Lockport Union-Sun & Journal Online

Columns

May 27, 2013

CONFER: When will the college bubble burst: Part 2

(Continued)

Lockport Union-Sun & Journal — So, how will they ever pay back their student loans? They won’t. In 2011, the Department of Education launched “Pay As You Earn” (PAYE). Under this program, loan holders will see their payments cap out at 10% of their annual discretionary income and, after 20 years, the loan balance will be forgiven. Come 2031 we will see the first of these forgiven loans hit the US Treasury to the tune of billions of dollars (I wrote about PAYE in 2012. Read the column here: tinyurl.com/ConferPAYE).

That harmful effect on our nation’s balance sheet will wane over time, though, because the college boom is setting itself up from a huge drop off in demand over the next few years. As I mentioned in last week’s column, universities are overpriced as a result of students’ easy access to money (government loans). Believing that an unlimited supply of candidates and money exist, the schools are charging what they can get away with. Those days are numbered.

The recession made Americans regain a sense of financial knowhow and they can see that these huge bills for tuition, dorms and books aren’t worth it. That’s why 70% of young Americans enter college, but only 31% of them ever complete a degree – 1 or 2 years is painful enough. One can expect that 70% trial rate to plummet over the next few years.

The fall has likely started. Look at how many colleges are now running campaigns to try to regain some of the money they’ve “lost” or how many are cutting some jobs to adjust to the recent slackening in demand. Those are immediate adjustments. Long term efforts will see falling or stagnant tuitions, downsized colleges, and massive cost-cutting across the board, making tens of thousands of faculty, staff, and support unemployed across the US.

That’s a bad thing, right? For them it is, but there will be a positive effect on the economy. As I wrote in 2010 (tinyurl.com/ConferGenX), Generations X and Y are a whole decade behind in their attainment of the rewards of adulthood (like a home and children), because they have to pay off their student loans. Take away that burden, and they can, at a reasonable age, buy things that they normally wouldn’t under the burden of student loans. While higher education might suffer, retail, housing, automotive, and other industries will get a shot in the arm. In this case, the economy won’t miss a beat and might actually improve as the bubble cracks.

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