Market Overview

Higher Ed Bubble Bursting: US Bank, JPMorgan Cutting Back on Student Loan Market


Has the higher education bubble finally popped? There is reason to believe that it in fact has.

I. Banks Restricting Student Loans

American Banker reported on March 30, 2012 that US Bank (NYSE: USB) will no longer be offering private student loans and that JPMorgan Chase (NYSE: JPM) will be restricting its lending to established Chase customers. According to the article, "US Bank sent a letter to participating colleges and universities saying that it would no longer be accepting student loan applications as of March 29." US Bank spokesman Thomas Joyce said that the rationale behind US Bank's move was that the bank is a "small player" in the student loans market and that "it's a very small business for the bank."

In a similar move, JPMorgan Chase, the nation's largest bank, will now restrict student lending to existing customers as of July 1. According to the bank's spokesman Thomas Kelly, "The private student loan market is continuing to decline, so we decided to focus on Chase customers." The American Banker article suggested that "more lenders could follow US Bank out the door" of student loans "as the Consumer Financial Protection Bureau and other policymakers turn their attention to the student loan market."

Whereas student loan debt has surpassed $1 trillion, the article noted that "some lenders including Discover Financial Services (NYSE: DFS) are ramping up their participation in the market. Discover has snatched up several large student loan portfolios over the past year and is growing originations."

Bloomberg reported on April 10, 2012 that "JPMorgan has been paring back student loans" as the bank's "student-lending portfolio shrank 15 percent since 2009 to $13.4 billion as of Dec. 31 as bad debts almost doubled." Further, "JPMorgan made $300 million of student loans in 2012, down from $1.9 billion in 2010 and $4.2 billion the prior year." Per Bloomberg, whereas "student loans are now the largest source of unsecured consumer debt in the nation...rising delinquency rates have spurred speculation about a possible bubble."

A "possible" financial bubble? Are you serious?

II. A Textbook Financial Bubble

I recently discussed how the higher education and law school bubbles appear to be textbook financial bubbles. Easy credit, the price of an asset rising above its true value, the accumulation of excessive debt, the bubble stops growing, borrowing becomes harder. Eventually, "panic ensues" as prices plunge below their fundamental values during the bust. As such, our current predicament suggests that at some point the higher education bubble will burst, causing the cost of college tuition to drop dramatically -- and potentially bringing down the entire higher education system and academia with it. As I previously explored, whereas the law school bubble is a significant subset of the greater higher education bubble, what is especially precarious about the law school bubble is that it pertains to the court system and the rule of law in American society.

The issues of the higher education and law school bubbles should be everyday financial news topics by now. As I've previously written, Zero Hedge has done well in keeping the issue of the higher education bubble fresh in readers' minds. An excellent article from Zero Hedge's Tyler Durden published April 7, 2012 asked whether JPMorgan has popped the student loan bubble. Durden compared the current higher education bubble to the subprime mortgage crisis. From the article: "Oddly enough, just like in the case of the subprime bubble, so in the ongoing expansion of the credit bubble manifested in this case by student loans, we have an early warning that the party is almost over, coming from the most unexpected of sources: JPMorgan." In light of JPMorgan's decision to reduce its lending for student loans, Durden discussed that if the economy's subprime history is repeating itself in the form of a student loan bubble, "what happens next will not be pretty." Durden noted that in light of the fact that "46% of America's 16-24 year olds are out of a job...what else are they going to [do]?" Durden: "What JPMorgan is implicitly saying, is that the party is over, and all private sector originators are hunkering down, in anticipation of the hammer falling."

Even further, Durden wrote that "with all private players stepping out very actively, it only leaves the government." Durden: "What will be hilarious in 2014, when taxpayers are fuming at the latest multi-trillion bailout, now that we know that $270 billion in student loans are at least 30 days delinquent which can only have one very sad ending, is that the government will have no evil banker scapegoats to blame loose lending standards on." Nevertheless, Durden concluded in that "by 2014 we will have far greater problems". Aye, student loans remain only one piece of a much more precarious global economic puzzle. One piece.

