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"And the strong to seem to get more
While the weak ones slave
Empty pockets don't ever make the grade
Mama may have, and Papa may have
But God bless the child that's got his own
That's got his own."
We can thank the late, great Billie Holiday for those lyrics. And we can thank our higher education system for giving "the child that don't his own"a chance to get some.
Some debt, that is.
Students, many of them adults looking to gain new skills, are being systematically ripped off and enslaved by schools and lenders, blinding them with hope about what a higher education can do for them while bilking them for billions in the process.
It's a dirty game, and a big one at that. You probably know, because you probably owe.
But wait.
First, let me offer some insights on the market before I get to my indictments...
Why the Doom and Gloom?
So far, so good...as far as earnings season, that is. Three quarters of companies reporting, so far, have beaten Street expectations. And 81% have offered up better than expected revenue forecasts for the future.
So... why all the doom and gloom?
For one thing, expectations have been repeatedly ratcheted down by analysts. The Street is only looking for 4% revenue growth and 3.5% profit growth in the first quarter. That revenue growth figure is well below the longer-term average rate of 6.2%; and 3.5% profit growth looks like it's off a cliff compared to the 9.2% profit growth in the fourth quarter.
Given the better than expected numbers so far - and the likelihood of more to come - and with depressed expectations presenting a lower hurdle for companies to easily clear, we have to ask ourselves again...why all the doom and gloom?
Oh, yeah. We're not in this alone. We're part of the global economy now.
European Debt is Still a Worry
I've repeatedly said (and I'm saying it again), there is not, nor will there be a decoupling of U.S. economic prospects from the global game we're such a big part of, now and forever. We may see bright spots here and there, but if and when it rains on Europe or China, any sunshine here will be blotted out by clouds and eventually we will get wet.
Right now, in spite of Q1 earnings being pretty darn good (again, so far) it's the prospect of clouds forming over Europe, again, and clouds over China that markets are worrying about. And they should be. We are all in this together.
Spanish 10-year bond rates rose to 5.93% on Friday, up from less than 5% just a month ago. Spanish banks borrowed $413 billion from the ECB in March.
Across the Eurozone, banks borrowed a total of 1.1 trillion from the ECB in March. That's a lot of borrowing from the central bank. Remember when borrowing from any central bank was a sign of weakness? Duh... it still is. Just because it's become a way of life, or a steady lifeline, doesn't mean it's normal. It's bad.
Italy's 10-year rose to 5.52% from below 5% in less than a month. In case you've forgotten, 6% is sort of the tipping point (at least it was for Ireland and Greece), above which investors balk at any country being able to keep borrowing at such a high cost and being able to keep paying back ever increasing debts.
At the same time, Germany's 10-year bund plumbed recent lows around 1.65%, and over here our 10-year yield fell from 2.40% in mid-March to 1.98% last week.
Not that anyone out there doesn't get it, but in case you're a little groggy, when bond yields rise for suspect borrowers, that's bad news. And when money floods into more stable sovereign debt instruments at the same time, like Germany and the U.S. 10-year paper, that's a "flight to quality," an almost panicky move.
Not that I'm saying there's a reason to panic. Just do the math, and keep doing it.
Stocks are at a Pivot Point
Stocks in 2012 have seen tremendous rotation. Last year's laggards were bought up early in 2012 and are big winners. Not that last year's winners were dumped, they weren't. They've risen too, but by about half what the laggards have done.
So, most stocks have joined the party. That scares me, especially if we see more flight to quality in the bond market and equity investors (well, they're traders really) continue to take profits.
Not that I'm saying there's a reason to panic. I'm just saying that unless investors come in and buy whatever dips we get, the trading crowd will tire and dips may become drags.
In short, I am far less bullish than I was a couple of months ago. I'm basically neutral.
We should see buying on this recent dip. If we don't see support and we see "vacuum selling" (no-bids and heavy volume on down days), I'll turn outright bearish.
Be cautious here. We're at a pivot point.
Back to School
Okay, now it's on to the enslavement of students of all stripes. I've got to bring this to your attention, if you aren't already all over this.
The Federal Reserve Bank of New York recently came out and said student loans outstanding are $870 billion. That's bunk. It's closer to $1 trillion when you "capitalize" (add in) outstanding, unpaid interest on delinquent and defaulted loans.
