higher education

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Peter Thiel's Solution to the Student Loan Bubble Makes a Lot of Sense


Peter Thiel, Co-Founder of PayPal

"Education is a bubble in a classic sense. To call something a bubble, it must be overpriced and there must be an intense belief in it. Housing was a classic bubble, as were tech stocks in the '90s, because they were both very overvalued, but there was an incredibly widespread belief that almost could not be questioned - you had to own a house in 2005, and you had to be in an equity-market index fund in 1999." ~ Peter Thiel on higher education for NRO.

Peter Thiel is a highly successful entrepreneur, venture capitalist, hedge fund manager, and perhaps most notably co-founder of Internet giant PayPal.

He is also a staunch libertarian, and anything but meek about sharing his philosophic point of view.

When it comes to higher education in America today, Thiel is less than impressed:

"It's basically extremely overpriced. People are not getting their money's worth, objectively, when you do the math. And at the same time it is something that is incredibly intensively believed; there's this sort of psycho-social component to people taking on these enormous debts when they go to college simply because that's what everybody's doing."

Like Thiel, we at Money Morning believe that America has been swallowed by a student loan bubble.

We've given you the numbers. We've discussed its uncanny similarity to subprime. We even tracked one student's epic journey to discharge his student loan debt.

And, like Thiel, we've thought up some reasonable alternatives to the blind pursuit of higher education.

For instance, we suggested starting a business. There is something about real-world experience that can't be replicated in higher education right now.

Just look at the commentary by some of the business elite.

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Student Loan Interest Rates Still Tangled Up In Congress

Student debt in the United States has already surpassed the country's auto loans and consumer credit card debt. A student loan bubble looms on America's horizon, and promises dark times should it ever burst.

And earlier this month, the student loan problem worsened.

Federally subsidized Stafford loan interest rates doubled from 3.4% to 6.8% after Congress missed the July 1st 2013 deadline, and instead recessed for the Independence Day holiday.

The failure sparked frustration amongst student advocates nationwide.

However, Congress is able to retroactively "fix" the damage done by the soaring rate increase - that is, if Democrats and Republicans can come to an agreement on the matter.

So far, no dice: an emerging bipartisan Senate deal hit a stumbling block last week.

Even though the House was able to pass its own plan in May, the Senate is still at an impasse.

Democratic senators are avoiding the prospect of trying to "balance the budget on the backs of students."

On the other hand, Republican senators want a plan that doesn't risk adding huge sums to the deficit.

Here's what we've got so far:

The tentative deal ties Stafford loan interest rates with rates on the 10-year U.S. Treasury note.

Additionally, there would be a capped interest rate of 8.25% for undergraduates and 9.25% for all other loans.

Republicans would get a link between the financial markets and borrowing terms through this proposal.

Democrats would get a guarantee that interest rates would not reach 10%, their proverbial line in the sand.

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Student Loan Interest Rates Double While Congress Takes a Vacation

Today (Monday) federally subsidized Stafford student loan interest rates doubled from 3.4% to 6.8% after Congress failed to reach that would've maintained lower rates by the July 1st deadline.

Monday also marks the beginning of the Independence Day congressional recess, sparking outrage among student advocates as Congress goes on recess without resolving this important issue.

Congress could retroactively "fix" the damage done by the soaring rate increase, but so far no deal is in sight.

The House has already passed a student loan proposal, but the Senate remains divided.

Particularly, Senate Democrats are divided amongst themselves over two different plans, and cannot yet present a strong front on the issue.

Sens. Kay Hagan (D-NC) and Jack Reed (D-RI) have a plan that would extend the 3.4% rate for another year, while also retroactively reducing the rate.

But a bipartisan group of Senators has a different, more long-term solution. They want to permanently tie student loan interest rates to the 10-year Treasury note borrowing rate.

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How Higher Education Can Be the Worst Investment Ever

Benjamin Franklin once said, "An investment in knowledge pays the best interest."

But nowadays, you would have to be delusional to assume that an investment in higher education will definitely pay off.

After spending copious amounts of time and money on a college degree, the graduate unemployment rate is a now staggering 14%. What's more, even those who have gotten a job often settle for work that's hardly commensurate with their newly-minted education.

That has helped to create a trillion dollar student loan bubble, with the average debt per student up 70% since 2004.

It calls into question whether or not a college degree is worth the investment these days.

Here are the facts, I'll let you decide...

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How Student Loans Became a $120 Billion Government Bonanza

Business has been good for the federal government when it comes to student loans.

Over the past five years, student loans have generated profits of $120 billion for the Department of Education.

And the latest projections from the Congressional Budget Office (CBO) put the take from student loans for the 2013 fiscal year at $48.6 billion - helped along by a change in 2010 that eliminated the middleman and made the Education Department the direct lender for all government-backed loans.

It means the government will reap more in profits from student loans this year than any of the nation's largest corporations. Last year, for example, the most profitable company was ExxonMobil (NYSE: XOM), which reported income of $44.9 billion.

The money is rolling in partly because the Education Department has stepped up efforts to collect on delinquent loans, but mostly because the U.S. government can borrow money far more cheaply than the students to whom it is giving the loans.

The government's student loans now carry an interest rate of 3.4%, which has proved plenty lucrative.

But unless Congress acts soon, the interest rate on government student loans will double to 6.8% as of July 1. (The temporary 3.4% rate was supposed to expire last July, but last year Congress extended it for one year.)

Meanwhile, 10-year Treasuries go for about 2%, and 30-year Treasuries for about 3%.

That widening gap in rates could drive government profits even higher, but at the risk of appearing to exploit a struggling and vulnerable segment of the population.

"As the pomp of graduation fades, many college graduates become keenly aware of their financial circumstance: in debt," Ernie Almonte, chairman of the National CPA Financial Literacy Commission of the American Institute of CPAs, said in a statement. "They start out with an anchor that slows their progression toward future goals. It's a difficult reality confronting a growing number of people."

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Subprime Student Slaves: The Lowlife Trap of Higher Education

"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?



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