III. A Socio-Economic and Academic Nightmare

Even though the higher education bubble is only one piece of a much scarier puzzle, its implications are ominous and far-reaching. If we perceive the higher education bubble through the prism of a textbook financial bubble, one possible implication is that college tuition costs will plunge dramatically in the near future. This may sound like good news in that college will be more affordable in theory, but at that point, higher education will probably not look as appealing. It will probably be much harder to attend college at that point. In addition, a number of higher education institutions may have to close owing to the bursting of the bubble -- thereby making higher education scarcer.

For such a system that was set up with the intention of allowing more individuals to go to college, it is ironic (yet more or less foreseeable) that the end result would mean that less individuals go to college. This phenomenon brings to mind Henry Hazlitt's declaration, "We must run the economy for everybody."

Even aside from the disastrous financial implications for the higher education bubble in effectively bankrupting an entire generation of young people, the higher education bubble could potentially torpedo societal confidence in the academic system, i.e., a coming collapse of American academia -- a critical blow. There's a downside to everyone's having a college degree -- as the more of something there is, the less it's worth. This is reminiscent of the villain's remark in the film The Incredibles: "When everyone's super, no one will be." The effects of the loss of this societal confidence in the academic system has far-ranging implications that could not be explored in a single article, but such effects play into everything from employment standards to the influence of the media to basic societal cohesion.

Speaking of a fall in societal confidence in the academic system, the bursting of the law school bubble could portend serious societal issues with respect to confidence in the legal system. Arguably, in light of current events we may be already starting to see signs of this. The legal system requires certain degrees of credibility and legitimacy in order to properly function. It is safe to say that we will see a number of American law schools closing in the not-so-distant future; this could mean law professor layoffs thereby possibly even further flooding the legal job market.

As I've discussed previously, the idea that the doors to law school would be open for one generation but closed for another generation while the legal job market is flooded could raise questions regarding how essential lawyers are in the first place. Owing to the costs of hiring an attorney and pursuing litigation, American society may find itself embracing alternative dispute resolution in the form of arbitration and mediation in the near future; in theory, this may decrease the demand for lawyers -- even further complicating the legal job market. And that's not even getting into phenomena like LegalZoom. Per my previous commentary, "in the years to come the law school bubble's bursting may raise questions in the minds of some commentators regarding the social fabric of American society. There may be no easy answers to these questions."

Per the commentary on Zero Hedge from Durden and Charles Hugh Smith, as student loans may be perceived as "welfare that must be paid back", the bursting of the higher education bubble could also spark debilitating societal unrest in the future -- as younger Americans are left hopeless and financially disoriented in a weak economy. Per Durden's question, what else are they going to do? Whereas this societal unrest may not necessarily involve violence and/or the destruction of private property, it may increase the costs of doing business by making commerce more difficult.

As for what comes next, only time will tell. Going along with my recent discussion, the bursting of the student loan bubble seems to go beyond the mere fettering of capitalism. When Karl Marx was writing about an eventual end to capitalism, I think he envisioned a relatively orderly chain of events leading into the end of bourgeois society and the social government of the working class. I don't think Marx anticipated a complete global economic collapse on psychological and socio-political levels where crony capitalism ravages through sectors like law and education to the point that those sectors are societally compromised at the expense of younger generations. In terms of the end of capitalism, I could be wrong, but I don't think Marx was writing about a global disaster enough to rival the Biblical apocalypse, which is pretty much what appears to be in front of us. Per Graham Summers' commentary on Zero Hedge, society does need a certain amount of trust in order to function, and trust is what has been compromised -- with the higher education bubble, the trust has been severely compromised on a generational level, pitting the old against the young.

That being said, whereas it appears that the law school bubble has already burst, we are also starting to see confirming signs that the greater higher education bubble is finally bursting as well.

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