There are at least 37 million borrowers who owe money on school loans.
Those between the ages of 30 and 39 owe the most, about $28,500 each. Those between 40 and 49 owe on average $26,000. So, it's not just "kids" coming out of schools, it's a good cross-section of the population (shall I say the "educated" population?).
Barron's cover story this week (and an even more indictment-esque story on one for-profit school, ITT Educational Services) on this very subject is where I've gotten the stats I'm offering up here. You have to get the paper and read the two articles. They are excellent and they will shock you.
Higher education costs keep getting higher. From 1990 through 2011, tuition costs at four-year schools rose 300%.
Two thirds of graduates in 2010 owe an average of $25,250 each.
The total outstanding student loan debt load is greater than all outstanding auto loans and greater than consumer's credit card debts.
Think about that.
Where are the Jobs?
Now, look around. Where are the jobs they've been promised? How are they going to pay back the money they owe on the loans they took out to chase the promises they believed?
This is a national travesty. Schools are enticing students, and increasingly adult students, to borrow to advance their employment prospects. What they don't tell them is that they're going to be enslaved by the debt burden they take on.
Government-backed student loans (far and away the majority) - and, as of 2005 (dirty legislation lobbying by banks), private loans made by banks and other lenders - have to be paid back. Those loans can't even be discharged in a personal bankruptcy!
The government can garnish your wages, take your tax refund, and grab your social security check, and it punishes defaulted borrowers by labeling them as if they had criminal judgments rendered against then in a court. As of 2005, banks aren't any better to borrowers.
For-profit "technical" and "trade" schools are some of the worst offenders. They promise borrowers a better life through better skills and sometimes lend them the money to get to that fork in the road. It's a fork because not even half of trade school students graduate. But they still owe what they owe.
What's become of our system of higher education? Why are university presidents paid millions of dollars? Why are tenured professors getting paid so much? Why are tuition costs going up and up?
Oh, that would be because there's money available to students to pay for it all. Come on kids, get an education. Come on all you struggling adults trying to get new skill sets to get jobs, get an education. And, here's the money, you can pay it back with the good job you're going to get.
What's really going on here is that higher education has become a racket. Yeah, I said that.
I want to hear from you. What do you think? What's your experience? What do we have to do about where we're headed as a nation that needs better education facilities at more affordable prices?
Let's make this OUR election year platform. Write to me. Get involved. I'll do the heavy lifting, but I need your support and participation. You've got a computer and email, talk to me. Talk to the nation.
Let's make our voices heard.
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The Student Loan Bubble is the Next Subprime
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.
I've been teaching for 42 years and am still at it. I personally know teachers in the 30's or near-to, that still owe $30,000 on their college bills. They 1) have put off marriage, and 2) do NOTHING during vacations. They don't have money to function. Do we live to work or work to live??
Having taught university level myself, I know we had students there that did not belong. That particular university had, as it's largest course offering in each semester's schedule, "bonehead" courses. Yes, the largest offerings were in remedial English and remedial math !!! Our tax money at work !! The hundreds and hundreds of academically deficient students had to take those "bonehead"" courses in order to continue and be admitted to the college. And, for no credit ! Sad.
But, please, don't get me going on for-profit educational "institutions". How criminal ! Administrators making tens of millions of dollars. Criminal!
This country, public and private sector is run by criminals.
Even as far back as 40 years ago when I first started out, most employers would tell you that they preferred to teach people the skills needed on the job. No prior training needed. Just a basic good education, which most people can't get these days even in high school or college. All those "great paying jobs" are given to applicants for various reasons, none of which seem to be expensive prior training. I know folks making $100,000 a year with no college degree and who received all their training on the job. What a rip off of the public are these student loans at the public's expense. Most university presidents should be in chain gang work program earning money to pay back to the public coffers instead of receiving millions of dollars a year for misleading the public. In addition, many of the "professors" don't even teach. Much teaching is done by graduate assistants.
Shah,
This is a very important subject, especially now that we are at crossroads and the way we take as a society will change the result we get from our efforts and investment in life.
The very question now is if we really need to go to Universities to get an education we can get by ourselves from the Internet almost free of charge.
