This page has been archived and commenting is disabled.
How To Profit From The Impending Bursting Of The Education Bubble, pt 1 - A Bubble Bigger Than Subprime
![]()
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
Follow me:
- advertisements -



For a 22 year old, that SS check will likely never come, and if it does, it will be 45 years or more by the time they're done raising the age limit and chained CPI.
I know several 20 somethings that are working under the table simply because they can't repay their student loans.
Well if you are an illegal alien - at 20 something - you can get on SS disability. I wish I was joking.
Better read the fine print in the new Financial Cliff deal. It might be in there for all anybody knows. Somebody probably should have a few lawyers read this sucker sometime in the next year or two.
Why start working if the income is just going to be taken away anyway? The American dream is buying what you want. If you can't do that because of debt (which also means no credit or surplus earning potential), may as well give up...which is also easier to do on pot. At death, bubble goes *pop*
Go overseas
Even then, you have to work off-the-books to avoid the long arm of Unlce Sam. Maybe better to work off the books domestically.
Learn a cash based skill.
Become a gunsmith.
"Become a gunsmith."
Uh, so which countries do you have in mind?
Gunsmithing is a time-honored tradition in the Khyber Pass.
Don't underestimate the power of the black market. Even if guns were "banned", low-key gunsmiths would make a fortune.
"Rock on!" to the bro who spoke of learning skills. Usefuleness, in practical terms, is an emerging market. Those whose skills rely on bullshit and state coercion need not apply.
Lathes, milling machines and TIG welders are superb capital.
or a drug dealer, the banks are happy to launder your money for ya.
The way that you play this bubble (which is a mathematical certainty) is understanding that the next generation will be using their cash for psuedo purchases that imitate true ones. For example, the millenials cherish the latest and greatest iPhone and whatnot. That takes the place of the prestige of say, owing a car that actually runs. I think the fed calls it "substitution", e.g. where you trade expensive steak for burgers.
Most of us operate on thin margins in our daily lives. These kids will have to do with MUCH less that we do. When these kids have a few hundred buck a month (or more) of indefinite student loans, you know where their collective discretionary money is going: to relatively cheap and/or affordabe status symbols. Hint: it's not McMansions. Imagine if you had an unexpected 500 a month nut to pay out of the blue (and you guys make money). That's what these kids are up against, and they have shitty jobs. And no assets. And BTW, they already have MASSIVE credit card debt. Don't see much talked about that though. Regardless, their margins will be RAZOR thin when they move out of their mom and step-dads basement.
I would like to have sympathy for them, since their parents are collective dumbasses. But they kinda made their own bed too. They voted en mass for Obamsta instead of Paul. They use the web more than we do, so don't tell me about lack of information. Maybe if they stopped texting for 5 minutes....
They wasted their student loan cash on booze, whoring, trips to Cancun, football games, etc. Experience is life's greatest teacher. But she can be a real bitch.
Ahem, actually many of them got screwed trying to advance Paul in the election.
Especially that dad worked at a bank and mom sold mortages or real estate. Their largesse came from their kid's standard of living.
Dingleberry,
Love you analyze. Well done. By the way, where have you being? I just discovered you…, and look forward for some more of your insights.
Thanks!!
Agree.
You dont need a car in a big city
But you must be connected to the internet at all times
For many years before I found Zero Hedge, I thought I was the only one who thought this, especially when I got that "you're crazy" look from friends/family when I spoke about it.
Me too.
It was clear the math didnt add up.
A lot of conventional wisdom didnt make sense in many areas. I thought maybe i just couldnt understand.
Now i realize i was right all along.
Ditto on that. I feel surrounded by the clueless . Man o man these steeple ain't gonna know what hit them. Thank God for ZH.
You can be arrested for doing math, watch it.
