Student Loan Debt Bubble?

You often hear that a college education in this country is a ticket to a better and more rewarding future, and it often will be. However for it to be more financially rewarding you need to keep a handle on its costs. Especially if you intend to one day have a home or a family. These are big ticket expenses that might have to be deferred a number of years if you allow educational expenses to engulf you.

At the moment there is 605.6 billion in federal student loan debt outstanding and 167.8 billion in private student loans outstanding (for the first time exceeding Credit Card debt), according to Mark Kantrowitz, publisher of FinAid.org and FastWeb.com. The average debt load carried by the graduating undergraduate stands at $24,000 dollars at a time when they are entering a world where the unemployment rate is a record high of 8.7%. For those that have already graduated and been working they already understand the tough choices one has to make financially to responsibly handle the student loan debt. The questions we should be asking are three fold: (1) How did we get here?; (2) Why it should be receiving major media coverage, and (3) What can be done about it?

How did we get here:

We got here like we did with most of our financial problems in the recent past, easy credit. However what makes this situation unique is that the costs associated with education have not been contained and have been allowed to increase at twice the rate of inflation. With tuition costing as much as $26,000 a year for a public or Private 4 year university last year, a lot of present students are finding themselves in the position to have to borrow more, transfer to a more affordable institution, or move home and attend a Community College.

In order to compete, Universities invest more in lavish infrastructure improvements to attract potential students and keep current students. These investments often make the college experience both rewarding and enjoyable, but it also gives one the illusion that this is what life will be like when you leave the sheltered walls of University life. The model as it currently exists is unsustainable, especially if this country wants to remain competitive economically over the long term.

Why it should be receiving more media coverage:

When we hear about financial problems nowadays we hear about foreclosures, financial banks, municipalities, and the unemployed. However what seems to be conspicuously absent from the conversation is that the escalating Student Loan debt in this country could be a future bubble that if it bursts will stamp out any economic recovery. The debt levels carried by both past and current students limit financial choices and at the same time could prevent a recovery from taking place in the housing market.

In 2010, there was an average of 330,000 foreclosure filings, 46% of them taking place in Nevada, Florida, California, and Arizona. The unemployment rate nationally stands at 9.8%, 8.7% for recent graduates. Wages have remained fixed with little appreciation on average. Taken together these statistics are not ingredients for a successful financial recovery.

If wages remain at present levels, and unemployment persists, then how is the college graduate couple, between the ages of 23-40 suppose to buy up this outstanding housing inventory when they have a combined $46,000 dollars in debt before they start.

The only way out of the housing crisis is for wages to increase, employment to pick up at a vigorous pace, and home prices to increase so people no longer feel like they are underwater. Otherwise the Young Professional Couple or Single person can not be expected to do their part and buy up the existing inventory and replace the baby boomers that choose to downsize their homes as they retire.

Above we discuss the norm, not the outliers. There are those out there that have over $100,000 in student loan debt, have been earning at rates far below their education level, or those that happen to get laid off. For those it can be a much harsher existence. That is because the rules of the game are written to benefit the lender, and we subsidize demand in higher education and not supply.

I understand those out there who say you did not have to pay that money, did not have to get in over your head to finance your education, and thus are solely responsible for your current fiscal situation. However, I have some counter arguments for you to consider:

(1) The Guidance Counselors, Admissions Officers, and Financial Aid Officers will all tell you that Student Loan debt is “good debt” that will improve your station in life and thus they encourage you to borrow. In a climate where tuition rates are double inflation schools use the “illusion” of aid to hook you then reduce it systematically each year leaving a student in a situation where borrowing or transferring are the only options to continue their studies.

Remember that Student Loan debt as a pure Investment is rather “poor”. It is illiquid and has no equity, and unlike most consumer debt vehicles cannot be discharged in bankruptcy.

(2) For those that get laid off and possess Private Student Loan debt there is no mechanism that allows you to avoid default if you cannot repay. It is the only financial loan instrument where the lender is sheltered from responsibility for the loan, but enjoys the power to garnish wages, seize income tax refunds, garnish Social Security benefits, and revoke Professional Licenses (bizarre if goal is repayment of principal plus interest). For those with Federal Loans they enjoy more flexibility and recent legislative caps, but if deferments have been exhausted the Borrower will find themselves in the position where they will have to forbear and that interest will “Capitalize” and the compound interest will be added to the principal and the vicious cycle will continue thus increasing the repayment amount of the loan exponentially. In these situations the rules of the game benefit the lender and greatly restrict the Student borrower’s future financial options.

What can be done about it:

First, we can address the cost of Higher Education. Educational Institutions across the board should freeze tuition rates and bring them in line with the cost of Inflation. This can be done by reworking the way colleges are provided government dollars. For those Public Universities that were able to cut costs and cut tuition rates they would have access to grant dollars.

