Why the next massive bubble could be far worse than anyone expects
By now virtually everyone has seen some combination of the two charts, showing the magnitude of the student loan bubble, a topic which even Goldman Sachs decided to take on last week:
Frankly, by now the topic of US student debt has been discussed to death, and like every other bubble, it will keep growing, as the very fungible proceeds are used to purchase such mission critical “student” addenda as iPads and booze, until it bursts. Yet is it really that bad? And how does it look compared to some other countries’ bubbles. Like that of the UK? Courtesy of Bloomberg we now know how a similar bubble is being blown across the Atlantic:
As the U.S. grapples with record-high college costs and outstanding student loans of $1 trillion, England is embarking on a plan this year that shifts much of the government’s burden of paying for higher education to students and saddles graduates with unprecedented debt.
Some students in England, after borrowing for housing and living expenses, will leave school with as much as 40,000 pounds ($64,200) in debt, said Peter Lampl, founder and chairman of the Sutton Trust, a London nonprofit group that promotes access to higher education. That tops the $23,300 average debt of U.S. student borrowers. The debt burden means graduates will defer buying a home and makes it harder for people from lower-income backgrounds to catch up, Lampl said.
“In this country, we will be on an order of magnitude ahead of the U.S.,” Lampl said in an interview. “We’re loading up these kids with debt. The whole thing is an absolute disgrace.”
In other words, UK students will soon be debt slaves only encumbered with orders of magnitude more debt. However, there is a twist:
While many English students will be borrowing more to attend college, the system is more forgiving than its U.S. counterpart, said Steve Smith, vice-chancellor of the University of Exeter.
English graduates don’t have to repay their loans unless they make 21,000 pounds a year. They pay 9 percent of their earnings over that amount and all debts are forgiven after 30 years. Payments are automatically deducted from paychecks. Graduates don’t have to pay if they lose their job or transition to part-time work, as many working mothers do.
A young person making 27,000 pounds a year will end up repaying about 10 pounds a week and someone in their early 50s who owes 50,000 pounds has the reassurance that it will soon disappear, said Smith, who served as president of Universities U.K., an advocacy group that consulted with the government on the changes.
So do US students once again have the short end of the stick?
By contrast, U.S. education debt can’t be discharged through bankruptcy and almost 2 million Americans with student debt are over 60, according to the New York Federal Reserve. About $85 billion in student debt was delinquent in the third quarter of 2011. In March, the Consumer Financial Protection Bureau said U.S. student-loan debt had reached $1 trillion, based on preliminary findings.
“The American system is brutal,” said Tim Leunig, who teaches economic history at the London School of Economics.
The Obama administration introduced an income-based repayment program in 2009 for U.S. borrowers who take out certain types of federal student loans. The plan limits debt payments to a percentage of a family’s income for graduates and erases the debt after 25 years. For those with government or nonprofit jobs, the debt can be forgiven after 10 years.
Of course no matter how you spin it, having debt three times your income before you are responsible for paying it down as a mitigating circumstance is simply idiotic. All colleges in the US and UK are doing, is generating another generation of slightly modified debt slaves, yet ones who have no choice, and more and more end up going to college because at least it is something to do in world in which those between 18 and mid 20s are only about 50% employed. And with debt as cheap as ever, the carrying costs are low enough to where one can just worry about repaying it tomorrow… Even if “tomorrow” ends up being when one hits their 60s. Still, since behavioral changes are additive, the fact that UK student used to pay virtually nothing as recently as 14 years ago, means the pain from the surging debt load is far worse across the pond:
Higher education in England was free until 1998, when students were charged 1,000 pounds. The tuition increased to 3,000 pounds in 2006, and rose with inflation each year after.
In the U.S., the average tuition and fees for 2011-2012 at public universities is $8,244 (5,136 pounds) a year for state residents and $28,500 at private schools, according to the College Board, a New York-based nonprofit group whose members include U.S. universities.
The new English system, unveiled in June by the coalition government of Conservatives and Liberal Democrats, is designed to reduce taxpayer support while introducing competition among universities for the top students, said David Willetts, the Conservative minister for universities and science.
Curiously, if the UK succeeds in enacting its own debt enslavement system, the rest of Europe will be sure to follow:
In the rest of Europe, where higher education is free or relatively inexpensive, governments are watching to see if the U.K. plan succeeds, said Jens Oddershede, president of the University of Southern Denmark in Odense, and the chairman of Universities Denmark, an advocacy group.
It’s creating “widespread fear all over Europe” among college administrators that the region will move toward a high- fee, high-loan system, Oddershede said. He pointed to the U.S. model, calling it “a system that can serve a capitalist society like America but wouldn’t work in a small country like Denmark.”
The prospect of rising tuition angers European students, who say they had no role in causing the financial collapse but are being made to pay for it.
“What caused the debt?” Allan Pall, head of the Brussels- based European Students Union, said in a speech at the European university conference. “Did we spend too much on higher education? We should ask that question instead of rushing to cut the first thing we see, the thing that creates jobs and growth.”
Yet just like US Trasurys (with or without the benefit of the shadow banking system which allows to generate near-infinite fractional reserve demand when using one unit of a “real asset” rehypothecated a fractional-reserve number of times), student loans keep seeing greater and greater demand:
While students have protested, applications through Jan. 15 fell just 1 percent, when adjusted for a decline in the college- aged population in England, according to the Universities and Colleges Admissions Service, which manages university applications.
That’s not surprising, given the importance of a college education for finding a high-paying job, Lampl said.
“Poor kids, low-income kids know they have to get an education,” Lampl said. “They’re not stupid.”
Asta Diabate, 18, who lives in Lewisham in south London, said the higher fees don’t faze her.
“I’m not worried, because it’s something that’s valuable,” said Diabate, who will start college in 2013. “It’s not like I’m going to pay upfront and installments are so low, it shouldn’t really bother me” when repaying the loan.
Of course, local financial employers must always exhibit snobbery when picing resumes, and focus on the promising candidates out of Ivy Leagues (or equivalent), as otherwise the whole charade falls apart. And as long as the return promise is much higher than the alternative, student can at least justify the massive debt load to themselves. Yet the question is how long until the next taxpayer bailout:
While the plan was devised partly to reduce government spending, it may ultimately cost more because many borrowers won’t pay back all they owe, said Nicholas Barr, a professor of public economics at the London School of Economics. About 70 percent of the loans will be repaid because of the 21,000-pound income threshold and the 30-year forgiveness period, according to government estimates.
Then again, a taxpayer bailout of the college loan system will never occur, as tuition and room and board will never, ever go down in price. Just like houses back in 2005.
In the meantime, the latest credit bubble, no matter if its US or UK iteration, continues merrily along, until it is forced to finally stop. Alas, with private lenders now outof the market, and the US government the lender of only resort, the administration’s generosity with other people’s taxes will hardly ever be tested, until well after the fact. By then we will likely have other problems.