Screw U: The Next Bubble May Be Higher Education

Employers want engineering grads the most.
  • Employers want engineering grads the most.

In economics, a bubble is something that trades at prices far beyond its intrinsic value. Fasten your seat belt: the next bubble may be higher education.

The $1 trillion of student debt is clearly a bubble — one that could wreak as much havoc as the housing bubble. For-profit colleges are a bubble; in fact, even greed-satiated Wall Street has figured that out, sending the stocks of these so-called schools plummeting. Big-time college athletics is a bubble, and the Penn State disgrace is awakening the public to it.

But there is an even bigger question: is higher education itself a bubble? “Research is now challenging the economic value of a college degree,” says New Jersey–based economist A. Gary Shilling. While college grads still do much better economically than those who only make it through high school, today’s high tuition and excessive debt, combined with lost wages while attending school, make a degree less desirable, he says. In short, the notions we have long held dear are looking like a bubble that is being pierced.

“Going to college does not make one smart and ready for a good, well-paying job,” says Shilling. There is a statistical relationship between going to college and financial success, but there is not a causal relationship. “Bright people would be successful without college,” as in the old days.

Four years ago, 81 percent of adults thought a college degree was a good investment. That has dropped to 57 percent, according to Rasmussen Reports.

Let’s take these bubbles one by one. Credit card, mortgage, and home equity debt dropped sharply in the past four years, but student debt continued to balloon. Now the average student who graduates with a student loan has a debt load of $23,000 to $27,000. The Consumer Financial Protection Bureau and United States Department of Education recently released a report criticizing lax loan standards by private lenders. “As the industry rapidly grew, the quality of the loans declined,” says an official of the bureau. He sees “big parallels to the housing market.”

The biggest offender is the for-profit college sector, which accounts for 12 percent of students but 46 percent of loan defaults. These companies get 85 percent or more of their revenue from federal loans and grants to students. But the education quality is often dismal, the drop-out rate stunningly high, and the costs excessive. Stock of San Diego’s Bridgepoint Education — perhaps the worst of the for-profit schools — was a bubble that lost most of its value after one accreditation group thumbed it down and another issued a warning. Without accreditation, the company is doomed. The stock has been as high as $27.26 over the past year and on Monday was trading at $8.41.

College athletics is a colossal bubble. Penn State’s cover-up of a coach’s pedophilia makes the point. Preserving the university’s football reputation was more important than stopping the sexual violation of young boys. In 2010, the university had $72.7 million in football revenues and netted $53.2 million. But the National Collegiate Athletic Association says that 43 percent of 120 major schools lose money on football. Now that the school has been sanctioned heavily by the sports authorities, Penn State will likely become one of the money losers.

There are other examples. The University of San Diego has been going through a basketball point-shaving scandal. Through the years, game-throwing and point-shaving incidents have corrupted major college sports.

Football coaches often earn more than presidents of universities. In 2010, Brady Hoke was paid $675,000 as San Diego State’s football coach. The next year he signed a six-year contract that could bring him $3 million a year at the University of Michigan. The new president of San Diego State will make $400,000 annually, and there is stinging criticism of his pay because of the California State University system’s structural deficit.

Conservative columnist George Will, although an athletics nut, says that when sports is grafted onto education, there is a “bubble of entitlements” and eventually “moral derangement.” Some say universities should spin off football and basketball into separate entities; the teams might be affiliated with the university, but players would be relieved of the burden of attending class (which many don’t do now).

For-profit colleges have dismal drop-out rates, but public institutions aren’t doing so hot, either. In 2008–2009, a stunning 84 percent of Bridgepoint students in a two-year program dropped out before completing the first year. And 63 percent of those seeking four-year degrees left within a year. But the nonprofits? Shilling quotes data indicating that 65 percent of those who start community college haven’t earned a degree or other credential six years later. The same is true of 56 percent of those enrolling in four-year schools.

Says Shilling, “Only 49 percent of graduates from the classes of 2009 to 2011 found jobs within their first year out of school, compared with 73 percent who graduated three years earlier.” Inflation-adjusted wages for male college grads 23 to 29 dropped 11 percent in the last decade to $21.68 an hour. Women were down 7.6 percent to $18.80.

High tuition and board, and staggering interest costs, make a college education less valuable, says Shilling. He cites College Board data showing that a student entering college in 2010 at age 18, and piling up debt, takes until age 33 to break even.

The National Association of Colleges and Employers reports that there is demand for engineering, business, accounting, and computer science gradates but little for social sciences, humanities, and education grads.

Shilling laments the “dumbing down” of college curricula — a result of pressures to open universities to more students. He believes that high school students with high IQs, grades, and test scores should be encouraged to go to four-year colleges, while those in the middle should be directed to community colleges. Those doing well there may go on to four-year schools, and others should be directed to vocational training.

Thus, the bubble might slowly deflate, instead of bursting with a sis…boom…bah! ■

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Don, I can't disagree. The only point I'd like to make is that I was calling this a "bubble" about the time the Bridgepoint scandal was boiling over some months ago. Could my prescience in that get a bit of credit? (Look back in my comments to your blogs.)

People have been willing to spend ever-greater sums to get college degrees, ANY college degrees, for the past decade to so, although the roots to that go back decades. A BA was your ticket to heaven, and no matter who issued the degree, it was vastly better than no degree, NOT.

Overall, the public is now convinced that education from the most prestigious universities will open doors that are forever closed to others. As a result, tuition has been rising at a rate greater than the overall cost of living for at least twenty years, and maybe longer.

It spreads down the food chain, too. Locally, the private and parochial schools are now on a tear, despite the punk economy, expanding and raising their tuition rates. The local Catholic diocese shut down a pair of down-at-the-heels high schools (USD High and Marian) to replace them with a pair of palatial, top-of-the-line campuses (Cathedral and Mater Dei) that cost many, many millions to construct. After generations of Catholic schools running on peanuts and crying poor-mouth, suddenly those schools are the best looking and best equipped high school campuses in the county. The diocese knew something when it went in debt big-time to finance those operations. In a like manner, Our Lady of Peace, Santa Fe Christian, and a few others have muscled their way into big expansions. Want your kids to attend those schools? Sure, but bring your checkbook.