Second, Guidance Counselors and High Schools should be required to provide a financial resource that could lay out the costs associate with a student’s educational choices and devise a plan to pay for it. If they do not come from a background where parents will contribute or foot the bill then they should be presented a plan that includes a “pay as you go” option and explains to students that school can be paid for in “monthly” installments thus avoiding the associated interest charges.

Third, for those with existing student loan debt that are not current students Congress should debate the wisdom of “forgiving” a percentage of this outstanding debt and freezing interest rates of those unable to repay. This would prevent the problem of compound interest and allow the members of this vast population to help contribute to “digging” this country out of its current financial crisis. If Young College educated Couples and the Single College educated person have to “delay” major life purchases then our recovery will continue to drag along.

Fourth, Congress should strongly consider passing HR 5043 – “Private Student Loan Bankruptcy Fairness Act of 2010 (D-Steve Cohen) and S.3219 – “Fairness for Struggling Students Act of 2010” (D-Richard Durbin) both of which will allow students presented with challenging circumstance with the option of discharging the debt in bankruptcy.

We live in a challenging time and we need our best and brightest to play a part in helping us collectively put our nation back on solid footing. In order to do this we need to build a solid foundation of fiscal responsibility. This can only be done if we: find a way to make Higher Education more affordable without the need for incurring debt, provide financial literacy resources to aspiring students at an early and appropriate age, and avoid being punitive to those that are dealt a bad hand.

Has China’s ascent to World Banker compromised the U.S. ability to compete in the development of Green Technology?

For the U.S. the world is a changing place. In the aftermath of the Great Credit Crisis, the country is beginning to realize how financially fragile and vunerable it is. As a major debtor nation its ability to invest in long term capital projects, R&D, and infrastructure is compromised should its relationship with China be affected.  How did it get this way?

            I am no economist, so my opinion is that of a layperson.  It seems to have started when China manipulated its currency (renminbi, the “people’s money”) to keep prices of its exports artificially low; coupled with the U.S markets and consumers heavy reliance on debt and speculation to create wealth.  As a result, from the period of 1999-2009, China was able to amass a large current account surplus. This surplus allowed China to purchase 2.4 trillion in foreign exchange reserves, with a little over 2 trillion of it being held in U.S. currency and debt. This has made China the de facto banker of the U.S.  How has this affected the U.S. ability to address human rights, China’s “technology for markets” strategy, and foreign policy goals?  The simple rather uncomplicated answer is it has weakened the U.S.

            Here is a recent example. In his swearing in ceremony, January 2009, Timothy Geithner made comments critical of China’s currency manipulation, then as a counter attack China made comments questioning the security of Chinese investment in U.S. dollars and bonds in March, and in April, Geithner came out saying their was no currency manipulation.  On this political and economic issue China was able to use its position as U.S. Banker to make the U.S. eat its words.

            Today it is its rhetoric that can affect the U.S., but China’s control of over 2T in U.S. dollars and debt has made it vunerable to a financial attack by China.  What would happen if China decided to cut off credit because it viewed U.S. securities as unstable?  It would cause a collapse of the U.S. markets. However, this is merely a possibility, as the reality is that the U.S. economy is the largest Chinese market for its exports.  The reliance of China on its export capitalistic model demonstrates that the extreme while possible is unlikely. However, if China over time were able to “create” an alternative reserve currency as it stated in March of 2009, it would greatly diminish U.S. power, provided that the alternative reserve currency were one that was perceived to be stable over the long term.  This is the position the U.S. has put itself in as the result of running such large budget deficits and refusing to make tough economic and social decisions and passing those decisions on to yet born generations of U.S. citizens. However, what is likely to happen in the short term?

            What is likely is that China will use its power to get concessions from U.S. corporations and government that it would not otherwise be able to get.  For example, the United Steel Workers recently filed a Section 301 petition against China’s green technology practices as infringing on World Trade Organization Rules.  Part of this grievance questions China’s use of its “technology for market” strategy.  At the moment, Chinese law gives it the right to approve or reject joint venture agreements, and the governments position is that the transfer of advanced technology should be part of such agreements.  So in essence if you want access to Chinese markets and funds in China you need to surrender control of technology as a condition of entry.  This is violative of WTO rules, but the question is how strong of a position is a debtor nation in when a creditor nation is in the position of dictating the rules of the game.  This scheme as used in the Green Technology sector puts the U.S. in a position where it may surrender valuable Intellectual Property rights in exchange for access to the Chinese market.  This is not a viable long term strategy for U.S. corporations or the U.S. government.      