The state must redesign the education system to allow the people who are smart enough to get online and do High school in six months and qualify for a college degree in one or max two years.
As we get nearer to a world with scarce natural resources to support the current schemes, having millions of young people get an education online is the key to the future. It will be cheaper for all the parents to build an online classroom at home and have their kids attend the lessons online in free Youtube channels than going to school just to hear and see the same teacher and same lesson. I met a person who is 17 years old and is working in a double degree he received his M.D. and is finishing a Psychology degree, his parents took the kid off from school at very early age as they realized it was smarter and cheaper to get a private teacher to get him through elementary and high school, he completed high school in less than one year and almost all his education has been online.
I am working on my own classroom at home now, I got a good quality projector, have installed good sound to my PC and are ready to get my kids through the online system (High Scool). There are plenty of kids who have IQ greater than 120 who can do wonders if conducted properly to get an education online. As in all challenges to current paradigmas, having the discipline and constancy to go through all the work needed to get a degree, must kids will realize that it is far easier to get up and turn the PC and projector ON and finish a degree at very low cost instead of staying late playing online-games, soon they can get to work in any endeavour they decide to, by saving money and funding their own start up, rather than getting into debt and having to work their "RRends" off to pay for something they could have gotten for free.
Thanks and regards.
Great Article! I graduated from college a few years ago and am extremely fortunate to have gotten an academic scholarship so luckily I am not in debt. I can't say that for a lot of others that I know. I have a friend that's going to graduate from law school this year and has no idea where he is going to work in a few months. He, like countless other law students, are starting to settle for clerk jobs since there is such a huge amount of lawyers out there. I could only imagine what it feels like to graduate and be over $100,000 in the hole. It's like graduating with a mortgage on your life. This is the plight of us Millenials.
So i graduated from college with degrees in Finance and Management and have been working jobs that require a high school degree or less. Delivering sandwiches, working in retail, and a bank teller. College is a joke. It teaches you nothing that is valued by employers. It is all smoke and mirrors and a complete sham.
The mainstream media is starting to pick up on this issue more and more but they really only discuss the situation, and not so much the consequences. Do they think that the Millenial generation is going to be a strong consumer when theyre saddled with so much debt? A country thats 70% based on buying crap we don't need is going to be in for one hell of an awakening when the future is filled with indebted twenty and thirty somethings still living in their parents basement ?
How timely your excellent article. I set up a fund recently providing aid directly to students for tuition. Not much but it will help a few. In so doing I set up a meeting with the person who manages the portfolio of many millions of dollars for the same university. I printed out your article and will question him about it.
My suggestion is go three years to cheapest college you can find. Then the fourth year switch to a big university to get their name on your diploma.
You are absolutely right. It is a racket. They give out a mere 5% per year of their total fund. They raise tuition every year. There is no reason they can't give out 10% or 15% of their multi-millions each year and lower tuition at the same time.
I think we should flood the universities with emails or letters. Let them know we are on to them.
Thanks.
I am lucky my daughter goes to a private school at this point in time providing adequate amounts of scholarship money on a needs basis; in this case exceeding the cost of qualified education expenses (IRS definition). As a fungible scientific asset at a land grant university, I make only a modest income, such that my daughter's scholarship exceeds my take-home by many thousands of dollars. It is less expensive to send her to the private school than it would be to send her to my place of work, where she could get a discount based on my employment. And so far no loans; although this means some hardship, e.g. selling cars, walking to work, foregoing investing in retirement instruments, living small, etc.
Most unnerving to me is that student loans in collection or worth more to debt collectors than delinquent loans because the government guarantees the latter; just like the FDIC guaranteeing hedge funds and derivatives with recent financial legislation. Just as unnerving is that so many professional certifications and licenses now depend not only on passing a test, e.g. the bar, or the state's CPA exam, but also require university degrees and university credits. E.g. last time I checked California is the only state to offer a path to becoming a lawyer without a law degree; state CPA exams are worth nothing without a degree including so many hours of classes. In this age of internet that provides the autodidact with unprecendented opportunities for growth, the realization of this potential is blocked by an apparent mafia uniting big education, big government, and big finance. Where I work, there are student hunger programs, providing food handouts, cynically to keep the students accumulating debt that turns out to be in many cases morally and actually unpayable.