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Doom and Student Debt

Posted September 17, 2015

“There's a growing education bubble, with rising tuition and students taking out loans they might not be able to pay back... it's going to pop.” — Billionaire Marc Cuban

In 1986, I was stationed on an aircraft carrier that was in dry dock in Portsmouth, Virginia. I rented a modest house with a roommate, and the rent was roughly the same as our combined housing allowance (BAH).

The month before the Navy raised the BAH allowance for the year — I think it was $87 a month — my landlord raised the rent that exact amount.

Go figure, right?

The same thing has been happening with college tuition. Every politician since Carter has been “putting children first” or “making college more affordable.” They have done this by making cheap loans available to anyone with a pulse.

In the 1970s, many people went to college with the proceeds of what they earned painting houses or flipping burgers during summer break.  

That is now impossible. Colleges and universities have raised the cost of tuition every year at well over the cost of inflation. In fact, according to Bloomberg, it has gone up 1,120% since 1978. That's ridiculous.

Flash and Sizzle

They used the money to hire micro-aggression administrators and women's studies professors. They built climbing walls and football stadiums.  

Sadly, many more idiots now go to college. They have $40,000 parties and drop out without a degree but with plenty of debt.  

Other more serious students — those in the middle class who weren't rich enough to just pay the bill nor poor enough to get special deals — got stuck owing the government ever-increasing amounts.

There are now 40 million people in the United States who have monumental student debt.

Student loan debt has increased by 84% since 2008. It now stands at $1.32 trillion, and it is growing rapidly. That's more debt than car loans or credit card debt. And it is the only type of debt that is not decreasing.

The sad fact is that even while tuition went up 12-fold, wages have stagnated over the same period. It is no wonder that many of these loans cannot be repaid, nor can they be discharged in bankruptcy.

A recent Experian report says that 39% ($417 billion) are in deferment. That is a staggering sum.

Short the Student Loan Bubble

There is no doubt that there is a student loan bubble. Already, many colleges like Sweet Briar are closing their doors.

Bloomberg is reporting that the number of colleges that have closed or been acquired every year has recently doubled. Many students say it's just not worth it.

The billionaire Marc Cuban says, “There's a growing education bubble, with rising tuition and students taking out loans they might not be able to pay back... it's going to pop.”

Cuban is pushing for a cap on student loans. He thinks it is going to happen, and it will get ugly.

He goes on, “A tiny drop in enrollment can have a big impact on a college that charges $40,000 a year. Losing 500 students would put such a college $20 million a year short. Losing 1,000 moves that number to $40 million.”

Again, the statistics are daunting. There are 1.82 million people that owe more than $100,000 in student loans.

Among graduate- and professional-school students, 15% owed at least $100,000 upon graduation — more than double the share just four years earlier.

That is a crazy number, and it can't continue. Something that can't go on won't.

I'm Just a Bill

Sen. Lamar Alexander (R., Tenn.), chairman of the committee overseeing education, has proposed reinstating loan limits for grad students as part of an overhaul of education policy that could face votes later this year.

If caps on loans pass, many of the lower-ranked schools will go under.

Right now, I'm working on a report that will give you a unique way to profit from the end of the student loan bubble. I'll send it around in a few weeks.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.

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