
The student loan crisis will dwarf the housing market crash. - mikekarnj
http://www.mikekarnj.com/blog/2010/08/11/college-inc/
======
patio11
It isn't going to be as bad as the housing market crash, because degrees are
revenue producing assets for the overwhelming majority of people and houses
are costs for the overwhelming majority of people. Also, student loans do not
have any mechanisms in them which are designed to induce payment shock, like
ARM resets are. (I am only half sardonic there.)

If your loan repayments are $700 a month when you graduate, they will be $700
a month for the next ten years. There is no mechanism by which they'll
suddenly jump to $3,000.

Even for degrees which you wouldn't expect great things from -- like, say,
English -- the value of the degree exceeds the price by huge amounts. The NPV
of a bachelor's degree in English is about a million bucks. You still come out
ahead with virtually any college/loan combination possible, as long as you
find a job with it, and unemployment among college graduates is still at
~4.5%.

There are a few degrees which are exceptionally bad decisions, but they are
the exceptions rather than the rule. One example is culinary school,
particularly the ones which will load you with the federal max of loans so
that you can get a $12 an hour job as a line cook. There is one glaring sore
thumb in the data for master's degrees, too.

If folks are interested, I'll blog about this in a few weeks. I did a project
for a client looking at government data and a few other sources to try to get
numbers on the worth of degrees by majors. The work is 99% over but, clients
being clients, there are some more steps it has to go through before they want
to launch it publicly.

~~~
byrneseyeview
Whoa, there! What discount rate are you using? For the median degree, I get an
NPV less cost of $47K. Here are my assumptions:

* Discount rate of 6% (we're talking about an asset with a 40-year lifespan and zero terminal value).

* $25K in annual school costs.

* $25K in annual opportunity costs. (May be conservative for people who are college material but didn't get a degree.)

* Four years to complete the degree. Which is very aggressive.

* $23K earnings differential. (The current average.)

* Forty years of post-degree work.

In this model, you get to breakeven 26 years after you start school. So, to
the current high-school senior: _assuming the job market in 2036 looks pretty
much like it does now_ , treat these projections as solid.

It gets worse. If you assume a more realistic graduation timeframe of six
years, the value is -$18K after 40 years. Of course, you can keep working;
you'll hit breakeven after 54 years (at age 72).

See sheet two for my assumptions:

[https://spreadsheets.google.com/ccc?key=0AjzB7A88UMCBdGVrUUN...](https://spreadsheets.google.com/ccc?key=0AjzB7A88UMCBdGVrUUNoMmpCRjE1LVpZYXMyQllEUFE&hl=en&pli=1#gid=1)

~~~
ahlatimer
I think you're overestimating the annual cost of school. I know it doesn't
cost $25k/yr for me to go. I pay around $6k/yr for tuition, plus another $1k
or so for books. According to College Board [1], that's about $1k less than
the average for a student going to a public school, in-state.

Your figure matches about what it costs to go to a private school, but, from
my experience, public schools are also more likely to give scholarships [2].
Even still, no one is forced to go to a private school.

[1]: <http://www.collegeboard.com/student/pay/add-it-up/4494.html>

[2]: I went to a private school my first year. It was around $30k/yr, but I
was also given a scholarship that cut that price to around $18k/yr. Most of
the people I met on campus also received scholarships of some sort as well.

~~~
moxiemk1
The school I'm at costs ~ $55k per year in the end, and the grants I get bring
it down to about $30ish, and my parents make not much more than $100k (by
working a full time and a part time job each)

The public schools I applied to that weren't rolling-admission 5th year of
highschool types ended up costing the same in the end, because they didn't
give need-based aid, and their merit scholarships were not large for people
who don't play sports.

~~~
yoden
Need based aid isn't really targeted towards people who's parents who make
more than 100k (more than the national average).

Merit scholarships are easy to achieve, given that you are exceptional. But if
you are middle class and not especially proficient, I do agree that you have
one of the hardest college experiences in america.

------
krschultz
"3. College Loan Repayment Reform: If anyone files for bankruptcy, the student
loan should go along with it."

No, no, no, no. This penalizes the people who pay back their loans far too
much. Who wouldn't just go into bankruptcy if they couldn't pay back the loan?
Unlike other loans, the bank can't take your degree back. Interest rates will
go up for everyone as it becomes a riskier loan. Suddenly people who had fully
intended to pay the loan back will be crushed under higher interest rates.

~~~
sliverstorm
Exactly. The ONLY plan worth taking would be graduate high school with no
assets, take out a big student loan and live off that, graduate college, and
file for bankruptcy. Tada, 4 years of your life absolutely free, and a degree
they can't take away to boot.