The pernicious effect that big time college sports have had on universities and on the high schools that feed them is widespread. For too many years, USC traded on its sports programs, while its academics languished and should have been an embarrassment. But eventually the corrosion on the campus eats through the protective lining and the truth outs. Pete Carroll bites the dust, and Penn State's Joe Paterno (JOE PATERNO!) is unmasked as an enabler of the worst kind of perversion. What's the world coming to? Uh, it's coming to the correct conclusion.

We may return to a time when it was not seen as some kind of defeat when not everyone went on to college study. The California community colleges may get redirected back to their initial mission, which was that a majority of students would pursue vocational programs. Today, and for a long time, most community college students were planning to transfer to four-year institutions.

It will be most interesting to see how this all plays out, and what effect it has on the universities. For some the change might be devastating, and for others, may be a vindication of their policies during the bubble.

I do recall that you pegged this. I began writing of Bridgepoint as a scam in 2010, I believe, so you were definitely ahead of your time. Yes, a college education from numerous angles is proving to be a bubble. Best, Don Bauder

Thanks for the credit. Every little bit of gratification is appreciated.

A credit is often preferable to a debit. Best, Don Bauder

WHY IS THE COST OF HIGHER EDUCATION RISING? Are the schools somehow getting better? Are the students learning more (productivity output)? Technology? Bigger buildings? Smaller classes? Of course not. The answer is simple economics- supply and demand.

More students are applying to the same number of schools. This should beg the next question of how or why this is possible. Population growth? Possibly. But certainly not enough to cause this sharp of an increase in tuition fees. Smarter kids? I doubt it. The answer is our good old buddies that caused the housing bubble and the medical cost bubble. Uncle Sam and the banks.

By offering government (tax payer) backed student loans, more students are able to apply. When more students apply to the same number of schools, the cost goes up. Basic supply and demand.

The common sense answer to this moral issue of equality that many of our poor, disenfranchised citizens were not getting their fair shot at a higher education, would be simply to build more schools of higher education. Surely congress and the media would have been able to make a strong case to increase taxes for the common good. But instead, our government (or should I say, the corporations and banks) decided to take the path of least resistance and offer government (tax payer) backed student loans.

This was easy to get by the public. Large PR firms financed by the banks would start their usual frenzy and first appeal to the liberal's socialist views and sensitivity to unfairness and equal rights for all. The conservatives would take their predictable stance by crying foul play and too much government intrusion (in which in this case they would be right) and bingo- we are divided and united at the same time. We have yelling and screaming on both sides on another moral issue and completely distracted away from any real issue or issues of any kind of substance.

Now, the old saying if you want to find the root of a problem- follow the money.... Now, the banks love any kind of government (tax payer) backed loans. First, they know students won't be able to pay them back right away, so they will be collecting interest for a very long time, and that's how banks primarily make money. Second, they know that these loans will never default because the government won't allow that to happen, ie the government will garnish your wages if you try to file bankruptcy or not pay.

So who's making out in all of this? The banks. Who probably got the idea in the first place? The banks. Who has all the money in our country? The banks. Who owns your house, your car, the building you drink coffee in, the shopping center you shop at? The banks. Who runs our country? The banks.

The same was true with the housing bubble when we had government backed home loans because it wasn't fair that everyone wasn't able to experience home ownership. More buyers flooded the market, supply stayed relatively stagnant and boom- housing bubble.

Note that the $400,000 paid the new SDSU president is criticized, despite the fact that it is less than what was paid to the SDSU football coach who was hired away by Michigan. I have read about the deficiencies in California system history and economics curricula. Best, Don Bauder

You make many good points. The rising costs of a college education are definitely explained by demand/supply. Actually, Shilling's report gets into that. You are right: the banks -- those bastions of supposed free enterprise -- love government-backed loans. The banks have made false claims to student borrowers. Now, student debt can't be discharged in bankruptcy except in very rare circumstances. Sen. Durbin of Illinois has introduced legislation that would permit students to get out of debt in bankruptcy. However, given the chokehold that money-waving bank lobbyists have over Congress, the passage of that bill is gravely in doubt. Best, Don Bauder

The Republicans will certainly oppose the bill launched by Durbin, a Democrat. Republicans have consistently supported the for-profit colleges, despite the party's claim that it is the guardian of the national treasury. Best, Don Bauder

It is only fro private student loans which should have NEVER been given that protection, nor should even gov student loans, they have MANY protections that violate the Constitution. Clearly unconstitutional. Like no Statute of Limitations, they can sue you after 50 years of doing nothing-try doing that to a gov debt as a plaintiff. Also can attach personal and real property without a court judgment or order.

Tell us more, SurfPup. Best, Don Bauder

There are some excellent pieces of analysis in the conservative press that blame government programs, such as guaranteed loans, for this hyper-inflation of tuition. The basic concept is that all that government money flowing into universities just allowed them to jack up the rates. Consumer "sticker shock" that should have limited the increases just wasn't there, 'cause all you had to do was borrow more. Did the students really think they would have to pay it back? Maybe and maybe not. Those who realized it would have to be repaid also thought their huge earnings streams would make it easy. But that's not what we have now in the job markets, and may not see again for many, many years. Put that together with an unholy alliance of government and bankers, and you have yet another recipe for disaster, just another one in a series of such messes.

A college student who didn't realize he or she would have to pay back student loans really doesn't belong in college. You raise some very good points -- particularly, the fact that the days of graduates getting high-paying jobs right out of college are gone. Best, Don Bauder

Wow - great article Don. A lot to cover here but a few of my takes.

  • Student loan bubble is almost certain to pop and cause a financial crisis along with all of the "we had no idea there was a problem" stories from gov't, banks, and educational institutions - similar to what we heard during the housing crisis.

  • Price of education bubble: Will be some changes in the higher education system but I think that's a little hard to predict. Could there be a major crash with hundreds of colleges closing and tuition rates getting slashed? Maybe but I would suspect once the government finally turns off the student loan money pipe the tuition rates will merely stabilize not crash.

  • Loans: In my opinion low cost loans are a terrible way for the government to give aid to people. In the short run they make things more affordable. In the long run they make things much less affordable and only help the banks and blatant scammers (e.g. bridgepoint).

  • The "value of a college education" claims made by colleges clearly ignore the distinction between cause and correlation. If you remove the fact that those who attend college tend to have higher intelligence and socioeconomic background than those who don't it's not so clear there is a substantial lifetime benefit.

