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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

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Comments (9)

  • SECfinance's picture

    Is your hypothesis that if the college loan bubble pops the value of college will go down? By value, do you mean tuition or intangible value?

    MM IB -> Corporate Development

  • monkey in suit's picture

    A very interesting article Chris, thanks for sharing.

    I spent a couple of months interning at a boutique PE shop a while back and one of the industries we were really interested in was for-profit education. For a lot of these institutions, their business model is simple: lure as many students as possible by promising them work placement opportunities and easily accessible loans (thus jacking up their revenue) and reducing their costs to the bare minimum. The margins are ridiculous for this type of business; though they have come down recently with more competition, as each institution has to spend more money on advertising/marketing to attract each additional student. But the bottom line is as long as they can keep on attracting students and making sure students have access to government loans, it is not difficult to see why this is a profitable business.

    Sadly, the ones who are paying the price in the end are the students. They pile on more debt and they oftentimes find themselves in a situation where the work placements they are promised aren't all they're cracked up to be (they could have gotten the same/better jobs without the additional education).

    Obviously, you can't compare these for-profit institutions to top ranking universities with long history and extensive alumni network. But recently, I have definitely noticed more advertising for MBA programs, even from these top ranking universities.

    So what's the takeaway from all this? I am not saying MBA programs are all bad; I think if you have a few years of work experience, they are a great way for you to show that you have the proper credentials to get to the next level. All I saying is you might want to reconsider getting an online degree/short term MBA programs at a second-tier college if you have zero job experience; because you will probably be no better off than before the degree. It might even limit you from certain entry-level opportunities because of your additional education. In this kind of economy, networking is probably a better way to go than spending 1/2 more years that might/might not help you.

    I am not sure if I am right or not, but here's just my two cents on the subject.

  • Fredbird's picture

    For what my input is worth here: I already got a master's degree in finance and accounting and went to the US to get another one (exchange program, tuition remission, TA job & salary) at a "non-target" public school. While it might not be true for all or even the majority of public schools, what I experienced there was extremely discouraging. I TA'ed for a class that relies on intermediate statistics (so taking Intro to Stats was a prereq for the class), which was regarded the hardest and most hated class in the undergrad business degree - and I was just like "WTF?". As a TA I really tried to dumb the course down as much as possible and have the students do exact the same to-be-exam-questions with different numbers, and these juniors and seniors so often weren't even able to calculate a mean(!), let alone a standard deviation of 2, 3, or 4 observations on the exam or reproduce anything we did, even though having the exams as open notes, open books, etc. And the worst part, they didn't even seem to give a flying damn about it. And that was students often getting high grades in all their other classes. Talking to professors, lecturers and other TA's about other classes, I was literally shocked how much dumbed down the degree was. As regards my own master's classes, I was mainly bored and there was barely anything intellectually challenging (however, I sometimes did have to put in significant work to complete all the assignments and study for several exams, that I do have to acknowledge). As regards empirical research, talking about it either in class or have students read through literature or conduct own experiments, students were completely spared of that in both the undergrad and master's degrees. I probably could have told the average finance master's student that the Journal of Finance is either a weekly newspaper that can be bought at the kiosk or a twitter blog. Sad. And that for >$10,000/year tuition fees.

    If that is any representative of the average public university, I really feel bad for you. Not just that students aren't being challenged or passionately taught but get easy grades for staying stupid, it also costs a freakin' lot (in Germany tuition's basically free to students, you only pay an administrative fee of around 250 per semester). Looking at it from an efficiency perspective, I witnessed too little output (learning) generated with way too much input (tuition fees).

    With no disrespect, get that public university system fixed. Please.

  • Working9-5's picture

    I second what Fredbird is saying. A few years ago I was an exchange student at a semi-target (Vanderbilt, Georgetown, UNC) and there were a lot of 'easy' classes. Classes that were dumbed down so students could get an A. Still people would complain about it was unheard of to memorize Black Scholes, CAPM, or the process for calculating portfolio return and variance.

    I'm not mad, just disappointed over people getting a degree in finance cant calculate the cost of their degree. It just screams bubble.

    CNBC sucks

    "This financial crisis is worse than a divorce. I've lost all my money, but the wife is still here." - Client after getting blown up

  • West Coast rainmaker's picture

    I was watching Good Will Hunting last night, and one exchange seemed pretty relevant:

    Will: "You dropped 150 grand on a fuckin' education you could have got for a dollar fifty in late charges at the public library!"

    Harvard Guy: "Yeah, but I will have a degree. And you'll be servin' my kids fries at a drive-thru on our way to a skiing trip."

    Now it is 200+ grand (maybe not at Harvard, due to financial aid) but the quality of education has dropped further. Some of these "colleges" shouldn't be allowed to operate.

    Go to your DMV, Social Security office, county clerk's office, whatever...pretty much every person there under 40 has a BA. And these are the grads that secured gainful employment: consider all the BA-ristas and bums coming from art schools.

    We require degrees for just about every job, so of course students get them. I am not sure where to put the blame: the government, for subsidizing loans? Lazy HR departments, using degrees as arbitrary screens? Or our culture, for placing such an importance on "education" and "doing what you love"?

    However, I can't really blame the students. They have been indoctrinated into this thought process from pre-school. They face social ostracism if they go to a trade school. The colleges are just responding to incentives, so I can't blame them either.

  • monkeyc's picture

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