Student loan market created a tuition bubble rivaling the housing bubble. When banks and government subsidize markets the average ....

Student loan market created a tuition bubble rivaling the housing bubble. When banks and government subsidize markets the average American gets an education in debt serfdom. For profit schools dominate the Pell Grant market.

Recently a handful of articles have discussed the rise of subprime debt in higher education. Broadly speaking a college educated American has lower unemployment, higher earnings, and a better potential for financial success. Like the housing market, the emotional notion that everyone should own a home allowed the predatory banking industry with government support to funnel out mortgages to people with no ability to pay it back. The consequences are still rippling throughout the current economy. Today the higher education market is seeing all the traits of a bubble and certain parts of the industry dominate the toxic loan market. Many of the for profit schools are more adept at tapping into Federal funds and marketing and pump out degrees with learning outcomes a step above a paper mill. They have no student learning outcomes attached to their funding source so they have no federal mandate to report how successful their students are in getting careers after graduation.

If we look at the rise of education costs and housing from 1993 to the present, we can see an exact trend with housing:

Source: Census

It should come as no surprise that over this timeframe, the cost of college and housing have risen at nearly the same pace. Why? Part of this comes from the massive amount of debt used to finance these markets. With housing for the large part of the last decade people were able to purchase homes with nothing down. Qualifications for loans were diluted so anyone with the mere desire to buy did. A fleet of commission hungry brokers and companies made sure they gave loans to everyone even if they had no ability to repay it back. When you disconnect success from the lender to the borrower you will find that predatory lending will take place. The student loan market has been the major reason why college costs have inflated at bubble like trends:

Source: New York Times

Over the last 30 years the cost of college has soared by approximately 500 percent. This has outpaced medical care costs and the median family income by a sizeable portion. The outrage should be directed at Wall Street and the government for inflating the market. You will hear these people argue that costs are rising because operational costs demand prices to go up but this is simply nonsense. Even studies that look at increases in federal grants and loans show that institutions will basically raise their tuition to meet the change in financial aid:

“(Chronicle) The finding tends to support what is known as the “Bennett hypothesis” — the notion, first popularized in the 1980s by the U.S. secretary of education at the time, William J. Bennett, that colleges and universities tend to absorb most federal student aid by increasing their tuition revenue.

The new paper, by Larry D. Singell Jr. and Joe A. Stone, both professors of economics at Oregon, employs a much larger data set than most previous tests of the Bennett hypothesis. Mr. Singell and Mr. Stone examined data from 1,554 four-year colleges and universities from 1988 to 1996. They drew on institutional data collected by the National Science Foundation and by the U.S. Department of Education.

Mr. Singell and Mr. Stone found that public colleges’ tuition for in-state students did not rise in tandem with Pell Grant levels. But private colleges’ tuition, and public colleges’ out-of-state tuition, increased by roughly $800 for every $1,000 increase in Pell recipients’ average grants.

Much of that additional tuition burden, the scholars suggest, is borne by students whose family income is relatively high. The Pell Grant program generally succeeds at expanding lower-income students’ access to college and at allowing lower-income students to attend more expensive institutions than they otherwise would, according to the paper.”

So the market simply adapts to suck up this added easy money like a debt hungry vacuum. You can see how flawed this policy is with the Pell Grant program. The Pell Grant like most programs started off with good intentions. It was designed to help low income families finance the cost of college. A National Postsecondary Study found that in 2000 families making less than $41,000 accounted for 90 percent of Pell Grant recipients. Now this in itself isn’t a problem if students come out with solid educational outcomes. But what is happening is a perverse scamming of the system by the for profit machine of education. This is the true subprime market of education.

They argue that everyone should have an opportunity to have an education no matter the cost (sounds familiar to the everyone should own a home argument). Of course these so-called equal opportunists don’t work for free and charge massively higher rates than local public state schools (you can see the massive profits of these for profits as they trade on the stock exchanges). And here is where you see the problem arise. For profit schools cover 6 percent of students but eat up 20 percent of the Federal Pell Grant money. University of Phoenix is number one here pulling in $656 million in revenues from Pell Grants. This is taxpayer money going to an institution that does not have to show educational learning or career placement outcomes. How many of their graduates are working in the field that they studied for? What is their career placement data? Of course these for profit institutions are fighting tooth and nail to stop any legislation that will tie funding to educational outcomes because it will expose them for the subprime education market that they are exploiting.

Then on the other side you have massive amounts of loans subsidized by the government for other students. Story after story is now coming out about students coming out with $50,000, $75,000, and over $100,000 in student loan debt from private schools and students are unable to find jobs. The tired argument is that a student signed on the dotted line and got an education. But that doesn’t address the bigger issue of college tuition inflation. Of course the hand of Wall Street is deeply involved here as well:

Recognize a few names? You should. These are the same players in the toxic mortgage lending market that received trillions in taxpayer bailouts for their horrible loans in real estate. Of course they don’t care about originating standards or putting undue stress here because they know the government is on the hook here as well. So now, what we see is this inflation bleeding over into the public school system:

Source: OC Register

Here is an interesting chart. The University of California is one of the biggest public higher education systems in the world with a solid reputation. Back in 1990 the cost to attend the UC was under $2,000 per year. At that time, the median household income was making $33,000 in California. So the cost was 6% of total median annual household income. Today, the median household income is $57,000 and the cost is over $10,000 per year. It now eats up 17% of the annual household gross income. In other words, the increase in tuition is far outstripping any gains in family income. Clearly people are finding other ways to pay and school are finding other ways to make money.

So why is this all happening? Because the government is operating under the advice of the banking system. Wherever Wall Street has had its hand in the last few decades bubbles just seem to spring up, (i.e., housing, higher education, tech boom etc) because it enslaves the population to debt while not actually paying attention to longer-term fundamentals. The reason college costs keep going up is because people can get government backed grants and loans without any outcome showing the ability to payback. Institutions simply raise fees to match this added funding. Just look at the housing market once the easy money is pulled back. Prices fall. This will happen in higher education as well if we stop spending money needlessly. Why not use that money to add classes at local community colleges? And those that currently capitalize are the for profit schools that market heavily to poor populations, enroll students, saddle them with debt, and have no need to show their long-term outcomes. This is subprime part two and the American people will be on the hook again while the predatory leeches get away with another bailout. When will people see that anything the banking industry touches turns into a method for bleeding it dry?