  • College sports: D1 hoops and football are obviously semi-professional sports leagues - the hypocrisy is so blatant it's comical. But I don't think it's changing any time soon. Look how long it took to get a 4-team playoff system in football.

Some think the bursting of the student loan bubble will have worse consequences than the bursting of the mortgage bubble. I would think if Congress finally curtails the flow of federal money to college students -- although that's no sure thing -- marginal colleges and even universities will be folding. Best, Don Bauder

It seems to me, the cost to run the colleges hasn't increased. I assume the rent is already paid, professors are making relatively the same, books cost the same. What costs have increased so much it would spike the cost of admission? The only thing that is going up are the upper echelon's salary, as you already indicted. As far as a college loan bubble crash. Good possibility. It would largely depend on where these notes are now (as in with the mortgage notes tied with all other types of securities and debt). Its fair to say that if college kids are graduating in an economy where they can't earn an adequate income- their students loans are the last that is going to be paid. But that won't cause the crash, because the banks have already figured these will be very long term debts, not like mortgage notes that start getting paid immediately. The only way the system will fold is if people 20 years out all stop paying their loans all at once. Which is a good possibility. Somebody, somewhere is earning or depending on these debts getting paid.

Private lenders are doing very well on student loans. After all, the debt can't be wiped away in bankruptcy except in very rare cases. But it is true that defaults are piling up. For-profit colleges are a huge source of the defaults. Best, Don Bauder

D1 hoops and football are obviously semi-professional sports leagues

Excelent comment, never heard it described like this, but it is 100% true.........minor league Pro Ball.

College football is a minor league system for the NFL, without the NFL having to put much money in the pot. Would you be a coach of a major university team? You know that probably 99% of your players won't make it to the pros, and you also know that you are destroying many of them physically -- perhaps for life. Best, Don Bauder

Private, for-profit law schools are, in my opinion, the reason California's overall Bar passage rate is so low. The pass rate for graduates of American Bar Association-accredited schools is about the same as passage rates on other state Bars for ABA grads. Some states have nothing but ABA-accredited law schools, but California has zillions of state- and non-accredited law schools which entice people who have no chance of ever passing the Bar and becoming a lawyer, thus saddling them with law school-sized debt and no way to make enough money to pay. It's kind of like banking now that the Glass-Stegal Act is repealed. Schools know the government will make good on the loans if students default, so the schools don't have to care.

Like for-profit health care, for-profit education is a bad idea all around.

I can't disagree: for-profit education is a bad idea all around. The market system works well for certain functions of the economy. It doesn't work well for education. And I'm not sure it works well for medicine. Best, Don Bauder

The pass rate for graduates of American Bar Association-accredited schools is about the same as passage rates on other state Bars for ABA grads No, it is much lower. I think it is 70% for first time ABA law students, vs 80%-98% in other states. Bar pass rate for NON ABA law schools is around 20%, I think Concord online law school is the only for profit LS in CA. Thomas Jefferson was when it first changed names from Wetsern STate, but they ar enow gone non-profit. Only 5 states allow non ABA law studnets to take the Bar, CA is one of them. The fatc is many of teh so called non-profit schools, including many LS's, are no different than for profiut schools.

Why don't you check these data and give us a complete report, SurfPup? Interesting stuff. Best, Don Bauder

The point is that diploma mill law schools lure people in who have no chance to be admitted to an ABA school (probably for good reason) and get them rack up enormous, government-guaranteed loans.

Look at http://www.ncbex.org/assets/media_files/Statistics/2011Statistics.pdf, particularly page 10. California's ABA school pass rate was 61% (third-lowest, ahead of Alaska and D.C.). Average was 74%. Sixteen states (by my count) had pass rates at 80%+, and 10 states had pass rates in the 60s or lower. So I stick by my statement that California's ABA grad pass rate is "about the same" as that for other states.

For a list of law schools in California, see http://admissions.calbar.ca.gov/Education/LegalEducation/LawSchools.aspx

I can't tell just by looking which of the private schools listed are for-profit and which are non-profit, but I'll bet there are more for-profit schools than just Concord.

Using that stats you just supplied, the AVE bar ass rate was 69%, CA was 51%, the second lowest in the data, a difference of 40%. CA is by far the hardest bar exam in the country and their pass rate is not "about the same" as other states,not when the avergae is deviated by 40%. Even if only using ABA LS.

We could argue all day about what the phrase "about the same" means.

Those 51% and 69% pass rates are for all takers. My original comments were about ABA grad takers. The ABA numbers (61% vs. 74%) show only a 20% (approximately) disparity. The fact that the disparity in passing rates for ABA grads is half what it is when you include non-ABA grads is what leads me to say "The pass rate for graduates of American Bar Association-accredited schools is about the same as passage rates on other state Bars for ABA grads."

Quick. We need a lawyer in this dispute. Call a law school. Best, Don Bauder

California still has a surfeit of lawyers. Indeed, the whole country is over-lawyered -- one reason for the excessive litigiousness. Best, Don Bauder

Is the CA exam "by far" the hardest? Best, Don Bauder

And by the list in the document from NCBEX, 19 states had non-ABA grad statistics, so presumably at least 19 states allow non-ABA grads to take the Bar exam. I do believe some (most? all?) states which do allow non-ABA grads to take the exam do not allow out-of-state non-ABA school grads to take their Bar exam.

The numbers you got right were the non-ABA pass rate (17% in California, 25% overall) and the ABA pas rate (74%).

And by the list in the document from NCBEX, 19 states had non-ABA grad statistics, so presumably at least 19 states allow non-ABA grads to take the Bar exam.

OK, we need some clarification. When I say only 5 states allow a non ABA grad to sit for the bar-I mean that the non ABA grad may sit for the bar with no other qualifications. SOME states (and I am guessing the other 14 on that 19 list) allow non ABA grads to sit in their state IF the state non ABA LS graduated from in allows the non ABA grad to take the bar in that home state AND* they are already admitted in that state, and usually there is a time requirement of 5 years of admittance required prior to allowing the non ABA grad to sit for the Bar in the other state.