~~~
nkassis
Bankruptcy isn't exactly fun. You won't be living the high life afterwards.

~~~
sliverstorm
You're in your early 20's fresh out of college. You wouldn't have been living
the high life anyway.

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CWuestefeld
I got as far as

 _The pursuit of profit is a common theme in all of the documentaries I have
listed, which is what ultimately led to the predicament we are in today._

That tells me that the author doesn't have the slightest understanding of
economics. That being the case, there's no sense reading about his economic
predictions.

UPDATE: I think I overstated that. What I really should say is...

The author appears to be of the class that believes that if something is done
profitably, it must necessarily be bad. While it's true that many evil things
are driven by greed, it's equally true that a pursuit of profits leads one to
provide the goods and services that society values the most. Since the opening
of the article seems to ignore the latter aspect, I don't expect that any
economic analysis it might engage in will have any depth.

~~~
yoden
Great post. Companies making profit is generally _good_ , because it grows
possibilities for all. Granted, if they're doing it by exploiting consumers,
that isn't true, but the author doesn't even consider that case.

------
kreek
There's a huge difference between the housing crash and a potential student
loan 'crash'.

A house is an asset. A unique asset at that, the only kind you can live in
(other than your car). An underwater house, despite the term, becomes
illiquid. You literally can not sell it. If you become unemployed you can not
move to find work without walking away and trashing your credit.

A drop in house prices affects everyone. The student loan crisis affects very
few and even fewer who make a meaningful contribution to the economy.

An underreported aspect of the housing crash was the end of the house as a
magic ATM machine. People were spending vast amounts of HELOC money during the
boom. Literally doubling their mortgages by pulling out cash against their
house. With the crash that has stopped and the economy has ground to a halt.

What market would a student loan crash take down? Are people flipping degrees
somewhere? If people feel a degree isn't worth it they'll go to a state school
or transfer in from a community college. At worst schools will be forced to
drop tuitions.

The post mentions student loan debts in the billions, subprime losses alone
are in the trillions. That's the money out in the open. There's even more
money off the books as banks don't have to report a loss until they sell REO
property. There's a shadow inventory of foreclosed homes right now that
matches the houses you'll find on the MLS.

The student loan crisis will in no way shape or form "dwarf" the housing
market crash.

~~~
vannevar
I'd go even further and say that a 'crash' in the higher education market
would actually be good for the economy. Unlike lower home prices, lower
tuition rates would have no significant direct impact on existing college
graduates, and would permit more people to seek admission, increasing
competition and therefore increasing the caliber of students enrolling. Bright
people whose talents would be otherwise wasted working at Walmart will instead
be able to contribute at a higher level to the economy.

------
Lendal
This crisis won't be the same at all, because you can't discharge student loan
debt. There is currently no reason for a lender to bother examining the loan
because repayment is virtually guaranteed. Having the federal government take
over the loans will only make the problem worse. Educational institutions are
able to raise their prices precisely because they know that with a combination
of federal and state grants and loans, anyone can go to college so why not
inflate the prices sky-high?

That's what happens when you mix unlimited government subsidies into what used
to be a free-market system.

~~~
nkassis
I agree that gov backed student loans are making the situation worse but
removing them would be disastrous. Maybe and I can't prove this but maybe, if
the gov was the sole lender, they could pressure universities into reducing
tuition?

~~~
mikekarnj
Scary thing is that the government will be the sole backer of educational
loans. We all know how slow and antiquated they operate. I don't know if this
is going to be a good or bad thing for the economy.

------
frossie
Interesting article.

 _2-year Universities: Who made up the rule that we have to attend college for
4 years?_

Tertiary education does take a hell of a long time in the US. In my field, and
in my generation, most UK students got their PhDs around 24-25 years of age;
for the US students it was more like 27-28. Yes, if that is a real effect that
would definitely be a problem.

I can think of two factors that may be affecting this (I have no data):

1\. The level of the student arriving at college. Yes you can probably get a
professional degree in 2 years with no holiday breaks, provided your college
doesn't have to teach you basics.

2\. The fact that US colleges cost so much money potentially create a vicious
cycle - you need a job to pay for college, which means you need enough spare
hours in which to work, which means you have to space out your courses, which
means you need more money etc etc.

I would be certainly interested in views from US graduates as to why they feel
it takes so long.

