Student Loans: One of the Biggest Economic Issues of 2012?
Are student loans going to make for one of the biggest economic issues this year? Though the topic has been somewhat in the background lately as media attention to the Occupy movement has waned, there is reason to believe that student loans may be one of the hottest economic and political issues in 2012.
A recent CNN article written by Brad Chase, a partner with Capitol Media Partners, discussed how youth may be giving up on Pres. Obama. Why is the youth vote up for grabs in 2012? Chase: "[B]ecause youth can't afford cars to put [Obama 'Hope'] bumper stickers on and those [Obama 'Hope'] t-shirts are worn out from too many days sitting on the couch unemployed." Chase discussed that the dire reality is that "just 55.3 percent of Americans between 16 and 29 have jobs." Even further, in 2011 Americans' student loan debt surpassed credit card debt for the first time ever.
Chase argued that in order to gain youth votes in the November presidential election, fairly radical programs may have to be advocated in order to provide relief to struggling young Americans. According to Chase, these programs could include a "limited student debt forgiveness program" that would effectively limit federal student loan debt to $30,000 (by erasing any federal student loan debt above that mark); the program would also cut student loan bills to 10 percent for individuals beneath the $30,000 mark. Chase: "That still leaves students accountable -- no free rides -- but it eases the crushing burden on millions of millennials".
In addition, the government could set controls and more oversight on predatory lenders/servicers that "resort to bully tactics to threaten students' parents". Lastly, Chase argued that bankruptcy law could be changed to allow young adults to discharge student loans in bankruptcy. Legislation that would allow students to discharge student loans in bankruptcy "would be huge in generating millennial votes". As much as political maneuvers could be taken to provide relief to young adults and gain critical votes, the damage of the so-called higher education bubble has already been done.
Zero Hedge recently featured a guest post written by Ben Tanosborn discussing economic bubbles and sociological problems in the US. Tanosborn cited government-guaranteed student loans as "the ugliest sibling of all yet to be birthed" regarding America's national debt. Tanosborn's assessment of the student loan predicament is dire and dismal, to say the least. Federally-guaranteed student loans "have had a double negative effect: first, by hiding the true unemployment and underemployment rate, as [the federal government] allowed millions of unemployed and 'professional' students, to attend both traditional and for-profit sham schools, where skills/knowledge acquired -- if such took place -- will be in most instances irrelevant to society since there won't be any jobs or positions for them as they attain their certificates, diplomas or designations." Tanosborn conjectured that the situation could lead many young Americans to emigrate from the US. And for those who stay in the US, current debts may be passed on to the older generation in the near future.
Both Chase's and Tanosborn's analyses may appear extreme, but various news stories in 2011 seem to suggest that higher education's chickens are coming home to roost.
Even back in late 2010, Bloomberg reported how Kaplan University, owned by the Washington Post Co. (NYSE: WPO) was coming under scrutiny from the federal government for targeting war veterans, when a majority of Kaplan's students drop out. Kaplan's activities would appear to be taking advantage of vulnerable individuals seeking to better themselves while Kaplan was attempting to cajole these individuals into a borderlining-fraudulent "educational" scheme.
The Huffington Post's Chris Kirkham reported in May 2011 that prosecutors in 10 states convened in a joint investigation into possible violations of consumer protection laws by for-profit colleges. The prosecutors were investigating the recruiting policies and possible misrepresentations of companies like the University of Phoenix. Later on in June 2011, MSNBC reported that the US Department of Education "issued tougher rules...regulating for-profit colleges, whose students make up about 12 percent of all US college students, but represent 46 percent of all student loans in default." Federal and industry investigators claimed for-profit educational institutions were gaming the US financial aid system to maximize their profits in receiving federally-guaranteed loan monies at the expense of students and taxpayers. MSNBC: "Students at for-profit colleges are nearly twice as likely to be unemployed upon graduation as graduates of other types of schools", that is, if the students end up graduating at all.
And this scrutiny is by no means limited to for-profit colleges. Last August I discussed how some law school graduates are suing their law schools on the grounds of alleged misrepresentations. I wrote previously, "As the lawsuits against Cooley and NYLS portend, people are starting to ask why law schools continue to pump out graduates when there are fewer and fewer legal jobs available." The lawsuit against NYLS claimed that the school "consigns the overwhelming majority of [students] to years of indentured servitude, saddling them with tens of of thousands of dollars in crushing, non-dischargeable debt that will take literally decades to pay off." 2012 could be "the year of law school litigation".
