback in a big way. As my guy sez, " your shit is my bread and butter " as he drives off in his brand spankin new Caddilac escalade on his way to his Vermont ski house.

Fri, 01/04/2013 - 05:28 | 3121362 S5936
S5936's picture

Oops! Got a little carried away there.

Fri, 01/04/2013 - 05:17 | 3121354 S5936
S5936's picture

I think the plumbers butt just might make a comeback in a big way. As my guy sez, " your shit is my bread and butter " as he drives off in his brand spakin new Caddilac escalade on his way to his Vermont ski house.

Fri, 01/04/2013 - 05:17 | 3121353 S5936
S5936's picture

I think the plumbers butt just might make a comeback in a big way. As my guy sez, " your shit is my bread and butter " as he drives off in his brand spakin new Caddilac escalade on his way to his Vermont ski house.

Fri, 01/04/2013 - 05:17 | 3121352 S5936
S5936's picture

I think the plumbers butt just might make a comeback in a big way. As my guy sez, " your shit is my bread and butter " as he drives off in his brand spakin new Caddilac escalade on his way to his Vermont ski house.

Fri, 01/04/2013 - 01:28 | 3121190 knowless
knowless's picture

not sure if facetious.

do you think student debt is a good investment for an 18 year old to decide to take on? irrespective of natural talent or level of education?

a college degree does not mean what it once did, and ushering way too many useless people into the system through cheap credit definitely degrades its value, which transfers to the culture at large by destroying the ability to price a candidate based on the face value of their credentials, strait up hyperinflation on that shit.

but still, yeah, going into manufacturing debt free is still better at this point than getting a useless degree, by far.

 

Thu, 01/03/2013 - 17:25 | 3120052 Salon
Salon's picture

I think the education bubble bursts in another way.

Revulsion by students at getting ripped off so they dont even take out loans or go to school in the first place.

Thu, 01/03/2013 - 17:30 | 3120069 BlueCheeseBandit
BlueCheeseBandit's picture

Actually, I wouldn't be surprised if the lemmings opt for the cliff.

My most likely scenario for the education bubble bursting is it goes down with the sovereign debt bubble. W/o gov financing I don't think many schools survive.

The one thing I'm sure of is this cant go on forever.

Thu, 01/03/2013 - 17:08 | 3120002 cowdiddly
cowdiddly's picture

hmmm there i that word "Thesis" again sounds like the brainwashing is still having its residual effect.

Thu, 01/03/2013 - 17:06 | 3119997 strangeglove
strangeglove's picture

Who needs pot?

Thu, 01/03/2013 - 17:01 | 3119978 pragmatic hobo
pragmatic hobo's picture

... saddling the student with insurmountable debt ... What can possibly be better than highly educated slave labor for bottom line of multinational corporations?

Thu, 01/03/2013 - 16:59 | 3119973 surf0766
surf0766's picture

Companies that supply to Colleges are beginning to get crushed. Margins are getting compressed because higher costs cannot be passed along to the students anymore.

Reggie, besides the financial supplies to colleges what other companies are you looking at.  Food, software, book suppliers?

 

Thanks

 

 

Thu, 01/03/2013 - 19:28 | 3120400 neidermeyer
neidermeyer's picture

Book Suppliers might be the hardest hit , after all it's a physical thing you can point to and touch.. the fraud in new versions every year is understood by all, What's really new in that "new" edition? Just an excuse to disallow the prior as a used book sale and sell that new version for $200... Everything will be .pdf and Kindle soon and if you don't think they'll be pirated copies you're mistaken.

Thu, 01/03/2013 - 20:48 | 3120622 laboratorymike
laboratorymike's picture

A couple notes about this from someone on the front lines:

1) I failed exactly one course in my undergrad, and I failed it twice. This gave me the unusual opportunity to be taking the class using the old textbook whent he new one just came out. I compared notes with one of the new students, and it turned out that instead of using a pink color scheme they used a teal one. Then they flipped the problem numbers around, and they made minor changes in the questions like a 400 unit/hr process instead of a 500 unit/hr one. We all raged over that one.

2) They do version updating because entrepreneurial students sell their textbooks to the next generation at minimum, and more entrepreneurial students will buy and sell textbooks under the table.

3) The newest form of textbook combat centers on the use of online content. Regardless of how you got the book, most of the assigned content is now through an online gateway, which requires the purchase of an access code. So you have to pay.

4) The professors have recently gotten into the business of charging for bound copies of the course notes, which used to be for free in every class (i.e. slides and homework problems). In my very last class I was required to pay $70 for the homework problems as opposed to the teacher giving out PDFs. So much for liberal profs caring about education and the poor!

5) My particular university lobbied for two provisions, first for the university bookstore to be exempt from sales tax, and second for students to be able to use loans to buy textbooks. Now all of the competitors are out of business and students have a bottomless pit of loan money for books. Can you say price explosion?