States have different requirements regarding the things you are talking about. I certainly do know all the rules for every state Bar regarding admission of non-ABA grads, lawyers admitted in other jurisdictions, etc. Every state is different. For example, Washington state will admit a lawyer licensed in another jurisdiction under the same requirements that that jurisdiction will admit a lawyer licensed in Washington state.


Now if we're talking just California, I believe a non-ABA grad licensed in another state has to have been in practice for 5 years and has to take the "lawyers bar" (days 1 and 3). An ABA grad licensed in another state does not have to have any number of years of practice, but does have to take the "lawyers bar."

Yes, if they are licensed in another state they take the lawyers exam, skip day 2, the easiest section in CA- the MBE. I thought the time was 2 years for CA but cannot recall and am too lazy to look it up. The essays in CA are harder because they are so subjective. When a bar applicant in CA can score in the top 25% (scaled 150 or above) on the MBE and still fail the CA bar exam then something is very wrong. I know people who have scored in the top 10% on the MBE and failed the CA bar exam.

In the private sector, accountants and their co-conspirators, lawyers, are masterful at producing profits out of thin air, or, conversely, in such case as professional sports teams begging for subsidies, HIDING any profits. So for-profit or non-profit law schools should have the same skills. Best, Don Bauder

The students need to take they're case to the Supreme Court. If GM, Freddie Mae, the Post Office etc. get money from the Feds without paying interest, putting up collateral or even paying the loan back. Why should a student have too! The feds borrowed 2.7 trillion from the social security fund that will never be returned..This is discrimination.

The banks get money from the Fed for almost nothing. But the banks' large borrowers also get money cheap. GM, Freddie Mac and the Post Office are special cases. Your point is well taken: student loans rates are too high. A recent Congressional action kept them from going even higher. I can't see how this trillion dollars of debt can be forgiven en masse, however. Best, Don Bauder

Or why a trillion dollars of debt should be forgiven. Forgiving this debt is just an accounting tool to just have someone else(the taxpayer) on the hook.

Except a large portion of that so called trillion dollar debt is bogus fees. costs and other fraudulent charges. The principle actually borrowed is probably 1/3 of that......I agree it should not be forgiven, but it should be no different than any other type of debt, subject tot he same laws and protections.

Only one-third? That sounds very low, SurfPup. Best, Don Bauder

Yes, taxpayers should not absorb a mass student debt forgiveness. Best, Don Bauder

And poor student loan debtors should not be scammed by the gov and their cronies like Al Lord of SLM, so he can build an 18 hole private golf course in his backyard.


Good name for the rapacious CEO: Al Lord. Best, Don Bauder

Yes, darkness, but look at all the money he has raked in. That loot is sunshine for even the darkest of hearts. Best, Don Bauder

The Fed always gets gouged (in return for campaign cash) by the middleman. Why do we need the lenders, when the loan is guaranteed? Why should they skim 10% in fees, plus 90% of the interest? If the Fed lends them the money for no fee, and .25% interest, and the bank charge 10% fees plus 3.5% interest. It is a racket. Then the default fee is 35% of the balance, and in late fees.. I borrowed $44,000 and now with all the above mentioned fees the balance is $141,000. So I am now at about 30% Principal and 70% fees and interest. Good thing banks are exempt from usuary laws. I think that the principal should always be collected, but the fees and interest and penalties, are outrageous, and should be forgiven under certain circumstances.

There have been deleterious student loan abuses by private sector lenders. A recent report published in part by DOE stressed that. However, there are also abuses in the public sector lending programs. The U.S. can't just declare amnesty for all the student borrowers, but there should be ways in which some borrowers can get their totals reduced. A college graduate with an enormous debt load is inhibited from buying much. And consumption is 71% of the economy. Best, Don Bauder

totally agree. I'm paying 7% compounded interest!! You are totally right. Why should they be charging any interest at all. TOTAL SCAM, TOTAL CORRUPTION. I thought I had it bad. I borrowed $15k and now its $30K. I couldn't even image having $141k in debt. Question: If you stop paying, will it ever go away or do you think the government will garnish your wages?

I do not know whether the government will garnish your wages. Sorry, that is something I haven't studied. Best, Don Bauder

Yes they will garnish your wages, and they don't need a court order to do it-violates the due process clause.

Sue the federal government for violating due process. Best, Don Bauder

I borrowed $6K and they turned it into $80K by fraud....

Usually, it's the other way around with the government. Best, Don Bauder

They turned the $6K debt into and an $80K debt by fraud.

Yes, they add on a default fee that has nothing to do with the time and effort to collect-also unconstitutional.

You mean those folks who swear to uphold the constitution are violating it? Goodness! Best, Don Bauder

They are just YES men to whatever gov wants-like Clarence Thomas, sides with the gov 95% of the time.

Thomas should be given an IQ test and Scalia a mental balance test. Best, Don Bauder

Scalia, whom I usual do not agree with but usually respect b/c his opinions are well written and supported, really crossed over the line in the Obama Care case, he personally attacked the POTUS in his descent. I have never seen that in 200+ years of SCOTUS opinions......he has really tarnished his legacy with that one intemperate opinion, which it too bad.

At least for me, his legacy was tarnished many years ago. Best, Don Bauder

You ask why lenders should skim fees when they get money for almost nothing from the Federal Reserve. The answer is lobbyists pouring money into the pockets of politicians. Best, Don Bauder

Most debtors can discharge their student loans merely by serving a four year enlistment in the military or joining the reserves. Student borrowers should be required to sign an enlistment contract as security for repayment of the loan. If the borrower defaults, then the borrower should be inducted into the military to serve at a reduced salary until the loan is repaid. I am opposed to any amnesty or amending the bankruptcy code.

The banks are lending money that's not theirs or doesn't even exist in the first place. They have not sweated 1 drop and have all the money. They have not EARNED it. The only reason we need them in the first place is because they've cause prices to rise so much my inflating the currency. They have caused the problems and then they make so we need them to bail us out. They're making money on all ends and not doing an ounce of work. You figure the total amount of money you pay into a house on a 30 year mortgage. Over half of the total amount you pay will go to the bank in interest profit. Less than half will go to the actual people who sweated and put the time and labor into building the house. Tell me how that is??