Do problems with higher education schemes have something to do with Wall Street? The blog Subprime JD, notorious in some legal academic circles, had a post in April 2011 claiming that even Goldman Sachs (NYSE: GS) was profiting off of an alleged law school scam. As Occupy Wall Street spoke out against excessive, exploitative student loans for young adults in the US, it would appear that we have come full circle.
So what are investors and traders to make of the issue of student loans? Will student loans be a major issue leading up to the November election? While student loans may be a continuing part of the political debate and while educational institutions may face heightened scrutiny from the federal government and society, traders could possibly target education-related companies like the Washington Post Co. (NYSE: WPO), Thomson Reuters (NYSE: TRI), Apollo Group, Inc. (NASDAQ: APOL), Career Education Corp. (NASDAQ: CECO), and DeVry Inc. (NYSE: DV) for short positions. Much of the future of the student loan issue depends on what the federal government does or does not do.
If the federal government reins in on educational companies and institutions owing to students' not paying back student loans (courtesy of a struggling job market), it could spell doom for the future of higher education. Dare I say it, a substantial portion of higher education could find itself somewhat societally delegitimized owing to the fact that not only are many college graduates not able to find jobs, but also because higher education has acquiesced to the present scheme. To put things into perspective, even some law professors expect a considerable number of law schools to close in the near future. Aye, despite bureaucratic games, excessive costs, and culturally reinforced educational standards, the market has the last say.
As the student loan situation reflects deep systemic issues and socio-cultural problems within the nation, we may have to wait to see how the issue reverberates through the US economy in the near future. To say the least, the phenomenon of student loans in the US has emerged as quite an ominous pitfall. In consideration of taxes at, let's say, 35 percent and capped student loan payments at 10 to 15 percent of income, one may be left wondering why the federal government did not directly subsidize higher education in the first place -- rather than feeding funds into a counterproductive, pyramid-scheme-like system of education that seems to take advantage of students. Even further, with the prospect of the higher education functioning as a pyramid scheme where the younger generation is at the bottom of the pyramid, one has to wonder what the current predicament portends for America's future not only in terms of higher education and employment, but also retirement.
It's enough to make one ask, "What kind of society lets its educational system devolve into a massive pyramid scheme?" Such an educational system could be classified as illegitimate, to say the least. I noticed that the Subprime JD blog chooses to characterize the situation as a sort of Ponzi scheme, but in essence, the higher education system looks a bit like a pyramid scheme where the top of the pyramid (older generations; established academia) is able to take profitable advantage via the deceptive scheme (by virtue of federally-guaranteed student loans) to the detriment of young students (the bottom of the pyramid) who have been culturally groomed to willingly take on the mass amounts of debt with the promise of getting a good job in the future. What kind of society lets its young people get roped into this sort of scheme?
What kind of society operates its educational system (and ipso facto, its labor system) this way and expects it to persist? If the younger generation begins to perceive the higher education system (and accompanying loans) as being inherently unjust and/or illegitimate, what implications does this have for the labor sphere? I've previously used the example of a college graduate working at Starbucks only to find himself or herself effectively relegated back to Starbucks after receiving a graduate degree. If people begin to perceive higher education as being illegitimate or akin to a sort of nationwide fraudulent scheme, at some point the cost of academic tuition and the number of students attending higher educational institutions will contract and collapse.
Of course, a pyramid scheme is a non-sustainable business model. In this light, one might also note that our current system of higher education is unsustainable. Given the gravity of the situation, the federal government may very well begin to take aim at those educational institutions that pursued customer-students just to make a quick buck while being apathetic to and uninterested in the customer-students' education, training, and well-being.
Thus, the problem with student loans is now systemic. Even though unemployed college graduates are not donating to political campaigns, it may get harder for politicians to try to avoid this elephant in the room. And with the higher education bubble, unlike the housing bubble, there are no underlying assets or collateral. To echo the thoughts of economist John Maynard Keynes: If I owe you a dollar, I have a problem; if I owe you a million dollars, you have a problem. Keynes' insight is quite applicable to the issues of higher education and excessive student loans. Many students and college graduates have no money; the ones who received the funds were the educational institutions; the ones who ought to be pursued would then be the educational institutions that engaged in these nefarious practices.
Even aside from the idea of higher education being a pyramid scheme, it would appear that owing to federal loan guarantees, there is a higher-ed bubble that will burst in the near future. Bottom line: Making an educational system into a pyramid scheme is a bad idea. There's a reason why pyramid schemes eventually collapse. As the question has wide-ranging implications for the US economy going forward, traders and investors might want to keep an eye on how the student loan debate evolves in 2012.
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