The Worst Investment in History

Posted by Ian Cooper - Thursday, May 12th, 2011

The Student Loan Bubble

We've been had by the biggest scam in U.S. history...

We believed the “experts” who encouraged us to borrow for college because it would pay off with great salaries in a robust workforce — much like we believed owning a home in 2007 was a great investment.

We ate up the notion that a college education was the key to getting a great job and living the “American dream”.

But as millions of students are realizing, the rosy picture that was painted for diploma-holding members of society isn't as rosy as it was made out to be...

Graduates are struggling to pay off hefty student loans as they stock shelves and wait tables.

We were had — and we may only have ourselves to blame.

What happened to pursuing an education without the clobbering $24,000 average debt that takes close to 20 years to pay off?

(That number may not sound bad to some of you, but it's quite a jump. In fact it's an 8% increase over the last year, and a 47% increase over the last ten years.)

Thus, we are absorbed by a trillion-dollar higher education debt bubble that's bankrupting college graduates and burying the rest of us in bills we simply can't pay.

Who Didn't See this Coming?

The same warning signs that preceded the housing bubble burst of 2007 are now rapidly unfolding in the higher education bubble.

The price of tuition is up more than 900% since 1978, while household income has increased just 150%.

Only 10% of all graduates can find work out of college. Unemployment for college graduates sits at the highest rate since 1970, leaving many students with no jobs and tens of thousands in debt. And rising tuition costs even make inflation look tame...

Consumer prices rose some 30% over the last 10 years, while college costs have risen some 47%.

rising student debt
Tack on rising costs at most colleges across this fine land of ours — coupled with a “recovering” economy — and it's really no surprise students are taking out more private loans... or the infamously unpredictable adjustable rate loans, which took down housing.

There's real trouble ahead for graduates who are competing in the toughest job market in years.

My cousin David, who will have to start paying back $1,150 a month for student loans, on top of a mortgage and mounting credit card debt, simply can't find a job. And thousands more are in the same sinking boat.

Without a paycheck, those loans won't be paid back, either, resulting in possible default rates of 15%. And the skyrocketing cost of commodities and energies serves as an added burden to students, as well as to the greater population.

Congressional Cuts

A current proposal before the House could cut the federal Pell Grant program, slamming the door in the faces of tens of thousands of students.

In a country that's touted the significance of higher education as a core value, House Budget Committee Chairman Paul Ryan wants to cut some $5.7 billion from the program.

The proposal would also cut back on the average grant and tighten eligibility requirements, lowering the maximum grant from $5,550 to $3,040 a year — its lowest amount since 1998. It would also remove 1.4 million students from eligibility.

This would force students to apply for even more loans that may not be paid back, resulting in even more student debt load and possibly higher default rates, which we're already seeing...

Of the students that began repaying their loans in 2008, 13.8% of them have defaulted. For-profit schools saw 25% of their graduates defaulting after three years. And public, four-year schools saw 10.8% of their graduates default after three years.

As of 2010, outstanding federal and private student loan debt totaled nearly $760 billion. Only 40% of this amount is being repaid; the rest of it was in default or deferment (meaning payments and interest are halted), or in forbearance (meaning payments are stopped while interest still accrues).

A Bursting Bubble... and Beyond

What do you think will happen when we can't pay back our $14 trillion debt — let alone the $433 billion in interest obligations?

Is it really surprising to then learn that applications for community colleges and other public institutions have skyrocketed more than 400%?

Or does it shock you to learn non-traditional online colleges are becoming successful at challenging higher-priced private schools?

Students can't afford the higher priced schools any more... especially not if the Pell Grant program takes a hit.

Tuition must drop, or there will be limited demand at pricey schools. And the schools won't be the only ones suffering from the education meltdown. The lenders could take a hit, too.

Stay Ahead of the Herd,

Ian L. Cooper
Editor, Wealth Daily

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