Maybe students and recent grads here at ZH should unite and hire a filmmaker to make a documentary on the student loan bubble. I'd be willing to chip in.

Fri, 01/04/2013 - 05:10 | 3121345 S5936
S5936's picture

And what particular university might that be Michael ? Just asking.

Fri, 01/04/2013 - 05:09 | 3121344 S5936
S5936's picture

And what particular university might that be Michael ? Just asking.

Fri, 01/04/2013 - 05:10 | 3121343 S5936
S5936's picture

And what particular university might that be Michael ? Just asking.

Fri, 01/04/2013 - 21:04 | 3124334 laboratorymike
laboratorymike's picture

I'd rather not say as I am going to grad school currently, but I will say 1-2 are about my undergrad, 3-5 is about my grad school. However, while my undergrad institution didn't have 3 gyms, they did build an oversized gym and ran out all of the student clubs that offered competing services. I think it's an almost typical, universal problem that students are required to pay for on-campus services that they don't need or even want.

I think one of the real solutions to this problem would be for universities to offer coursework in such a way that you get zero services, just classes. I don't think it will happen until after the bubble bursts, but when it does I will be glad to see the gyms go, the sustainability office go, the departments that end in "studies" go, etc. etc.

Thu, 01/03/2013 - 23:15 | 3121019 Freddie
Freddie's picture

One of the biggest textbook companies? McGraw Hill - owner of Standard & Poors.  Guess who they will not downgrade?  They did downgrade US debt and Obama sicked the FBI on them.  What a corrupt country - getting worse by the day.

Thu, 01/03/2013 - 16:59 | 3119968 Salon
Salon's picture

I have studied the federal FAF. There are ways to game the system.

It is wrong that only people without money get reduced rates. That kind of system does nothing to motivate hard work and savings.

It has motivated me to find ways to hide my income and game the system. I will be damned before I will pay the full rate for what are now worthless watered down degrees for my kids.

Thu, 01/03/2013 - 16:09 | 3119811 sitenine
sitenine's picture

Way to completely ignore the fact that student loans are non dischargeable in any and all circumstances. Therefore, regardless of the 'default' rate, ALL student loans remain on the books at 100% of value without even resorting to mark to fantasy. Try again.

Fri, 01/04/2013 - 03:40 | 3121288 Cast Iron Skillet
Cast Iron Skillet's picture

As to "student loans are not dischargeable" - I bet the rules gets changed to allow student loan defaults in order to provide "relief" for the poor unemployed potheads, and I bet it happens during Obama's current term.

Thu, 01/03/2013 - 16:55 | 3119958 Sabibaby
Sabibaby's picture

Way to completely ignore the fact that student loans are non dischargeable in any and all circumstances.

 

Reggie already said he wasn't going to rehash that stuff in the beginning. The nondischargeable chatter is a problem for the recipient of the loan. People not paying back their loans is a problem for EVERYONE -especially if the boneheaded college edjumicated get their way and cry to Obama to make tax payers cover their education because they're entitled to a free education like the kids in other countries where healthcare is also free and the entire country gets endless bailouts that seem to have little ramifications at first sight...

Thu, 01/03/2013 - 19:34 | 3120410 carambar
carambar's picture

Sabibaby , you don;t know what you are talking about when you mention foreign countries.

There is not such thing as $40000 a year college for the average student in Europe, the cost is much much less.

The reasons? Student are not asking for the kind of wastefull amnenities that you can find in US colleges, administration and teachers are not overpaid

and undergraduate are not subsidising graduates programs as it is in the US.

What US student need to ask is a back to basic. What the heck about these state of the art dorms if they bankrupt you?

 I think the education provided in US college is good if you have a focus.

None of my kid ever considered a private college, they all went to state colleges when most of their friends went to private colleges.

Why? College sport is a strong marketing tool that many parent/alumni bit at the expense of their wallet.

 

Fri, 01/04/2013 - 03:11 | 3121272 Sabibaby
Sabibaby's picture

I agree completely that education in America is out of control expensive and ridiculous. It's should be a matter of national pride that all levels of education are affordable for everyone, and I think technology already makes this possible. This is exactly the reason the bubble will burst :)

Fri, 01/04/2013 - 05:05 | 3121341 S5936
S5936's picture

Just another scam in a long list of American scams. PT was on the money RE : the people of the Ussa

Thu, 01/03/2013 - 17:36 | 3119980 sitenine
sitenine's picture

Fair enough. Reggie never rehashes a fact that might actually blow a hole through his entire thesis.

Thu, 01/03/2013 - 16:19 | 3119831 Reggie Middleton
Reggie Middleton's picture

Hence the problem. Non-dischargeable is not the same as "paid" or even "paid-up". It is this mindset that got the EU soveriegns in trouble. What difference does it matter if the broke 22 year old pot head can't discharge his debt, if he doesn't pay it???