It's more than annoying that the banks can borrow money from the Fed for almost nothing, gamble it away on any kind of crapshoot, then sit back and be bailed out if the bet goes sour. I am in favor of restoring Glass Steagall and breaking up the big financial institutions. Best, Don Bauder

Hi Don,

Wouldn't it be breathtaking to see the government pursue deadbeat bankers like they pursue victims of education fraud.

When the same government sponsors these loans, it's an implicit approval of the contents of the course and the school's reputation.

Yet these schools are often pathetic in delivering content and applying educational methodology, online especially.

Forgive student loan debt instead of bankster crimes...



Fred: Yes, pursue deadbeat bankers and their banks -- and pursue them criminally, too. Those responsible for the 2008 crash have skated completely. Best, Don Bauder

Not completely. Those in charge also lost in the stock market, the value of their homes went down, etc. But those prescient enough to realize that things were going south, were able to get very rich off the crash.

The upper 1% had 23% of national income at the 2007 peak; that came down to around 20% -- still ridiculously high -- and then bounced back to around 21%. Best, Don Bauder

There's no "prescience" involved. It's either luck or illegal inside trading.

I am completely unaware that student loans can be discharged by serving in the military, either on active duty or in the reserves. But I do not question you on the point. You are not alone in opposing amnesty or amending the bankruptcy code on these loans. Best, Don Bauder

It's not a total forgiveness. It's has to do with the College Cost Reduction and Access Act of 2007 and something called the Public Service Loan Forgiveness Program. I don't remember all of the details, but I do remember that part of the requirements are making 10 yrs of payments while working in a qualified public service job, including the military, or for a non profit. Like I said, I don't remember all of the details or the specifics, but if you do a google, I'm sure it's there.

I am sure Burwell will give an answer. Best, Don Bauder

Hi Burwell,

First, I'm curious where you found this discharge of debt for enlistment deal. Is it a new program?

As to your proposed hypothetical extension where deadbeats are enlisted by default...may I quibble?

I was already enlisted, 84-88. Honorable discharge. Sailor of the Month. Letters of Commendation. Blah, blah, blah...

I consider myself a lifelong learner. Maybe I take a class at a private school...get a loan to cover the cost.

Hypothetically, I'd default, refusing to pay for a private school's useless computer course.

You'd have me back in the Navy for this?

Whoo boy, that would be some fun. An old shellback like me ain't gonna take too kindly to some pimply 3rd class screaming in my face. We can all predict how that ends...

So what's next for our hypothetical deadbeat Fred, newly E-1 again?

The brig?

Military prison because I couldn't or wouldn't pay back an overpriced course (that likely did me no good at all) where the loan was piled up with extra fees and penalties...

Bread and water for meeting that with any defiance? How many years? Even more if I don't behave "nice"?

...nah, Burwell. I don't think that solves the problem. The unintended consequences would be monumental.

(but good idea nonetheless, thanks for proposing it)



Fred: I am 76 years old and when I left the military (National Guard in the early 1960s), I had the sense that the Army did NOT want me back. Smart decision. Maybe I should sign up for a course, get a loan, default, and dare them to put me in uniform again. And pocket the proceeds. Best, Don Bauder

You know, there was a philosopher (Nozick?) who suggested that it's precisely us old supernumeraries who ought to be hunting out IEDs in Afghanistan.

Makes a lot more sense morally, and genetically...and it would probably prevent more wars if the geriatric politicians had to don uniform.

I have always believed that the world's people should enter into a pact in which all countries agree that the politicians and diplomats would have to be armed and go to the front first in the event of a war. We could eliminate wars...at last. With their own heads in the line of fire, they would find a way to avoid hostilities. The financial system works that way: when the fat cats have their own money at risk, they find a way to reach an agreement. Best, Don Bauder

Don, that would be a nice little arbitrage......Just make sure you borrow $100K to make it worth your while.

Sorry, Jeff, I have no debt. Best, Don Bauder

In 2014 student loan repayment will be capped at 10% of income, with forgiveness after 20 years. The Government will loan directly, cutting the banks out of major swag. Wall street is in danger of actually losing for once unless they can reverse this law before it goes into effect.

How did Wall Street lose in Congress? Lobbyists must have been concentrating on something else. Best, Don Bauder

Probably watering down Dodd-Frank which passed about the same time.

Yes, the lobbyists spent a lot of time and money extracting teeth from Dodd-Frank. Best, Don Bauder

They have had the income contingent program, which is what this is, for 30 years at least.....and once the principle and interest have risen 20 fold over that 25 years and the debt is discharged you will owe the IRS taxes on it, and can go into their contingent repayment program for another 25 years-it is a fraud and scam. It is really not an alternative.

The colloquy for this column has been excellent -- giving us many reasons why some believe that the student debt crisis could be more harmful than the mortgage crisis of 2008. Best, Don Bauder

I don't believe it will be worse than the mortgage crisis, either. But some do. Best, Don Bauder

Big banks cry "too much government , yet love "government " backed student loans ? Go figure.

Continue to be amazed how big money can convince so many people to act against their own self interest. Just saying.

San Diego's so-called conservative establishment bemoans government interference in business -- until it wants government subsidies for ballparks, football stadiums, hotels, etc. etc. Best, Don Bauder

San Bernardino followed San Diego's example, even building a ballpark to revitalize their downtown.

How'd that work out?

Yes, San Bernardino officially went into the tank this week. Ah, corporate welfare! Best, Don Bauder

Lots of good bargains in San Bernardino's Muni Bonds right now, but not for long.

Lets hope they turn out better than Stockton's POB's.

Speculating in California munis is no game for sissies. Best, Don Bauder

Right after the council decided to go BK (but before actual BK filing), I found that San Bernardino GOs had not gone down much. That may have changed. Best, Don Bauder

Here's my prediction.

As a result of student loans, big bailouts on both the financial institution and the personal student borrower level are coming. Probably not quite as bad as the mortgage meltdown but still pretty big.

I make this prediction regardless of what existing laws or rules are. There will be extensive personal bankruptcies and defaults and numerous large financial firms needing (and receiving) bailouts. The precedent has been set.

I guess the question is how many of these student loans have been packaged in convoluted derivatives and sold to investors. It was that snowball effect that made the mortgage crash so bad. Best, Don Bauder

The military CLRP student loan forgiveness program is described below. The GI Bill is the only college aid program the federal government should fund.


