In Wall Street: Money Never Sleeps, Gordon Gekko gives a speech at a university in which he accurately describes the context of the modern college student as:
… the ninja generation. No income. No job. No assets.”
There is truth to this despite being just a witty Hollywood acronym. It merits attention on par with the housing and sovereign debt crises as college itself may be the next asset bubble and here’s why…
The housing, sovereign debt crises and even the dot com equities were all asset bubbles that shared five common characteristics and are eerily similar to today’s collegiate debt market. Just like equities, housing, and credit your degree is an investment and when bubbles finally implode so does the value of the underlying asset. Equities are off their highs from 2007, housing prices are falling three years later (i.e. location dependent), and in my opinion the value of today’s college degree has fallen precipitously due to simple economics. The following is what I found in my research…
- Affordability: Say’s Law states, supply will create its own demand.
The New York Federal Reserve shows that loan growth has increased 511% since 1999 with an enrollment of about 15 million in 2010
- Borrowing Cost: What about the opportunity cost for servicing loan payments?
The average 2011 loan balance was $27,200 but once the loans are in repayment even at .5 to 1% of the principle it is estimated that it can equate to an opportunity cost of $5 - $10 billion
- Delinquency: Student debt is non-dischargeable in bankruptcy.
In a September 12th, 2011 press release the Department of Education stated that 320,000 out of 3.6 million graduates defaulted on federal loans which have risen to a 12 year high of 8.8%; As of May 23, 2012 the University of Tennessee’s Glen Reynolds say’s that about 38% of loans are not current.
- Price: What happens to price when quantity demanded increases? It goes up!
Moody’s Analytics shows that since 1990 tuition inflation has cumulatively increased to almost 300%; In 2011 dollars the average cost of college in 1980-81 was $3,101 yet by 2009-10 that cost has risen to $17,633 across all institutions according to the Institute for Education Statistics
- Regulation: Guess who is responsible for the college loan market?
The Health Care and Education Reconciliation Act of 2010 under Title II Part II Sec. 2201 / 2202 amended 20 U.S.C 1074 Sec. 421 and 424 (a) (Higher Education Act of 1965) to eliminate the Federal Family Education of Loans and their implicit guarantee which means now the Department of Education is the sole originator of the college loan market in which four of the largest lenders will service them
So monkeys, should we be concerned about the making of another asset bubble?
Do you feel that your degree is being de-valued due to the increasing supply of labor?
Sources: Bloomberg and unpublished research, May 2012