Subprime Student Debt Slaves: The Lowlife Trap of Higher EducationPolitics / Student Finances Apr 17, 2012 - 06:58 AM GMT
"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.
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.
[Editor's Note: Shah Gilani's free newsletter Wall Street Insights & Indictments has been an overnight success. This past weekend's edition on education was so powerful we decided to republish it today.
If you're not already signed up for Insights & Indictments, subscribe by clicking here.]
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