January 21, 2011

HIGHER EDUCATION BUBBLE UPDATE: “Nearly half of the nation’s undergraduates show almost no gains in learning in their first two years of college, in large part because colleges don’t make academics a priority, a new report shows.” Check out the chart on how college students spend their time. Is it worth $50K/year?

Related: “The big surprise is that this is news to anybody.” “The next financial bubble is out there. It is comprised of people like your son who are carrying enormous debt without any prospect of paying it off. They are going to default. It’s our fault, you say. Well, you say that now. But if we gave your son the grades he deserved you both would have screamed foul and due processed us to death. If your son is a member of some protected class, we would have had to defend against the accusation that we discriminated against him. Anyhow, he got more than he deserved, and the rest of us subsidized his education directly or indirectly with our tax dollars. Of course, you do know that we are going to have to pick up the defaults, just as we picked up the sub-prime mortgages. . . . When the defaults come, we will print more money and maybe foreclose on a few for-profit institutions. There will be congressional hearings, a few scapegoats from the for-profit world, and a few horror stories about exploitative student loans. There will be an academic Enron and an academic Countrywide. When the smoke clears, the academic AIG will have bailed out the academic Goldman Sachs for one hundred cents on the dollar. And it will be business as usual.”

UPDATE: A reader emails:

The education bubble is out there, but it won’t burst the same way the housing bubble did. A person can walk away from their house and their credit cards, heck maybe even their spouse and kids, declare bankruptcy, and be free from all consequences 10 years later. By law, student loans simply don’t work that way. I’m really not sure it’s even POSSIBLE to default on student loans.

Getting out from under college loans was an industry for the generation who were undergrads in the 60s and 70s, but by the time I went through in the late 80s, Congress had closed all the loopholes (that I knew of at any rate), and they seem quick to close any that open even today. You can’t escape student loans via bankruptcy, they’re explicitly exempt. Student loans never, ever go away due to non-payment. They damage your credit rating, perhaps more than other debt because there’s so much of it. Penalties climb and do not go away.

Yes, it’s possible to go without paying them. I went for eight years doing exactly that, and had the sub-300 credit rating to prove it. When I needed a good credit rating, to buy a house in my case, I had to get them sorted out, and got assessed a fat $23k penalty for the privilege. That may be a KIND of default, but not (IMO) the same sort as a mortgage default.

That’s true. And as I’ve said before, any other industry that encouraged its customers to go into debt like this would be characterized as predatory.

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