We all should chew on this one. Best, Don Bauder

The average student loan debt is $23 to $27K? Is that for a college education in the United States? Where was the stat pulled from? Newsflash: even at a generic state school, you're looking down the barrel of $80k for a Bachelor's degree.

The $23,000 to $27,000 is the average debt of students with loans, not the average of students with and without debt. We checked the number carefully. Best, Don Bauder

I have said it before, more than half the graduating law students-about 40K per year, will NEVER work as attorneys, no jobs, and I would guess that 50%-80% of all law school loans will default, the jobs out there if they can find one will not support the debt service......default happens, or at least not be repaid in full.

According to Shilling, only 55% of law school graduates last year were employed full-time as a lawyer nine months later. Law students often accumulate debts of $150,000. Law school applications are down 14% this year from last year. Best, Don Bauder

some of these law schools are gtting hit with fraud lawsuits for handing out misleading employment data, like the local Thomas Jefferson LS.

Yes, there are several suits out there. It will be interesting to see how skillfully these law schools defend themselves. Best, Don Bauder

I believe that requiring borrowers to sign military enlistment contracts that activate upon default would sharply curtail the default rate. Defaulters could repay their loans with honor by serving in the military at reduced pay. Unpaid student loans are just piling up and I suspect that little or no effort is being made to go after deadbeats. Most loan defaulters probably drive Passats or BMWs and could easily repay their loans in a few years if they scaled back their spending and stopped pissing their money away in bars and restaurants. I would like to see the passports of student loan defaulters and see how many have taken costly foreign vacations while their loans remain unpaid.

You raise a question that hasn't been answered in this discussion. How aggressively does the government chase after students who default? Good question. Military could be a good solution for some. In my military days more than 50 years ago, the Army was happy to take the dregs of society. But that isn't true anymore, I understand. The military might not want a bunch of deadbeat debtors in uniform. Best, Don Bauder

The last thing the Army or the rest of the DoD needs to do is start accepting the dregs of society. With the higher standards that exist today, we still have cases of atrocities, abuse, and massive theft. No, the armed services are not some sort of blotter for society to sop up its failures or its deadbeats or any other such miscreants.

That may be one reason why there won't be a reinstitution of the draft, except in an emergency. Best, Don Bauder


I can appreciate the sentiment - loan defaults have gotten to be a problem in society. But I think there needs to be some balance between a stringent tough stand vs. deadbeats vs. complete loan forgiveness.

Moreover, given the precedent set for loan defaults related to the mortgage meltdown I think it would be extremely unfair to single out students. If we're going to require military service and surrendering passports for those who default on student loans, then shouldn't the same standard apply to executives of Wall St firms, short sales and foreclosures of houses, owners of bankrupt/failing businesses, etc.?

Ultimately in the long run I think we need to change the role of government. The government needs to quit providing loans and pushing loans - period. Most if not all government loan programs should be phased out IMO. The loan programs fuel bubbles and only help bankers in the long run.

And while I hate regulation, I think we need some reasonable regulation of financial institutions - esp. to break up TBTF corporations and to prevent conflicts of interest. Ironically, some regulation in the finance sector is needed for the free market mechanisms to work. Once the proper regulations regarding corporations are in place, esp. eliminating TBTF, then the free-market self-regulations (good companies prosper and bad companies fail) can take place.

Wouldn't that be something? Put Wall Street malefactors in the Army instead of in jail? Suddenly, weaponry would start disappearing and showing up on the black market or being shipped secretly to countries on our enemies list. Best, Don Bauder

Sticky fingers have a way of finding cash to grab. Best, Don Bauder

Maybe we could at least send the some of the Wall Street executives receiving bailouts to boot camp. With any luck they'll have a drill sergeant who was screwed out of a lot of money by the corrupt nonsense which went on in the financial industry. They can even wear their Gucci loafers for the long hikes if they like.

Many years ago, a wife of a Pendleton drill instructor was found guilty of killing her husband. The jury debated the death penalty. Some San Diegans thought the death penalty would be too easy on her: she should be forced to marry another drill instructor. Best, Don Bauder

Thing is...it's often the liberal arts majors who find the greatest difficulty finding employment that pays enough to repay the loans.

So, Burwell, you'd get Medieval Poetry and Gender Studies majors in uniform. During their college years, they were indoctrinated to believe that only non-violence is legitimate.

First order they receive, they'll stage a sit-in. They'll demand vegan chowhalls, and a strict prohibition on profanity or demeaning language, weekly consensus building meetings, and drink only organic fair trade coffee on watch.


What about enlistments for the bankers who had their debt forgiven?

Maybe a few scuffed Gucci loafers would be in order for those crooks, rather than indentured military service for the poor who were enticed into loans by their schools, banks, and the government collectively with misleading promises of non-existent jobs.

(P.s. Thanks for the link above. I see that loan forgiveness for an extra six months is only for officers with no prior service. So Don and I cannot arbitrage student loan debt into re-living our youthful soldiering.)

Unpaid student loans are just piling up and I suspect that little or no effort is being made to go after deadbeats.

The scam "fess and costs" associated with student loan defaults, including the ability to attach property without a court order and no statute of limitations, makes SL debt the most profitable and easiest debts to collect-and highly fraudulent, as in forcing defaults to collect the high fees and costs they get. Fees and costs that were/are never incurred. The SL insudtry is colelcting over $1.25 for every $1 of defaulted SL debt.

The fact is defaults were NEVER a problem in the SL industry-ever. They had a much lower default rate than any other kind of debt-even in bankruptcy, less thank one half of one percent.The claim that there are tons of INTENTIONAL defaulting students out there is 100% false.

Perhaps there WAS never a problem in the student loan industry. But remember, there is agreement all around that in recent years there have been egregious abuses in private student lending and certainly abuses in government lending, too. So maybe we can only use the past tense, and not the present tense, in describing the student loan mess. Best, Don Bauder

They put all the unconstitutional laws in place that made student loans immune from all contract law-based on the claims that there were large numbers of grads, many in the professional areas like law and medicine, who were intentionally discharging their student loans in BK right out of college, so the claimed the need from Congress to put in all of these scams like no Statute of limitations, automatic 35% of loan balance added to a default, no court action needed to attach property and wages......it was all based on fraudulent claims of grads not paying-all false.

