Sunday, September 9, 2012

More Doom and Gloom for Higher Ed

The Chronicle of Higher Education recently noted an alarming report in the New York Times:

"Many borrowers are struggling to pay off their student loans, and the debt collection industry is cashing in. As the number of people taking out government-backed student loans has exploded, so has the number who have fallen at least 12 months behind in making payments — about 5.9 million people nationwide, up about a third in the last five years."

The full NYT article may be accessed here.

For American college students, the situation could get a lot worse before it gets better. The relevant lending rates have been at artificial lows for several years... and not just the Stafford rate, a well-controlled subsidy that only carries a fraction of overall debt among our young people.  Of far greater concern are those lending rates related to long-term bonds: the 10- and 30-year yields are subject to market whim. A big bounce off those artificially low yields is inevitable, and the timing could be very cruel for our unemployed and underemployed young people. 

There are several reasons to anticipate a bond reversal:

* First, the Fed's "Twist" program is winding down, and any extensions will have diminished effect; the next round of QE will have some diminished effect on bonds and seems more likely to force investment into stocks and commodities as investors seek a hedge against inevitable inflation here and in China and the Eurozone; 

* Second, the Eurozone will solve its issues (by hook or by crook) and that will be the end of the flight to safety in US bonds... if this is starting to happen, we'll see it in continued reduced in Spanish and Italian yields as soon as next week;

* Third, core fiscal issues and Washington's procrastination will make US debt far less attractive overall, and could easily lead to Federal and State downgrades. Translation: the cost of borrowing is about to go up for everyone. When we see encouraging headlines about the recovery of the US housing market, we have to remember the other side of the coin: the financial industry needs lending rates and - rest assured- will eventually get them;

* Fourth, many equities related to manufacturing (auto, aluminum, housing) have been stagnant for some time, with several *trillion* dollars of investment on the sidelines due to prevailing uncertainty. Corporations and investment firms do not yet see the signal to take risk. When that money comes back on the table, the bond market will lose its allure, sending yields back up to realistic levels. Likewise the commodities markets, which are now coming back... by act of God (drought) and by act of Fed (more QE).

The timing of all of this is the cruel part for our young people. Bond yields will rise well before the job market recovers: the market works on speculation and knows very well where things are headed. So we could see a lot of these things unfold long before the jobs are created, leading to an increase in loan defaults. These effects will of course be most extreme among those students who don't have mom and dad's mortgage to bail them out... i.e. it will disproportionately affect underprivileged students.

So there is continued crisis ahead for our young people. And yet we see ~zero strategy posited by our colleges and universities... no responsibility taken to help students reduce cost and to find employment and clear out that debt before the market comes calling. It's as if higher ed actually *wants* full-scale bubble implosion and federal intervention.

...on top of which, some politicians actually think it's a great idea to herd more students into this dysfunctional debt cycle. Ah don't get me started ;)

No comments:

Post a Comment