~~~
evgen
> in my generation, most UK students got their PhDs around 24-25 years of age;
> for the US students it was more like 27-28

The programs were not quite equivalent. US Ph.D. programs have traditionally
included more courses and include a comprehensive examination in addition to a
dissertation. A US Ph.D. candidate must demonstrate a broader understanding of
the field and cannot just jump into thesis work upon starting their Ph.D.
program.

~~~
frossie
_The programs were not quite equivalent._

Sure, they may not be identical but they were teleologically equivalent. Newly
minted PhDs from both countries proceeded to compete for the same jobs on a
seemingly equal footing.

------
ezl
Seems false.

1\. Housing market debt dwarfs higher education debt in notional value. >14
Trillion vs 830B.

2\. Most mortgages are non-recourse, meaning you can walk away. Most education
loans are not. So people can't just leave banks on the hook without much more
severe penalties.

When a homeowner walks away from a 600k mortgage on a house only worth 500k in
the market, he/she is implicitly trading credit for 100k in cash. For some
people that trade becomes much bigger 900k loan on a now 500k house. A lot of
people will trade credit for 400k.

If walking away from an education loan was easy(which it isn't), I'm selling
my credit for the value of my loan outstanding. That number tends to be a lot
smaller, and most college-grads don't find it worth losing your credit for it.

* edit for readability

------
jacquesm
Student loans are a rip-off. The market is set up in such a way that to get
jobs you have to have a degree, and to get a degree you have to borrow a bunch
of money so that you can pay your way through school if your parents aren't
wealthy enough.

The end result is that you'll be beholden to a bank for a good sized portion
of your life (as if having a mortgage or rent isn't enough to hold you down).

Smart societies have free education, and their schools may not be always as
good as those that you pay for with half of your life or so but they're
adequate enough.

The main reason why education should be free is because education not being
free creates an inequality between people born rich and people born poor, the
poor will end up getting their education but pay for that with a significant
portion of their time later on, the rich don't care.

~~~
jrockway
I don't see this as being true. I went to a state school (UofI). It cost $700
a quarter.

I got bored and dropped out. I had absolutely no trouble finding a job. Not
having a degree has not come up at all, even when working for a big
corporation that does extensive background checks.

So I am not buying that college must be expensive, or that there is no way to
get a job without completing college. Sure, some people are rejected from some
jobs for not having a degree, and some people spend a lot of money on college
for no real reason. Overspending on college is no different than overspending
on anything else.

(Example: I just bought a $900 vacuum cleaner. That doesn't mean that if you
don't have $900 you can't clean your house. It just means that I overspent.)

~~~
waterlesscloud
You had a subsidized education. The cost of the education was not $700 a
quarter, that was just the share of it that you paid.

~~~
jrockway
This subsidized education is available for anyone, though, just like the
$70,000 a quarter educations are.

------
ja27
I don't want to discharge my student loans. I just want to be able to
refinance them again based on current market rates.

~~~
Teese
I want to know why I can't. Nobody has said why, just that you can't

------
c1sc0
Whatever happened to studying for the sake of it? You know, like learning new
things & stuff. When did that shift from studying as exercise for the spirit
to studying as a way of fattening your wallet come about?

~~~
harry
I've been curious about this myself. Through my work I get to take whatever
college level course each semester I want. Been dabbling in physics and the
like, but it hasn't really proven to be worth it. The material is COOL and
when the professor is really allowed to 'open up' and sorta spin their tales
and views it is amazing. However, the basics are only taught in this rigorous
get-er-done style with 4-5 major exams a semester.

My past experiences felt so accelerated and like the goal is to cram material
in the smallest available time frame - thus making enjoying the material
difficult.

------
nkassis
One thing no one talks about, why do all degrees virtually cost the same in
most universities. Why would a engineer pay the same as a liberal arts
student. The reason I saying this is maybe the cost should be proportional to
the expected earnings?

~~~
brown9-2
Well, what is the university charging students for - the services that they
produce to give you your education, or the expected value of your salary after
graduation?

In theory, universities are not for-profit.

Is there something about an engineering school education that is inherently
more expensive than a liberal arts education?

~~~
nkassis
Yes in fact it cost more in equipment, facilities, salaries of professors to
educate an engineering student compared to a mathematics student or English
student.

~~~
elai
Many universities have different prices for different faculties classes. What
end's up happening is that business costs the most, sciences cost the same as
any other class and engineering/comp sci. is only marginally higher.
(450/500/680). From a purely cost point of view, that is a bit skewed.

------
nolite
looking forward to my bailout

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joe_the_user
The frustrating thing about the article is that it never asks _why_ the cost
of four year education has been up faster than inflation for many, many years.

His answer to the problem is less education. That seems like a problem to me.

The reason we had affordable state school was that education was a good for
society as a whole. America, as a whole benefits from having well-educated
people.

The state schools we had were affordable for both the student and the states.
Why is that no longer the case? The article misses this question _entirely_.

------
startuprules
Actually, the commercial real estate market crash will dwarf both the student
loan and the housing market crash.

"Over the next five years, about $1.4 trillion in commercial real estate loans
will reach the end of their terms and require new financing"

Elizabeth Warren Warns About Commercial Real Estate Crisis, 'Downward Spiral'
For Small Businesses, Local Banks
[http://www.huffingtonpost.com/2010/02/11/commercial-real-
est...](http://www.huffingtonpost.com/2010/02/11/commercial-real-estate-
wa_n_458092.html)

