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The Higher Education Bubble

Written By Brian Hicks

Posted September 8, 2009

Students have had to drop out of school because they can’t afford tuition.

Others, like Michelle B., are simply looking for answers to the question, What more do the schools want?

The rise of tuition is not included in the loan package, leaving students like myself not only paying an incredible balance, but the loan does not include living expenses. The amount of money I receive from both loans is a joke! There is a bubble alright, and the pop of that bubble is on us and them.

Is it any wonder why we as students can’t pay our loans back? The banks don’t set us up to pay them. They contribute to the problem; the way the loans are set up, we’re set up to fail. I want to finish school. If you’re wealthy, no worries. For the rest of us, we’re out of luck.

Even parents, who once questioned the value of spending $1,000 a square foot for a home, are now asking whether it is worth spending $1,000 a week to send their kids to college.

And this isn’t an isolated scenario. . . it’s happening everywhere.

Truth is — for college students and educational institutions alike — times are likely to get even worse as the higher education bubble just begins to pop.

And it will pop. . .

Joseph Marr Cronin, secretary of education in Massachusetts, and Howard E. Horton, president of Boston’s New England College of Business and Finance, think so, too.

No doubt about it.

What most people who are not involved directly in higher education fail to understand is that institutions and lenders are sharing the same sinking boat as banks and other financial companies.

Assets are drowning. . . and debt and costs are rising.

Under-capitalized colleges are also staring down threats to solvency (just as banks are), as penny-pinching students and parents go for cheaper alternatives (community college, online colleges, etc.), and sources of funds dry up.

Worse, Cronin and Horton comment:

The middle class, which has paid for higher education in the past mainly by taking out loans, may not be precluded from doing so as the private student loan market has all but dried up. In addition, the endowment cushions that allowed colleges to engage in steep tuition discounting are gone.

Yep, when you think about limited access to credit — no more using your house as a piggy bank — coupled with higher college costs, we could end up with students finding college simply out of reach.

So is it really surprising to then learn that applications for community colleges and other public institutions have skyrocketed some 440%? Or does it surprise you that non-traditional online colleges are becoming successful at challenging higher-priced private schools?

According to Forbes, college tuition has increased by more than three times the rate of inflation over the last 20 years, despite flat-lining U.S. wages. The College Board reports the average tuition in at a private four-year school is now up 6.6% yearly from 2007, ringing up at $23,712. . .

And it could haunt students and America for years to come.

When students (and in most cases, parents), couple tuition with living expenses, we are looking at about $50,000 for a year of school. For the bubble to not pop, tuition must drop. . . or there will be limited demand at pricey schools.

But the schools aren’t the only ones suffering from this education meltdown.

The Lenders Could Get Crushed, Too. . .

First and foremost, the education bubble — fueled by easily-lent money and over-borrowing — has created yet another bubble: student loans.

The last days of college are supposed to be the happiest time of year for thousands of students. Instead, there’s trouble ahead for graduates who are competing in the toughest job market in years.

Only 19% of them can find a job, as compared to 50% in 2007 and 25% in 2008.

And then there are those graduates, like my friend Mikey, who will have to start paying back $1,150 a month for student loans — on top of a mortgage and mounting credit card debt — and who simply can’t find a job.

And thousands more are in the same sinking boat; thousands more that won’t be able to pay back student loan debt.

As usual, the numbers tell the whole story. According to the College Board in a report earlier this year, total student loan borrowing more than doubled between 1998 and 2008. The numbers are staggering. We’re talking about $85 billion in loans, as compared to $41 billion ten years ago.

Privately funded student loans have risen, too: from 7% in 1998 to 23% of all student loans in 2008. It makes for quite a brew for cash-strapped Americans this year, who are already saddled with unemployment and loss of income. Sallie Mae, for example, had a delinquency rate of 9.4% in Q3 2008, as compared to a rate of 8.5% just a year earlier.

I’m willing to bet that rate gaps higher as the months go by.

The student loan market has been, is, and will be riddled with trouble. Expect higher default rates, as students can’t pay back these loans.

Still, we’ll look to profit from their demise. . .

Secondly, as President Obama urges an end to government subsidies for student loan providers, a number of education stocks could swan dive.

Putting the kabash on these subsidies, according to Education Secretary Arne Duncan, could save the U.S. billions every year. The only roadblock is congressional approval. . . but this one looks imminent.

Here’s an excerpt from a recent New York Times editorial:

The [new administration’s] budget rightly calls for phasing out the wasteful and all-too-corruptible portion of the student program that relies on private lenders. And it calls for expanding the less-expensive and more-efficient program that allows students to borrow directly from the federal government. That means doing away with the Federal Family Education Loan Program, under which private lenders receive unnecessary subsidies to make risk-free student loans that are guaranteed by taxpayers.

A number of stocks are going to get battered by this.

Things could get bad for students and lenders alike. . . real bad. But there is opportunity to play the downside for "tuition paying" profits. . . and Options Trading Pit has two such ways.

Good Investing,

Ian L. Cooper

P.S. I’m putting a full report together on how you can profit from education’s demise. Meantime, if you’re ready to begin taking these imminent gains, simply click on this link to get started right away.