TNR: 'Don't Send Your Kids to the Ivy League'

Agree with cranberry. That was dumb.

A third of recent Ivy League grads have gone into finance and consulting in recent years, because investment banking / management consulting has gone through a decade + of paying outsized money for top recruits. At the same time, a lot of other professions have lagged in terms of opportunity and pay. The money is great and it's a career that gives you status at a young age. It's not a surprise that a lot of graduates who are in demand choose it. They figure they will pick up good skills and make a boatload of money while waiting to find something they really love.

If and when that changes, those top graduates will choose whatever other career offers them a payday.

Here is the thing about the Ivy League schools. We are waist-deep in an education bubble, being fueled by fiscal and monetary policy that has incentivized every kid to take on a huge debt load to get a college education. It has driven up the price of tuition -- colleges don't have to compete on price, because you have government backing of the loans (similar to government backing of mortgages in the early to mid 2000s) and the Federal Reserve manipulating rates since 2001, which has skewed the lending risk, even as more and more kids graduate drowning in debt that they will not be able to pay when rates inevitably rise.

That policy has created huge incremental demand for college. The demand it creates has filled up colleges, and as a result, the Ivy League schools that I had a at least a chance of getting into when I was graduating high school in the 1980s, have become impossible to get into. They have ridiculously low acceptance rates -- a huge percentage of high school valedictorians get rejected from Princeton, for example.

The spillover effect is that a second tier of schools that used to sit beneath the Ivies have gotten very difficult to get into too, and it filters on down to the schools below those schools, etc. As a result, a lot of schools that were a joke when I was that age are now relatively competitive in terms of acceptance.

That higher education bubble is going to pop eventually, and it is going to flush out the demand that is driving up tuition and keeping an insane number of schools filled with students.

When that happens, a lot of schools are going to struggle. But the Ivy League schools will still occupy the same place in the hierarchy they always have, and offer a ton of opportunity for anyone who graduates from one.

 

Those tuition declines are noise compared to what is eventually going to have to happen. Delinquent student loans have been creeping up -- kids are graduating to shitty prospects in the perma-recession we are in and are likely to be in for quite some time -- and it hit about $124 billion last quarter. The total student loan market total hit a record $1.08 trillion (yes, trillion), with implicit government backing of those loans -- because our Treasury is so flush with money and no debt, I guess.

This is what it looks like over time:



But this is nothing compared to what is going to inevitably happen -- rates are going to rise at some point, perhaps sooner than people realize. Either the Federal Reserve will FINALLY step away from the ongoing mess it has created and continues to create, or it will totally destroy the dollar, which it has needlessly damaged significantly already.

I'd anticipate them monetizing debt (including the student loan market) and creating inflation for as long as they can. It is all they know. If that happens, it will keep lifting stocks and bonds until a whole bunch of silly people get wiped out at some point, a la 1987 and 1999 (but worse), and it will keep the student loan disaster from collapsing a while longer.

But it is going to happen -- whenever that day comes. They will either take their thumbs off the scale, at which point rates are going way up to reflect the real economy, or they will create a dollar crisis we can't get out of, at which point rates are going to shoot way up to reflect the credit mess we have created. In a free interest rate market, rates would be significantly higher than they are.

When rates rise, the fantasy that has created a whole bunch of asset bubbles and lending / leverage bubbles instead of a self-sustaining economy is going to prove to be exactly that, a fantasy. And the student loan defaults are going to hit like a tital wave.

When the demand is pulled from the higher education market, because of those defaults, which collapse that lending market, tuitions will inevetibly come down. Colleges will have to compete in a very tough environment.

We can not create endless inflation and keep our heads in the sand. We are getting much closer to the end of the rope. The Fed has made money ridiculously plentiful and cheap -- $4 trillion dollars created out of thin air over the past few years. Aside from consumer price inflation anyone who fills a car with gas or shops at a supermarket knows about, it has largely manifested itself in asset inflation that benefits everyone who could already afford assets such as apartments in San Francisco or Picassos or rare sports cars or stock portfolios.

Government backing of student loans has meant that just like our national debt, those loans have are being monetized by the Fed -- which exists to do whatever it can to force down rates at this point to try to hold off a financial collapse / defaults.

That has just led to more and more lending and borrowing. In the case of college, that lending has not surprisingly inflated tuition -- there is almost a one-for-one correlation between the Fed's rigging of rates (only in one direction of course) starting with Greenspan in the early 2000s and the run up in tuition.

When the madness eventually comes to an end, tuitions will come down.