I'm sure it was not the first time unconstitutional laws were put in place based on fraudulent claims. Best, Don Bauder

Don't want to seem uneducated, but how much has "offshoring" of American jobs contributed to depreciation in the value of a diploma?

When jobs are sent to overseas countries having slave- and low-wages, jobs requiring a degree are lost in the U.S. Further, U.S. companies claim that there is a shortage of U.S. engineers, forcing the companies to import foreign tech workers through the H-1B program. Our engineers state that there is no shortage of indigenous engineering grads, but companies just want to save money by importing workers. Best, Don Bauder

Before Congress changed the law to make student loans non-dischargeable in bankruptcy, the default rate was rapidly approaching 25%. See link below. The Federal government should get out of the student loan business because it cannot administer programs like this. The GI Bill should be the only federal college aid program.


If the government got out of all programs it cannot administer, federal spending could REALLY get slashed. Best, Don Bauder

B-your newspaper article cites to no authority for those default rates-and I can guarantee you the number is FAR off base.

I am going to link you to one of the most extensively researched and authenticated law review article/s there is on student loan data-from John Pottow at the University of Michigan whom I have spoken to on multiple occassions about the default rate and other issues, P. 266, first paragraph;

The fatal problem is that there are no compelling empirical data to buttress the myth that students defraud creditors any more than other debtors.88 Thus hard fraud becomes difficult to take to heart as the theoretical foundation of the non-dischargeability rule. In fact, as mentioned earlier, the seminal General Accounting Office study from the 1970s indicated a lower than 1% bankruptcy rate for student debtors.89 Furthermore, as also mentioned earlier, a special rule for student loan fraud does not even make sense; it is redundant with the general anti-fraud injunction of § 523(a)(2), and there has been no documented infirmity with § 523(a)(2) as a mechanism to police fraudulently incurred debt.

You can download Professor Pottow's law review article here, the numbers 88 and 89 above are the footnotes citing the legal authority for the data used;


We have a disagreement here. Best, Don Bauder

Actually I am a little off, B was speaking of straight default, while I was speaking of those that tried discharge thru BK..........The default rate used by the gov is called the "co-hort" rate, and it only counts the first two years out of college, of which it takes 9 months for a loan to default, so the time period is even less than 2 years, then they stop counting defaults all together, like many numbers the gov uses (like unemployment) the number is totally gamed and obviously manipulated.....the true default rate is the number of loans not fully repaid, and that I would wager is currently over 50%....

BTW- I agree the gov should get out of these programs, or at the very least treat them like everyone else.

Don, you are correct, the gov is not equipped with the brainpower or management skils to effectively run large programs.

I think Medicare and Social Security run well. The government has run some excellent infrastructure programs. And there are many more. You simply cannot make the blanket statement that everything will be better run by the private sector. That is not true. Best, Don Bauder

Everyone following this blog and comments has to look at Doonesbury for today, Monday, 8/6. The strip is so relevant to this issue. While I seldom find that strip amusing, he is spot on today.

Follow Visduh's advice and look at Doonesbury. Best, Don Bauder

Doonebury strip, spot on;


Those of us fools suckered into higher education deserve federal consumer protections just like any other fool entitled to file for bankruptcy. Those schools that misrepresented the employment statistics of their graduates while in cahoots with a predatory lending system, thereby making their graduates victims of consumer fraud, well, gosh, sounds like a lawsuit to me.

Bridgepoint has been hit with a number of lawsuits. The recent ones relate to the company's knowing that an accreditation operation was displeased with the level of education, among other things, but not reporting that to shareholders. When the accreditation was denied, the stock lost half its value; investors had been taken by the company's failure to report negative information that it had. Best, Don Bauder

"Those of us fools suckered into higher education deserve federal consumer protections just like any other fool entitled to file for bankruptcy."

If God did not want these fools sheared, He would not have made them sheep.

But why did God make so MANY sheep willing to be sheared? San Diego's many scamsters live off God's error. Best, Don Bauder

It is fraud, and even if it were not fraud the loans should still get the same treatment as other loans, and even still the gov and lenders should not get EXTRA unconstitutional help from the congress.

So back to the original question - is higher education a bubble? Is a college degree (and advanced degrees) worth it - at least in purely economic terms.

Seems to me the correct study hasn't been done - or at least I haven't been able to find it. A study needs to compare net lifetime earnings in real dollars - basically incomre minus taxes and tuition, taking into account effects of interest and inflation. And the study needs to statistically remove - as much as possible - differences between college graduates and non-college graduates such as intelligence and family income.

Has anyone seen such a study?

As of now, college grads will enjoy higher net inflation-adjusted lifetime income than the high school-only grad. That study has been done. I don't know of any study removing differences in intelligence and family income, but, intuitively, we know that family income plays a huge role in the young person getting into college -- particularly Ivy League schools -- and intelligence does, too. With so many college grads and advanced degree holders doing poorly now, future studies might show different results. But I think they will still show that college grads do better than high school grads. Best, Don Bauder

I think that a study removing the effects of family income and intelligence would be relatively easy to do. Of course, some other factors affecting income like ambition, drive, ability to work with others may be difficult to quantify. But family income and intelligence are both quantifiable. I can only think that the reason it hasn't been done is that the educational establishment doesn't want prospective students to be fully informed regarding the value of education.

Certainly there are ample intelligence data that the universities have. And data on wealth of parents should be available, partly because information on parents' wealth may have to be submitted by students seeking financial aid. Best, Don Bauder

A study needs to compare net lifetime earnings in real dollars - basically income minus taxes and tuition, taking into account effects of interest and inflation.

Good idea.

As for family income and statistics, it is well verified that being accepted to an ivy league school is more indicative of your family's wealth vs intelligence.

In theory, college was supposed to be a way to enable those from poor families to have a chance to better their lot in life. But I think in many ways college is turning out to be a way to keep rich families rich.

You make a point, but others strenuously argue the reverse -- that schools are dumbing down so they can admit the underprivileged students. Shilling argues that. Best, Don Bauder

Back in my day, yes, so-called legacies (whose parents attended the school and probably donated) had a big role in a student getting accepted in Ivy League schools. That is less prominent these days, although it still exists. One big problem in Ivy League schools is grade inflation. Best, Don Bauder

You mean George W. Bush got into Harvard's MBA program because his family was rich? Incidentally, in almost 50 years of financial reporting, I have seen an amazing number of crooks and crackpots with Harvard MBAs. Best, Don Bauder

Don, As a professor I see several issues that have not been addressed adequately in the comments: 1. There are schools in San Diego with ZERO default rates on student loans, because they cater to the international students, and if you follow the money trail you will realize that:

You have to be "well off" to get a student visa, and you can't depend on your government to pay your tuition.

