The college bubble

Close your eyes and imagine student-loan debt as the proverbial “elephant in the room.” Or dorm room, if you will. This shouldn’t be difficult: More than half of you surely owe, have owed or will owe a balance, perhaps elephant-sized. And who wants to talk about that? Plus, everyone knows what a student dorm looks like. Or at least smells like.

Anyway, picture in your mind this cramped Sacramento State or UC Davis dorm: Is your Dumbo freshly bathed and in good shape? A bit unwieldy? Or does your pachyderm just plain stink?

Until recent years, most student debt resembled the first two: nearly trouble-free, paid off in a decade. But a hushed, yet budding contingent of financial experts are worried that excessive borrowing by students without any real credit history is creating America’s next trillion-dollar economic bubble.

Both Forbes magazine and The Economist published “higher-education bubble” stories this year; each made the case that student loans are the next subprime mortgages. And just before the start of this academic year, Moody’s Analytics, a wing of the behemoth Wall Street credit-rating agency, released “Student Lending’s Failing Grade.” This study suggested that tuition hikes, record student debt and unchecked lending are fostering conditions that alarmingly parallel the real-estate bubble and bust of the 2000s.

“Fears of a bubble in educational spending are not without merit,” Moody’s warned.

And, even if this is premature, everyone agrees the country is in a higher-education crisis that will surely get a lot worse. As UC Davis director of financial aid Katy Maloney told SN&R last week: “The state’s such a mess, the federal government’s such a mess, it does make you scared about a lot of things.”

Maloney is quick to report, however, that most UC Davis grads exit with “quite manageable” debt obligations. Plus, grant money is on the up. And paying off student loans is easier than ever, in theory, because of new Obama administration income-based repayment programs.

But this fall’s Super Congress—the unusual supercommittee of 12 lawmakers who will weigh heavily on the fate of higher ed in America—and its $1.2 trillion in across-the-board cuts, could further cripple higher education. And, ominously, it’s not uncommon now to hear people question the value of a college degree.

“There’s a kind of backlash conversation arising nationally,” observes Nancy Shulock, of Sacramento-based Institute of Higher Education Leadership & Policy. She calls this “dangerous”—the last thing society needs is people doubting higher education—but it’s hard, she adds, “because the economy is in such a bad shape. And almost everyone knows a college graduate flipping burgers.”

Meanwhile, leaders don’t have answers. So governments will remain broke; tuitions invariably will surge; and student borrowing, defaults, forbearances and deferments will rise.

And there’s also the small fact that earning a college degree no longer guarantees a well-paying job. Or a job at all. Just ask the estimated 34 percent unemployed recent U.S. graduates, a growing legion nearly three-times larger than the overall jobless. Or the thousands of students who borrowed thousands in private and federal loans, only to never graduate, due to hardship, cutbacks, whatever.

Their debt is an elephant for life: In 2005, the Bush administration passed a law disallowing bankruptcy on student loans. Now Uncle Sam will garnish wages, tax returns and even Social Security checks to get paid. And, as one national financial aid expert told SN&R, “a third of college graduates will be paying back their loans when their children go to college.”

They say the only thing more expensive than a college education is not getting one. Will they be saying this 10 years from now?

Inside the numbers

It’s minutes before 9 a.m. on the first Monday of UC Davis’ school year. Inside a newish building dressed in wooden shingles and vertical glass windows, a trio of undergrads queues at a financial-aid office window, waiting for an employee to roll it open. The line across the quad at the UC Davis Coffeehouse is nearly 10 times as long. But by 11 a.m., financial aid wins: longer, but quieter and not as caffeinated.

On the second floor is financial-aid director Katy Maloney’s office. She’s worked for the university since 1989 and, while her job isn’t Stand and Deliver glamorous, she keeps the wheels turning so that the approximately 61 percent of undergrads who received grants and 47 percent who took out loans can pay for their education.

But what’s really interesting about Maloney is how tuned in she is to the truth and fiction of all that’s good and bad with higher education in Davis, the Sacramento area, California and the nation.

For starters, the director—who espouses both a sympathy for student needs but also a tough-love ethos—is quick to point out that UC Davis, and all of the UCs, still dole out more grant money than loans, which is something that can’t be said at more private, public or for-profit colleges nationwide. And that, even during the past three years’ astronomical tuition hikes, “every time they increase the fees, we get more grant money.”

But students also take out more and more loans. Consider the numbers:

According to the Federal Reserve Bank of New York, the totality of outstanding U.S. student-loan debt has grown by 511 percent in just over a decade. This is a rate nearly five-times more rapid than the increase of the national U.S. debt—ahem, tea party—and twice as fast as mortgage and home-equity liability during the same period.

Last year, for the first time ever, the sum of outstanding student-loan debt exceeded that of household credit-card debt, this according to the College Board.

This rise in student debt is mostly attributed to tuition hikes and fees, which during the past decade have nearly doubled, outpacing inflation for all sectors, including health care. In fact, student debt is now a 10-figure number: The entirety of outstanding national student-loan obligation will reach $1 trillion by Christmas this year.

