University Bubble 99 - Remedial GFS at the U - Part 3

Posted On: Monday - February 20th 2017 6:23PM MST
In Topics: 
  University  Global Financial Stupidity

After that brief intermission, we'll continue from this post, which reported the student loan numbers, with a statement of the problem, the root cause, and a conclusion (nope, no closed-form solution, sorry).

I mentioned briefly in the last post, as an aside, that student loan borrowing shot up around the time that assets fell of their peak. The total borrowed amount is, again, 1.4 Trillion dollars or so, and this number is increasing rapidly. It'd be just fine if most students were getting their money's worth out of their degrees, meaning that a cost/benefit analysis just in terms of financials, would look good (very low). That would mean that the cost of payback, with interest was within their reasonably-expected budgets of their reasonably-expected prospective jobs. The first post in this series discussed this somewhat.

It's just not going to work out though, for most students out of (and plenty more in) the STEM fields. The guy with a degree in a humanities major who studied hard, got good grades, and tried his best for good employment, may end up working a long while at the same coffee shop he worked at before and during college, but with a $50,000 to $100,000 note due, the size of the last generations' mortgage payments. Many may know this, and many may not, but what I've seen (and this is the reason for short story about the restaurant near campus) is that they don't seem worried about it. Many of the students just want to, and will have a really great time for 4 years (hey, didn't must of us in the past too!), and they just put the expenses into the one big loan amount, and quit worrying about it. However, it is a much more luxuriant and expensive lifestyle than in the past and getting moreso each year, with the fancy dorms, gyms, meals, etc. that don't resemble the colleges of yesteryear.

The number of loans in default can be measured various ways (no payments in X months, never been a payment, etc.) so I don't have an exact number. According to various articles in ZeroHedge, though, there are on the order of 20-25% of them in which the money just ain't coming. Wait, you say, "these must be payed off - they can't be blown off in bankruptcy, that's the law, and the money can be deducted when said graduate is getting Social Security". Listen, if the guy can't pay, he won't pay. Who will pay it back? That gets to the root of the problem.

Why are the students spending more borrowed money, for both the luxuriant lifestyle and the universities' big tuition/fees? A commenter on another web site was quoted here with the explanation in a nutshell, but I'll do it this time: Why would a bank officer not loan money to any student in any major when said loan is guaranteed to make money? The private bank loans are backed up by the US government, so once the bank gets it's origination fee, it is already ahead, and default or not they will be ahead, as they can pawn off this "underperforming asset". In the past, any loan officer could be fired for making a riskly loan, like $60,000 to an Art History major over 4 years. He wouldn't make the deal (maybe a smaller $1000/year or so to help the guy with his rent - $4000 total, not nearly at the same risk for default). As for the direct government loans, what can one say - you, Joe Taxpayer, are the idiot loaning these people the big bucks for 4 years of fun and luxury.

There is a phrase for this kind of thing where the market is screwed up by government interference to where responsibility is taken away from one party in a transaction: Moral Hazard. This phrase could basically be used in every post about the Global Financial Stupidity in progress in this world. The bank's responsibility is brought to zero, as they won't lose on this student loan deal.

Now, the universities, because of the non-free-market nature of their business, discussed here, also NEVER have had the financial responsibility as a real business, but, in the past, they at least could not make college unaffordable, no matter whether the service rendered was worth it or not. Now, though, why work hard to keep tuition/fees and the dorm rent reasonable, when the students CAN ALWAYS GET THE MONEY? The financial aid office will be the first to ensure the parents upon the campus visit, that "hey, we will make sure your kid will have the money to pay - our website shows you exactly how to fill out the loan forms, hell, let's do it on your phone right now, shall we?"

Therefore, as one can see on the 4th graph of Part 2, tuition has shot up to the moon. This money is being spent on the fancy gyms and dorms, more dieversity coordinators and other admins. and building sprees on campus that you wouldn't believe. A full half of the campus at the University here was not there in the late 1990's.

The conclusion about how why and how this mess will end will have to come in Part 4.

Monday - May 4th 2020 4:58AM MST


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