Why does this matter? if the barrier to entry is low, then you get privileged college students, which isn't so bad, as a professor, a college, or for San Diego-

They pump millions into the local economy, to the tune of at least 3 grand a month, per student and don't behave like college students at a state university, and are generally speaking easier to teach, aside from the language barriers, confines of the culture, and writing skills in English.

Students can't work on a student visa, so they generally have more time to study, or welcome the chance to practice English.

Mr Hosley, international students cannot receive student loans b/c they are not eligible under the law, not public student loans anyway. So your comment makes no sense really.

And I highly doubt they can receive even private student loans.

Mike and SurfPup: We need some clarification here. Best, Don Bauder

I believe that there are private loans available, ie non US government loans, but they all require a US resident co-signer. Also, I do believe that if an international student has a green card, he/she is eligible to apply for federal student aid.

Only citizens are allowed gov insured SL's, or that was the law 10 years ago, unless it has changed recently. There is no recourse to a lender if they lend to a a foreign national and who later leaves the country. Well, there MAY recourse under treaty/international law, but it would cost 100 times more than the loan. A US co-signer would put the co-signer on the hook, but then the co signer is the true recepient for legal purposes.

I do think we have to clarify if only U.S. citizens are permitted access to government insured student loans under current laws. Best, Don Bauder

That depends upon what your particular definition of foreign national is. The federal government considers a foreign national to be: a person who was born outside the jurisdiction of the United States, is a citizen of a foreign government, and has not been naturalized under U.S. law, including resident aliens. According to the Dept of Education website,as a non citizen you can qualify for federal student loan program if you are considered an “eligible noncitizen.” A permanent resident with a Form I-551, I-151, or I-551C (Permanent Resident Card, Resident Alien Card, or Alien Registration Receipt Card), also known as a green card, qualifies as an eligible noncitizen. So you actually CAN receive federal student aid as a "non citizen". BTW, this is just one of FIVE ways a non-U.S. citizen get federal student aid. But ONLY those individuals that meet these requirements can receive federal student aid as a "non citizen".

Anybody want to argue with this interpretation? Best, Don Bauder

Mike: That is an interesting observation. Can you name the schools with zero default rates? Best, Don Bauder

One of the key issues in the article is the question of the economic value of higher education. For foreign students from less wealthy nations (e.g. India and China) the economic value of a U.S. college degree is MUCH higher than for U.S. students. For a U.S. citizen/permanent resident a college degree means, most likely, a somewhat higher paying job than without a degree. For a foreign national a U.S. degree - particularly a graduate degree - means a path to a U.S. job which is much higher paying than the job they might have without a degree in their native country.

This is particularly true at the graduate level - in many fields the pay difference in industry for someone with a master's vs. someone with doctorate degree might not justify the extra education. But for a foreign student the effective payoff is much higher because a PhD degree means a better chance to work in the U.S. Thus, there is a much better return-on-investment, so to speak, to a foreign national working towards a PhD degree than to a U.S. resident.

But for a foreign student the effective payoff is much higher because a PhD degree means a better chance to work in the U.S. Thus, there is a much better return-on-investment, so to speak, to a foreign national working towards a PhD degree than to a U.S. resident. and why the US corporate welfare queens love the H1-B Visa program!

A huge number of U.S. graduate students in electronics-related fields are from foreign countries. You are right that a U.S. degree is more important to many foreign students. Best, Don Bauder

International students dont have SL's. There can be no default.

Again, we need clarification on this. Best, Don Bauder

Appears to be few, very limted, exceptions.

If what SurfPup says is true, the original claim that some San Diego universities have no problems with student debt can perhaps be seen in a different light. Best, Don Bauder

Biology, apparently, doesn't even rate a thin line on the charts, but an understanding of life is what will keep you alive. Ignorance of life, especially ignoring the ignorance, is a fatal path. Engineering, business, and accounting are all ignorant of life--especially what it takes to keep an organism like Homo sap. ticking.

And here we thought you spent your college years concentrating on anatomy. Glad to hear that biology and physiology also interested you. Best, Don Bauder

San Diego State used to have a botany department and now doesn't even have basic courses in botany. Best, Don Bauder

When i went to SDSU Human Anatomy was listed under the Botany Department, then changed to the Biology Department.

Human Anatomy was the most busy work intensive class I have ever taken, the study was not hard but was so volumous it was beyond torture.

It used to have a College of Life Sciences. You mean that is now gone?

I don't know about the College of Life Sciences. The botany department was dissolved and folded into the biology department, which is part of the College of Sciences, which includes chemistry, astronomy, geology, physics, etc. The major point is that there is no basic course in botany now, and few courses having to do with plants. Curriculum offerings have been slashed due to budget cuts. Best, Don Bauder

Cutting middlemismanagement should be every organization's objective. Cutting topmismanagement is even more important. Best, Don Bauder

Senator Yarborough once told me, "Son, when you want a man's cooperation, it's best not to threaten him." So while I agree in principle, I believe that middlemismanagement must be pruned first; topmismanagement has more power to evade and destroy any direct attempt at threatening their perks and prerogatives.

Unfortunately, it is the topmismanagement that prunes the middlemismanagement. Best, Don Bauder

Top mismanagement needs its goons. Without them they are vulnerable.

What about instances when top mismanagement is a bunch of goons -- in many senses of the word. Stupid. Brutish. Through the years, some people have told me they want to go with a certain company because top management is dumb and it will be easy to rise through the ranks. Not so. If top management is dumb, a smart person will never get to the top...until the company goes bankrupt and is reorganized. Best, Don Bauder

Sounds like a clear indictment of those "some people," not to mention the institutions which granted them degrees. Will the Harvard (etc.) MBA's please stand up?

Stand up and do what? MBAs think they deserve to sit on thrones. Best, Don Bauder

That's why my "OCCUPY" sign would say "DON'T BUY THEIR SHIT!"

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