            For those that believe the U.S. should bring all that manufacturing capacity home and build those Green Technologies in Silicon Valley, Detroit, and the Hi Tech corridors across America; lets not forget that over 90% of the raw materials that go into producing the Solar Panels, Wind Turbines, Advanced batteries, energy efficient lighting and the like are controlled, produced, and found by and in China.  So we can build it here, but we still have to get the materials there, and how much leverage do we have as a nation when we are 2T in the hole to our creditor? 

            This is a simple analysis of a complex set of circumstances that has been put together using the following resources:

(1)  The Shadow Market, Eric J. Weiner

(2)  The World is Curved, David M. Smick

(3)  United Steel Workers Section 301 Petition against China in the WTO

(4) February 25, 2010 Testimony of Daniel Drezner, Professor of International Politics, The Fletcher School of Law and Poltics, Tufts University, before the U.S.-China Economic and Security Review Commission.

Time for the Creative class to heed its call

The World needs more Howard Roark’s:

            In Ayn Rand’s classic the Fountainhead it was the creator that received a bum rap but ultimately prevailed.  It was the collective conscience of society that dictated the terms of how people were supposed to live in a society.  To the “Ellsworth Toohey’s” new idea’s brought forth by rugged individualism were frowned upon.  The inventor of the truly innovative was discouraged and not encouraged.

            Well, I recently read, an Article in Wired Magazine about Elon Musk.  He, my friends, is an innovative CEO that is trying to help shift our society away from the Oil and Gas Infrastructure that fuels our transportation to a more electrified one. If you don’t know him he was a co-founder of Paypal that received 180 million after its sale.  His plan is to ultimately produce electric vehicles for the masses, but first had to prove that an electric vehicle could be sexy which he did with the Roadster.  Now he is on the verge of producing a Luxury Sedan called the Model S that is being built from the ground up using new, novel, and innovative designs and know how. In fact, Tesla recently purchased a former Toyota plant to mass produce these vehicles and future vehicles.  The process has not been easy, and according to Wired magazine “Musk was down to his last 20 million of his personal fortune” in 2008 at the age of 37.  He put more money into the company and with contributions from investors was able to secure 40 million in Emergency Funds.  These actions bought the time Musk needed for a deal with Daimler for battery packs to be reached and an investment in Tesla itself to be secured, and government loans for the development of the Model S from the Advanced Technology Vehicles Manufacturing Loan Program to come through. Musk did not fold, did not walk away when it got really tough, and with the Roadster proved that an American Start Up could produce an electric vehicle (even if for the upper crust).

            Elon Musk displays the traits and has assembled a team of the creative class of rugged individuals that Ayn Rand’s character Howard Roark stood for in the Fountainhead. For “it is the integrity of a man’s creative work that is of greatest importance” and man’s achievements like the Roadster and other electric vehicles like it that allow us to benefit from that creative energy.  At this moment we are at the cusp of an era of Electric vehicles that are all following in Musk’s and Tesla’s footprints.  The only thing that can derail this movement toward the electrified vehicle is the collective conscience of the consumer to engage in group thinking and choose to hold onto the irresponsible gas and oil transportation infrastructure, that gas prices drop precipitously and encourage the SUV larger is better mentality, or a lack of political resolve to keep the current flowing positively toward a more responsible energy policy.  After all it is individuals like Musk and his “creative class” of rugged individuals that demonstrate why policies in the Energy arena should be slanted in favor of those individuals and creators who actually build useful beneficial products.

Why we need to play catch up in Renewable Energy

Most of the great Inventions that Electrified and motorized the world were developed in America.  What America was great at was taking its Intellectual Property and bringing it to the mass market.  That manufacturing capacity is what allowed America to out produce its enemies in World War II.  So, where did America drop the ball on Renewable Energy?  America dropped the ball because it chose the Race to the Bottom and low labor costs over a long term strategy that kept know how and manufacturing capacity on its own shores. 

            In the late 1970’s during the Carter administration the U.S. was producing 85% of the worlds wind energy, but the tax incentives and programs established then were not sustained.  The oil prices dropped and we failed to keep the innovation moving forward.  The tax credits that encouraged innovation in this area were approved for short term durations that did not encourage private investment.  This caused the U.S. to lose its lead in this area.  Although the U.S. uses more Windmills than any other nation; it has to purchase more than half of those windmills from foreign companies.  Today, General Electric is the only top ten wind energy technology company that calls the United States home. 

          It is time that America once again takes the lead and sets some ambitious goals by leveraging its Intellectual Capital to create Intellectual Property that can be mass produced by American factories to supply local wind-farms their turbines.  What a novel idea to have American factories producing the technologies and the machinery needed for the Renewable Energy revolution.

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