The next bursting sub prime bubble........

Two article addressing the next sub prime credit meltdown...... student loans......

The first

It's a story of an industry that may sound familiar.

The buyers think what they're buying will appreciate in value, making them rich in the future. The product grows more and more elaborate, and more and more expensive, but the expense is offset by cheap credit provided by sellers eager to encourage buyers to buy.

Buyers see that everyone else is taking on mounds of debt, and so are more comfortable when they do so themselves; besides, for a generation, the value of what they're buying has gone up steadily. What could go wrong? Everything continues smoothly until, at some point, it doesn't.

Yes, this sounds like the housing bubble, but I'm afraid it's also sounding a lot like a still-inflating higher education bubble. And despite (or because of) the fact that my day job involves higher education, I think it's better for us to face up to what's going on before the bubble bursts messily.

College has gotten a lot more expensive. A recent Money magazine report notes: "After adjusting for financial aid, the amount families pay for college has skyrocketed 439 percent since 1982. ... Normal supply and demand can't begin to explain cost increases of this magnitude."

The second

Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry. I was wrong. The for-profit education industry has proven equal to the task.

The for-profit industry has grown at an extreme and unusual rate, driven by easy access to government sponsored debt in the form of Title IV student loans, where the credit is guaranteed by the government. Thus, the government, the students and the taxpayer bear all the risk, and the for-profit industry reaps all the rewards. This is similar to the subprime mortgage sector in that the subprime originators bore far less risk than the investors in their mortgage paper.

In the past 10 years, the for-profit education industry has grown 5-10 times the historical rate of traditional post secondary education. As of 2009, the industry had almost 10% of enrolled students but claimed nearly 25% of the $89 billion of federal Title IV student loans and grant disbursements. At the current pace of growth, for-profit schools will draw 40% of all Title IV aid in 10 years.

How has this been allowed to happen?

The simple answer is that they’ve hired every lobbyist in Washington, DC. There has been a revolving door between the people who work for this industry and the halls of government. One example is Sally Stroup. In 2001-2002, she was the head lobbyist for the Apollo Group — the company behind the University of Phoenix and the largest for-profit educator. But from 2002-2006 she became assistant secretary of post-secondary education for the Department of Education under President Bush. In other words, she was directly in charge of regulating the industry she had previously lobbied for.

I can hear the barney Frank's in five years blaming the for profit college biz for this dilemma when all they were doing was chasing the money the feds have been throwing around for decades.