And still more people keep going to school: Some 70 percent of high-school graduates enroll in community or four-year colleges, according to the U.S. Census Bureau’s latest data. This in addition to more adults going back to school than ever; students between the ages of 50 and 64 who enroll have grown by nearly 20 percent since 2007.

So what happens if this trend continues for another five, 10, 20 years? Is that “college bubble” territory?

“I don’t dwell on it too much, but I could see that happening,” UCD’s Maloney explains. “As far as if it keeps on going. I could see families [saying] ‘I can see how it’s not worth it.’ If it does continue, and people end up using loans, can’t get jobs, can’t pay it back, it’s going to be bad.”

How bubbles go ‘pop!’

Mark Kantrowitz is the guy to talk to if you need help paying for college. The oft-quoted, Pittsburgh, Penn.-based financial-aid expert, who operates www.finaid.org, told SN&R last week that, while tuition is up and a degree doesn’t guarantee a job per se, the so-called “college bubble” isn’t quite fully formed.

“I wouldn’t say that we’re at a bubble yet,” he argued. “But we’re definitely headed to a place with decreased college affordability. And, 10 years from now, we’re heading to a place where we’ll have more students with more problems.” Problems such as more loan defaults and delinquencies.

To have an actual economic bubble, Kantrowitz says you need: 1. an excess in liquidity, such as free-flowing, available credit during the housing bubble of the 2000s; and 2. a price of an asset that is disconnected from the true value of an asset, such as home prices during this same period.

“And the bubble bursts,” he says, “when liquidity is gone.”

The catch is that a college degree isn’t a hard-and-fast asset like a home or a dot-com business or a currency. How do you place a value on it?

Yet analysts, such as those at credit-rating agency Moody’s or PayPal founder and hedge-fund speculator Peter Thiel, still say a bubble and a burst is exactly what will happen to higher education. Here’s how:

Demand for student loans is driven by tuition costs, which will remain on the up. Excess liquidity, or credit, exists in the form of student loans, of which demand, too, will increase.

But, as the price of a college degree goes up, its true value lessens due to high unemployment, marginal salary differences between graduates and nongraduates, and more student-loan delinquencies or defaults.

If these nonpayments reach critical mass, loan money invariably tightens up, just like credit during the subprime mortgage crisis.

When liquidity disappears, the college bubble bursts.

This nightmare scenario postulates a textbook of awful repercussions. Ironically, many are the very problems everyone told SN&R this country faces today: underfunded colleges and universities, overpriced tuition, difficulty in affording school for middle- and lower-class students, students paying more than governments, high unemployment.

Students in particular have hopped on board this college-bubble-thesis train. Perhaps this is because it speaks to their frustrations—with personal debt, job prospects—but also because the idea of “predicting the next bubble” can be seen as a rather sexy prophesy. Something cool to blast on about on Facebook.

Anyway, one student in particular did more than just babble: He found the bubble concept so inspiring, he built a website in late 2008, www.studentloanbubble.com. This student, who operates under the prosaic moniker “Student,” called SN&R from a Pittsburg area code last week to explain his take on the theory.

“Universities have access to unbelievably cheap capital,” Student noted, “because they use students. They build buildings and hire faculty, something the state should be paying for. But instead, students take out loans, and from the state, who makes a profit of it.”

This is true: The federal government makes an estimated 15 cents on every dollar it loans to students.

“The student puts the money in, and what you get out of the diploma, or whatever, never materializes,” Student argues. “And tuitions will have to fall at some point.”

Like any good student, though, there are holes in Student’s argument that you could drive a school bus through. And also, like any good grad, his proclivity for such academia-speak as “ad hominem” irks. But still—like Moody’s and Forbes and The Economist—perhaps he, too, is on to something?

Or then again, wasn’t it Moody’s itself, along with its credit-agency contemporary Standard & Poor’s, who triple-A stamped all those bogus subprime-mortgage credit default swaps in the nascent 2000s, arguably the spawn that birthed America’s housing bubble into a potential global catastrophe the first place?

Crisis real and now

No matter what you zero in on in the higher-ed world, it all comes back to state funding vs. student contribution.

“People are concerned that the burden has permanently shifted from the public good to the private good,” explained Sac State assistant professor of public policy and administration Dr. Su Jin Jez.

It’s more than a concern: This year, for the first time ever, students will pay more into the UC system than the state of California from its general fund.

And the state’s impasse makes it difficult to even look forward. “I feel like the past how-many years makes me not want to make guesses about the future,” she explained. “I think we see right now people are questioning the value of higher education.” And that’s the tragedy: “There’s no reason you should question going to college.”

Also on Sac State’s campus, Nancy Shulock, who works as executive director of the Institute for Higher Education Leadership and Policy, can at least put her thumb on a silver lining: “A good byproduct of people asking that question” is that something finally might get done.

For instance Shulock, who just last week unveiled a report looking at the so-called “policy drift” in California leadership, thinks the “onus now is really going to be on the colleges to better structure” its system.

This would help, because, at the very least, there are serious equity matters: The state spends two-thirds more on the UC than its community colleges, “the largest such disparity in the nation,” according to Shulock. And Jez notes that the state’s Latino population, which will be the majority soon, is another big elephant in the dorm: “We’re doing a really bad job educating Latinos—this should be a crisis.”

