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  • Chris Graham


Today I want to get into the student loans discussion. It’s been a hot topic for a few years, so we're going to talk about some of the data but then also some of the supply-side economics that are impacting the market around education.

There are $1.53 trillion dollars in student loans outstanding today, which is probably why it’s such a hot political topic, and part of the reason is because default rates are at 11%. For context, the highest mortgage default rates during the mortgage crisis of 2008, 2009, and 2010 were right around 11%, but they have since come down dramatically and are less than 2%. Student loan default rates have stayed at 11%. All other types of debt have lower default rates than student loans.

41% of people, with outstanding student loans say they will delay a home purchase because of their student loans. That's highly impactful to our overall economy. There’s been a 20% drop in home ownership among college grads ages 24 to 32 from 2005 to 2014. 26% delay marriage, 31% delay having children, and 37% percent live with their parents. Why is this? It doesn’t make sense because in fact, shouldn't a flush of cash to produce college-educated graduates create more ability to do these things? So, why are we seeing the opposite happen and seeing less economic independence?

Well, what happens when you flush a market with cash? Schools do a couple of things. First, they raise prices. This growth of debt from 2004 at $350 billion, to 2008 at $625 billion, to $950 billion in 2012 and then today at a whopping $1.5 trillion is a 15.6% compounded annual growth rate in the amount of cash flushed in the market. That’s astounding! So, what happens next? Well, the first thing you do is you raise prices so that the cost of education goes up. But what if you actually can't raise the cost fast enough to absorb all the cash? Then, you expand degree offerings. I’m not trying to pick on the University of Kentucky, but they have some of the most ridiculous programs (I know this because I know a couple of people that actually go there). I've seen that Family Sciences is now a degree at University of Kentucky. They've expanded their graduate programs to 138 graduate degrees versus 38 just 20 years ago. These expanded offerings to absorb cash are often in areas where there's no additional productivity and where you're going to get behind in your economics. So how can we underwrite education more intelligently?

What we're forgetting is the second, third, and fourth layer effects of any action. In this case, the action of flushing a market with cash. There is a program called an ISA with University of Purdue and Utah, just to name a couple of universities that have this. It’s an Income Share Agreement where a percentage of your income for a period of years after your graduation will be shared with the university and in exchange, you graduate with no student loans, so essentially you can go to school for free. This is an underwriting program where they will rate the degrees based on the economic success of the degrees. A lower level degree that typically has less economic success will have to pay for a longer time at a higher percentage whereas students pursuing a more successful degree will pay for a shorter time at a lower percentage rate. What you’ll find when you look at these tears structures of ISAs is that the STEM degrees are at the very top as far as predicted economic success, so things like mathematics, engineering, and other real-world, productive degrees. At the very bottom are things like family sciences, gender studies, and all of these degrees that really provide no value. Those are the cause of this delayed economic maturity. Looking at these ISAs (see the chart below) and taking into consideration the expanded course modes, what you're getting are these second and third layer effects of flushing a market with cash. One man's trash is another man's treasure, right? This is a version of supplies economics: flush the market with a supply of cash and then create demand to absorb that cash. It's actually Pretty fascinating. It might not be helpful in regards to a particular student loan situation, but it might be helpful in reviewing a flush of cash into any market and how you might get unintended consequences.

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