Yep, BarryO has domestic math drones ready to fucking launch. Only problem is we're 28th in the fucking world with math competency so no one can do the fucking targeting calculations
For-profit education is even worse! I attended a major mid-Atlantic university. The amount of construction they did in the 2000s was mind-boggling. It was all fueled by easy debt that will have to be paid back on the public dime, in their case. Instead of keeping school affordable and useful, they have made it into a most awful abomination of Greek social life and semi-professional sports, all the while caterting to do-nothing minorities and Marxists. It all needs to burn down now.
Yep , and putting the screws to their beloved students with a loansharking like text book scam. Most in academia flat out suck !
Consumer driven education with consumers having no idea what they need, and the university appealing to their worst instincts to draw in students.
Way to be out in front on this one, Reg. This thesis has been around for a very long time. The stocks of the whole for-profit education space are down 80%-90% from their 2010 peak:
COCO -88%
APOL -75%
CECO -90%
ESI -86%
STRA -78%
EDMC -84%
Yes smart ass, if you go through the BoomBustBlog archives, short recommendations started in 2009. I think I am out in front of this one. On top of that, since this is only part one of the series, you don't even know what the thesis is yet.
....soundin' kinda bitchy, there, Reg.
I'll take a guess on how to profit from the bursting of the education bubble
get the fuck out of the USSA so you are not one of the taxpayers footing the bill on this soon-to-be massive bailout.
Democraps have a lot of young votes to buy with your tax dollars.
I work with about 10 college students and they all know that OB is a crack.
You forgot "Biatch"
That seemed pretty straight forward.
But I'm razzing you anyway. I agree that the actual debt bubble hasn't really started to burst. Interested to see how you'll play that.
I don't see how its straight forward. This is a long-short play that I've yet to fully articulate and your thinking in one dimension from two years ago, and doing so with a smart mouth on top of it.
RiF (Reading is Fundemental). Let me guess, you graduated from Pheonix University's advanced reading comprehension program, eh??? I just had to slip that one in :-)
Alright, alright. I'll wait until I see the full thesis. Just don't knock my alma mater, and it was massage therapy.
You're killing me with the suspense tho! Is it short SLM? Long Debt Collectors? Short low-end cons discretionary like DLTR? Why make us wait?
"... A mind is a terrible thing"
A brain is a wonderful thing, a mind is a screwed up thing.
Thanks Reggie I like your analysis. I have written about the bull shit taught in universities a couple of times. ZH should post them but I am on the pc shit list.
http://usa-wethepeople.com/2011/07/usa-university-economic-propaganda-ex...
http://usa-wethepeople.com/2012/12/teaching-fascism-at-the-university/
Eco,
If there was a PC shit list here at the great ZH, I'd likely be the fucking poster child. I think you're safe ol' boy.
I did the equivalent of ‘how to succeed in business without even trying’ in the early 90’s. I wandered into a job checking medical claims into a computer to suddenly being the rock-star office geek in charge of the Sheet Metal Workers Union of Southern California, Nevada and Arizona contribution accounting department in a third party administrator. I wrote a Lotus 1-2-3 program that brought us from being three months behind in applying payments to same day processing. I had dial up access to transfer literally billions between the lockbox, pension, health, supplemental retirement and other smaller funds direct to the bank. We were so fast that all the rest of the interests, national, local and employer funds had us process for them, including accepting the deposits and we supplied same day reports on the member’s earnings.
I was hotter than shit. I got the position because I had somehow accidently save the third party administrators ass by overhearing a couple of big shots talking near me about how they were about to lose the account because they couldn’t show how they were more effective. I interrupted and showed them how to make a chart in Harvard Graphics to demonstrate their points. Yeah…that far back and that primitive.
Long story short…I didn’t permanently save the account, only gave the union time to decide to go self-administered. The union offered me a job at a dramatically reduced wage and the requirement that I join a clerical union. Unions make my skin crawl and the wage reduction was not in my interest. They offered to buy my program but didn’t want to meet my price.
