from
(snip)"Another student protest, another mass arrest. Monday, thousands of students from all over California snarled traffic during their march on the Capitol in Sacramento. Hundreds of students then flooded the Rotunda of the Capitol, a somewhat raucous affair. Eventually, the California Highway Patrol cleared them out, and 60 were carted off and thrown in the hoosegow for trespassing and resisting arrest.
Their problem: tuition increases. Already, tuition in California's state schools has tripled over the last decade, and state budget cuts will induce universities to jack up tuition again. But the state is out of money. And so it's struggling in a weird and ineffectual way with its red ink. For more on California’s ongoing debacle, read.... Search For The Missing Moolah.
The same day the students were arrested, the New York Fed released a report on the consequences of incessant tuition increases across the nation: ballooning student loan balances that are increasingly difficult to bear:
- 27% of the borrowers who had to make payments (not current students) were past due.
- $870 billion in student-loan balances at the end of the 3rd quarter 2011 (higher than credit card debt of $693 billion and auto loans of $730 billion), up 2.1% from the 2nd quarter, while other consumer debt declined or remained flat.
- Average balance: $23,300. That includes the millions of student loans that, after years of payment, have much smaller balances or are nearly paid off. Average balances owed by recent graduates are much higher.
The report lauded President Obama’s executive actions of October last year designed to ease the repayment burden of federal student loans. Laudable as they may be, they only soothe the symptoms for ex-students by shifting more of the costs to the taxpayer. But they don’t deal with the cause: the system itself. It has become dysfunctional.
Universities as businesses, in an environment that is devoid of price competition. For example, when the University of California system demands higher tuition, the whole system falls in line to support those increases, rather than resist them.
Captive customers. Students have to get their education within the higher education system. When tuition goes up, they can’t massively drop out because it would jeopardize their dream (by contrast, if air fares jump, customers react by flying less). They can choose cheaper colleges, but all colleges are jacking up tuition and fees. And the nationwide existence of “out-of-state tuition,” while plausible on a state basis, stifles cross-border competition. So students fight tuition increases the only way they can: by obtaining more funding.
Finance. The student-loan industry profits from processing student loans. Naturally, they encourage students to take on more debt. The amount is a function of the cost of the school, not of the ability to pay back the loan. While risk serves as a natural brake in making loans, in the student-loan industry, risk is transferred to the taxpayer who guarantees the loans.
The ultimate enabler. The government, in constant need of voter support, will fund and guarantee whatever it takes to allow students to get their education regardless of how reckless tuition and fee increases are. Thus, Obama’s executive actions make repayment less onerous, but they don’t do anything to contain tuition increases.
There are no price pressures on universities—except student protests (so, keep at it). Outrageous clockwork-like tuition increases are met not with resistance but with an unquestioning, endless, and ever increasing flow of government-guaranteed student loans. The beneficial forces of market discipline have been wrung out of the system, and governments have not stepped in to exercise alternate controls.
University administrator salaries, bonuses, benefits, golden parachutes, and pensions have shocked the public when they’re exposed in the media. Programs that have little to do with education swallow up more and more money. And sure, everybody loves to have well-equipped labs in fancy buildings. But the system needs to be restructured, either by opening it up to competition or by exposing it to effective checks and balances. Solutions won’t be easy, but there isn’t much room left before it will bankrupt an entire generation."(snip)
Arguably, the important take-aways from this are as follows ...
- student loan debt has now become the number one financial 'burden' for many younger Americans
- 27% of existing student loans are already in default, with the default rate heavily skewed towards younger Americans
- the overall average $23k in student loan size understates the average amount owed by younger Americans
- under current law, the vast majority of student loan debt cannot be discharged via bankruptcy ... only 'postponed' repayment for another 3-5 years ( with added interest accumulating ).
- at current after-tax pay rates for younger American college graduates, student loan payments consume a large fraction of their after-tax income
- with little or no after-tax income remaining after making student loan payments, many younger Americans have near zero credit / ability to be approved for additional borrowing, and have near zero 'discretionary income' to fund consumption
Thinking a few years down the road, from a demographic standpoint there are a huge number of baby boomers nearing retirement age. Classically, this has translated into people transitioning into retirement selling off their big house, selling off their stocks and bonds etc. However, with the current student loan situation, it's very doubtful if very many younger Americans will have the credit or 'discretionary income' to buy those houses, stocks and/or bonds. This will create downward pressure on future housing, stock and bond prices.
On a more immediate basis, heavily student loan indebted younger Americans with near zero credit, and near zero after-tax 'discretionary income', will not be able to afford to start families ... thus will not purchase houses, cars, furniture, appliances etc. This is already affecting retail sales statistics ... with the 'middle class' retailers now hurting badly while the high end is doing great and the low end is doing OK.
At some point, US taxpayers are going to be presented with the 'tab' for the large number of defaulted student loans. It's time to recognize that a large number of majors from teacher to music to law ( and many others ) now present a 'losing' scenario ... where the amount of after-tax income available to workers in those professions is simply is no longer sufficient to service the $100,000+ student loan debt they have taken on to qualify for those professions.



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