But instead of the state anteing up, the burden is still on student borrowing.

At both Sac State and UCD last year, freshman and first-time student borrowers needed an average of nearly $5,000 in federal student loans, a number that has almost doubled since the beginning of the decade. Sacramentans with student-loan debt carry some of the highest balances in the nation, too, according Moody’s.

The U.S. Department of Education, which released its most recent student-loan default rates this past month, reported that failures to pay were up across the board, at public, private and for-profit institutions (specific data for bachelor degrees at UC Davis and Sac State were unavailable).

Meanwhile, Sac State upped its tuition 23 percent this fall. And just this past month, the UC Regents proposed to increase student tuition by 32 percent over the next four years; they’ve requested the state to pick up half this tab, but no one’s expecting an assist from Gov. Jerry Brown.

And in Washington, the newly minted Super Congress will decide over the next month how to further gut higher-ed funding. On the table includes whether to finance the Pell Grant, which is $1.3 billion underfunded; or preserve higher-ed write-offs such as the American Opportunity Tax Credit, or a $2,500 claim on returns. The Budget Control Act of 2011, which was enacted in August, already eliminated subsidized interest loans for graduate students and also prompt payment discounts, which will appease GOP deficit hounds to the tune of a paltry $26 billion over 10 years.

“There was this vision of higher-education as a strong public-good component, meaning it benefits everybody in society, not just the user,” Shulock explains. “But if you’re going to have that shift in the balance, where does it end?

“We can’t just continue this policy.”

Saving our schools

The consensus, for now, is to salvage higher-ed by helping students first.

Northern California-based The Institute for College and Success says one of the first good moves will be to keep large tuition increases off the board, and out of the headlines, even if state funding drops. “Large tuition increases are troubling in part because it signals to students that costs are rising more fast than their ability to pay them,” explained program director Debbie Cochrane. “So kids won’t apply.”

UCD’s Maloney, who laments Congress’ unwillingness to work with President Barack Obama on such pet issues as middle-class education tax write-offs, hopes that relatively new income-based repayment plans will help stave off a spree of loan defaults.

“If you call the government and go, ‘You know what, I can’t pay,’” she explained, “they’ll totally work with you.” But she urges students with unwieldy debt to make that call. “You have to communicate with them; you can’t just run away.”

She also urges the Super Congress to preserve the Pell Grant.

“They keep talking about how they might not want to fund that,” she says, “and that concerns me, because that is a major source for us, and for low-income students.” Maloney estimates that Davis receives $40 million a year via Pell Grants. Without, that “would be devastating.”

FinAid’s Kantrowitz takes the Pell Grant funding debate one step further.

“I’ve been arguing for a long time that Congress should double the maximum Pell Grant” he said. This makes good economic sense: more Americans with bachelors degrees mean more higher-earning jobs, and, subsequently, more income-tax revenue, which will pay for ramped-up grant costs over 10 years.

But right now, he laments, there is no leadership in Congress on higher-ed issues.

“When Sen. [Ted] Kennedy died, he was the last true champion for improvements on student aid.”

Here in Sacramento, it’s a similar story as in D.C., with the state Legislature’s unwillingness to invest in higher education. So universities such as UCD are now publicly working to raise $1 billion from private donors to offset state-funding cuts. This privatization effort, called “The Campaign,” has netted approximately $708 million from more than 83,000 donors since its inception in 2006.

“So, in a way, when people say the UC is privatizing, it’s kind of true,” Maloney says.

Yet going private will never be enough to cover UC Davis’ nearly $2.7 billion in annual operating costs. That’s why the university just revealed its intention to kick-start a dramatic, quick addition of 5,000 students, specifically to increase funds as state contributions decrease.

But more students simply means more students borrowing—which will keep feeding the ever-growing, trillion-dollar elephant in the dorm room. The government won’t lead, the schools keep growing—maybe the burden is on the students to enact some kind of change?

Maloney admires the recent upswing in student action. “I like what I’ve seen in the last few years,” she said, “I’ve seen a lot more protests. … I didn’t see a lot of action or activity before.

“Maybe that will make a difference.”

By the numbers

More students are enrolling in two- and four-year colleges than ever. Yet more students, many with zero or even poor credit history, are taking out student loans, both from the federal government and also private lenders. Meanwhile, the state Legislature and Congress have taken the butcher’s knife to higher-ed funding. Let’s crunch the numbers.

511%
the amount by which student-loan debt has grown in the past decade

70%
of high-school graduates enroll in college

1,000,000,000,000
estimated total of outstanding U.S. student-loan debt, in dollars,by year’s end

20%
of individuals between ages of 50 and 64 have returned to college

5,000
average student-loan dollar amount borrowed by freshman at UC Davis and Sacramento State

23%
increase in tuition and fees at Sacramento State this year

40,000,000
amount in dollars UC Davis students receive in federal Pell Grants annually

32%
proposed increase of tuition and fees at UC Davis over next four years

26,000,000,000
dollars saved by Congress from subsidized-student-loan and other higher-ed cuts this past summer