The loss of the account meant dramatic personnel reductions. My bosses left rather early to take lucrative positions elsewhere. I was left to decimate the employee base. I had the distinct opportunity to fire my own mom who happened to work in the health insurance division because she was surplus. (We both laugh over it still…she brags about being fired by her own son, I brag about firing her.) I looked for opportunities in the company and the one that came up would only take me on if I had a college degree.
Well, fuck, I didn’t have one. I learned on my own. In the end, I had to let my own self go. I wrote my own termination notice and fired myself.
I was sick of working my way up a ladder. I had a lot sales jobs before and excelled. But as soon as I started making real money, my immediate superior would fire me and take over my route. I was sick of it and decided that I had to get a documented education.
I went to college rather late in life, my mid-30's, with a simple mission. Get a fuckin' degree in the shortest amount of time at the least amount of cost. I had no idea what to study so I went through a months’ worth of Help Wanted ad in the Los Angeles Times and saw that the most ads were for accountants.
I went to the local Junior College (known locally as Tumbleweed Tech) and, after the placement and common sense tests, went to a councilor to find out how the system worked. I was lucky in that the one I found, after getting pissed over the idiotic bureaucracy and simply barging in on and sitting down, was a guy about my age and he recovered enough from my rudeness to explain the track in the junior college level leading to Associate Degrees in Science and Liberal Arts using the same basic classes. He outlined the courses required, then explained that I needed to get a transfer contract signed by a University. The nearest one, in the California State University system was what students dubbed Commuter U aka San Bernardino...CSUSB.
I found out in Junior College that, while semester units were the atrocious cost of $13 each, and classes were usually three units each, after twelve units per semester there was no additional charge. Well, I loaded up and was taking twenty four units per semester. Then I transferred to the University (after they continually lost my application until I physically walked it through the process from desk to desk until I was enrolled) and found out that the quarter system was the same way. I don’t remember how much the units were at the University because it all became a blur. .
I did take student loans for the University. I was broke, on food stamps, on welfare, and I worked part time steam cleaning carpets. The Welfare office made it hell because I still lived with the wife and kids, I worked, AND I went to school. The paperwork they required each month was easily six inches high.
I took every undergraduate accounting course offered, along with most of the Master’s courses. From the start of my Junior College until I simply HAD to take a job I had completed a Associates in Liberal Arts, Associates in Science (Business), a Bachelor of Science (Accounting Concentration) and 90% of the Master of Arts Degree in Professional Accounting in three years. (I also was required to take Male Bashing 101, Corporate Bashing 101, Religion Bashing 101, and Caucasian Bashing 101…on my fucking dime!)
My grade suffered somewhat with the constant exhaustion, needless to say, so I only average a 3.66.
What I remember most of my University days is this. I was in a bathroom stall, taking a shit, and two guys in the next couple of stalls are chatting about how tough their program was. One guy complained that he had failed remedial math, again, and had to retake the class. The other guy bitched that the massive amount of reading…one chapter a night…was not right because he had a life he needed to carry on with…etc.
I finally broke in, as I broke one off, to ask what program they were in. They were in the School of Education…they were studying to become teachers.
Thanks for the links. I enjoyed the articles, but don't get the quip about "the pc shit list". I consider ZH to be an anti pc list kind of blog. I would think being on a pc shit list would be a feather in one's cap with respect to having articles posted here.
Why do I have a feeling that Part 2 will conclude with "Full details available to paying subscibers"??!
economics, thanks for the link. Great work. Check the speeling in your bios, under your picture.
Again, not that I care, your message is much more important. Keep hitting us. Thanks!
Let's also remember that a good percentage of "Student" loans is not actually taken out by students. It has become easy money for those who have run out of all other sources for running up debt. However, there may yet be some justice because, unlike other forms of debt, student loans cannot be discharged through personal bankruptcy.
That second article is a must read. You are right, I wish ZH would publish. Thanks for linking.
Enslave the children for Ben. Drone those who will not comply to death. The wealthy need more wealth.