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Ready to pop? The subprime student loan bubble balloons

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John J. Jankowski Jr./The Wilmington News-Journal/AP

(Read caption) More than 100 people demonstrate against the lending practices of student loan company Sallie Mae outside its headquarters near Newark, Del. in this May 24, 2012 file photo. The protesters criticized the heavy debt burden that students accumulate during college and what they say are unfair profits made by Sallie Mae.

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Yes, dear reader, the market seems to have turned. Friday was a disaster…

“Grim Job Report Sinks Markets,” reported The Wall Street Journal.

We’ve had our ‘Crash Alert’ flag up for the last two weeks. Hope it helped.

Day after day stocks have been falling. And day after day has brought more bad news. Greece was on the verge of collapse. US growth figures revised downward. Consumer sentiment fell. House prices are still going down. Unemployment is going up.

The whole world is ‘turning Japanese.’

And then, oil closed at $83 on Friday. The Dow fell 274 points. The 10-year T-note must have thought it was already in Tokyo; the yield dropped to an unbelievable 1.45%. Was that a typo on the Bloomberg line?

And get this, gold rose $57.

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Whew!

What’s happening?

The Great Correction is getting greater. And the odds that the feds will panic…in the US or in Euroland…are increasing.

Remember, the Fed works for the banks. And the bankers know who their ultimate master is. They’ll play it cool. But if stocks fall below 10,000 on the Dow…and unemployment gets worse before the November election…they’ll come in with more QE. That’s why gold is up so strongly. Investors are running scared. They know they can’t trust the euro. As for the dollar, they’re not so sure…

We can hardly wait to find out what happens today!

What’s the next industry to bubble up…pop…and collapse?

“Student loans,” said our new friend, Barry Dyke.

From the far north…well, from New Hampshire…Barry has been following the money. And he sees a lot of it going to the education.

Why?

“It worked just like subprime,” he explained.

The feds bankrolled it. Guaranteed it. Regulated it. And conveniently didn’t notice as it got to monstrous proportions… And then, when it blows up…they’ll be there again, pointing fingers and promising to “regulate” more heavily.

“When you pay for something, you get more of it,” says presidential candidate Ron Paul.

The feds paid for one heckuva a lot of education…subsidizing students and colleges…with trillions of dollars. They pay for GIs to go to school. They give grants to the schools themselves. And they hand out hundreds of billions in loans, at low teaser rates (just like subprime!) to students…often to students who are unqualified and unlikely to get much out of it.

Here’s the Washington Post story:

As the nation amasses more than $1 trillion in student loans, education experts say a vexing new problem has emerged: A growing number of young people have a mountain of debt but no degree to show for it.

Nearly 30 percent of college students who took out loans dropped out of school, up from fewer than a quarter of students a decade ago, according to a recent analysis of government data by think tank Education Sector. College dropouts are also among the most likely to default on their loans, falling behind at a rate four times that of graduates.

“They have the economic burden of the debt but they do not get the benefit of higher income and higher levels of employment that one gets with a college degree,” said Jack Remondi, chief operating officer at Sallie Mae, the nation’s largest private student lender. “Access and success are not linking up.”

The plight of “non-completers” has grown in magnitude as student debt tops $1 trillion, according to the Consumer Financial Protection Bureau. In addition, the sputtering economy has forced a growing number of students to make difficult choices between the benefits of a degree and the burden of paying for it. More students are balancing their studies with full- or part-time jobs or signing up for a reduced course load to save money, increasing the likelihood that they will not graduate.

Colleague, Justice Litle is on the case too:

We have all heard it said: “You can’t put a price on a good education.” But this is silly — of course you can.

It was the thoughtless peddling of such a mantra that allowed institutions of higher learning to raise prices with impunity… year after year, at a faster rate than inflation, as costs spiraled out of control… with government-sponsored loan programs fueling the whole thing.

Sound familiar?

Echoing subprime, the college bubble even has its own version of the “principal-agent problem,” in which the financial interests of the college (which profits from the loan money) have no alignment with the students (who voluntarily drown themselves in debt).

Soon these (literally) poor, debt-burdened waiters and waitresses of the future may realize they were snookered, and wake up angry… not unlike the legions of starry-eyed home buyers who, caught up in the rush of the American dream, chained themselves to a grossly inflated asset at a price impossible to pay.

Geez. It looks like college students have been the chumps in this story…flimflammed by the feds and the universities.

But, remember, we are grateful to the patsies. They’re the ones who keep the whole scammy economy going.

Imagine what would happen if young people decided to learn something instead of going to college? They could get a job learning from a plumber or a machinist…or apprenticing to a furniture maker…or just sitting in the library with a big stack of books and a notepad. No tuition payments…no beer parties…no orientation programs (No means no!)…no graduation programs (You can make a change!)…no research labs…no football stadiums…

…imagine if a group of them got together, hired a teacher…and learned the classics…or theoretical physics…or quantum mechanics…or linguistics…the old fashioned way? Let’s see, pay the teacher $80,000…split it among 7 students… Good teacher/student ratio…much better than sitting in a lecture hall with 150 other students. And $8,000 each.

A lot better than the $40,000 we spent to send our five children to college. Yes…we spent about $40,000 for each of them, per year. You can do the math. It adds up to $800,000. And we’ve got one more to go!

That’s why we’re still writing these Daily Reckonings…we can’t afford to stop.

And it’s kinda fun, frankly…as long as you don’t take it seriously.

But let’s not talk about us. Let’s talk about them. Those poor young people…leaving school with $25,000 in debt (approximate average)…and a punky job market.

If they got a degree in math or science, they can probably get a job. But what if they got a degree in the social sciences? Or the arts? Or no degree at all? How many baristas can Starbucks hire?

What can they do?

Go to work for the government! Or at least go to work in ZombieTown. You don’t need to know anything to work for the feds. No kidding.

Regards,

Bill Bonner
 for The Daily Reckoning

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