Thu, 01/03/2013 - 22:35 | 3120918 Freddie
Freddie's picture

Hey Reggie - how can we short Harvard? I hope it burns down instead.

Fri, 01/04/2013 - 04:17 | 3121322 mkkby
mkkby's picture

You know, I used to hate your comments but now they're growing on me.  + 1.

Thu, 01/03/2013 - 21:32 | 3120759 ChanceIs
ChanceIs's picture

A rhetorical question:

How can there be a bubble (or a bubble bursting) in an entity in which there is no market?  There is no market for student debt.  The government owns it all.  There can be no bursting of student debt the way there was no bursting of the "SIVs" that the TBTF banks had back in '07 - which I assume that you and I now own through the prudent machinations of our unwillingly appointed financial advisor, Her Bernanke.

Now if you want to talk about China buying the student debt - along with the students - then we could have a discussion.  You know - gold for student debt with the students attached to wash floors in Shanghai.  So short gold as it floods the US market?  Maybe Chinese held US Treasuries for US student debt and students.  Short the Treasuries then?

Now if we are talking the government selling the student debt in the open market at say $0.10 to the buck, and the TBTFs buying it, and then putting it back to the Treasury because it was uncollectable (like the government FNE/FRE/FHA should hoave done in reverse to BoA) at $1.00 on the buck, then I would say....hell yes...get long the TBTFs.  The other side would be shorting the USA for its idiocy in granting the student loans in the foirst place.  But a lot of us have alreay been short the USA.  So is that the deal???  Short the USA, long the TBTFs???

 

 

Thu, 01/03/2013 - 16:25 | 3119848 sitenine
sitenine's picture

I think you're the one smoking pot bro. That 22 year old will eventually turn 50, be making some income, and will be having his wages garnished. How can you ignore that?

Fri, 01/04/2013 - 04:16 | 3121320 mkkby
mkkby's picture

You're both high on something stronger than weed.  What part of bailout nation don't you understand?  Now it's mortgage loan forgiveness and foreclosure assistance.  Next comes student loan assistance.  That trip to Cancun is going to turn out to be free and Reggie's math is just an exersize that we've all seen 100 times.

Thu, 01/03/2013 - 17:28 | 3120061 otto skorzeny
otto skorzeny's picture

why are you assuming that the 50 year old will have a job-the Baby Boomers that can't afford to retire will still be working at age 95-ZIRP4EVA/QE62 BITCHEZ

Thu, 01/03/2013 - 16:49 | 3119935 Dr. Sandi
Dr. Sandi's picture

By the time the pot smoker has turned 50, the bad student loan will have been in default and sold to a collection agency at a huge discount. It is no longer on the books of the originator and is, therefore a loss.

The pot smoker turned middle age crisis sufferer still has the payments hanging over his head for the rest of his life, of course. But at that point, it's not a loan anymore, it's a collection by a third, fourth or fifth party.

Fri, 01/04/2013 - 12:12 | 3122238 Dr. Sandi
Dr. Sandi's picture

I stand corrected. The feds aren't currently selling their bad debt, they're hauling people into court via the U.S. Attorney's offices. But apparently not suing those under $45,000 yet because it's not cost effective.

The IRS isn't involved unless there's some money inside the government that can be swiped through their fine offices.

I'm guessing that eventually, the 45K and under crowd will be sold to collection agencies. If they can't make more than they spend on a lawsuit, it's probably not worth the effort. (Unless there's a new makework project for attorneys too.)

But with the muscle of the feds behind them, it could be very different from the usual bank credit collection harassment.

Thu, 01/03/2013 - 18:36 | 3120256 duo
duo's picture

then, after years of psychotropic drugs, shoots up a school or flies an airplane into the IRS office.

Fri, 01/04/2013 - 01:27 | 3121188 IrritableBowels
IrritableBowels's picture

Shame on you for equating the two.

Thu, 01/03/2013 - 17:06 | 3119996 sitenine
sitenine's picture

Third party? No. The IRS will be the one collecting.  Period.

Thu, 01/03/2013 - 18:31 | 3120241 monoloco
monoloco's picture

Yeah, after his mom dies and the couch goes away they can place a lien on the cardboard box he's living in.

Thu, 01/03/2013 - 16:42 | 3119904 Hot Piece of Bass
Hot Piece of Bass's picture

I didn't know they garnished welfare checks for student loans.

Thu, 01/03/2013 - 17:16 | 3120028 Allen S
Allen S's picture

They do garnish disability and social security to repay student loans. I believe social security is limted to 15% or the difference between monthly benefits and $750 whichever is less.

 

 

Thu, 01/03/2013 - 17:20 | 3120039 sitenine
sitenine's picture

Bingo

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