Higher Ed Bubble to burst, Sallie Mae posed to take full advantage of it.

http://www.examiner.com/x-1760-Baltimore-Investing-Examiner~y2009m8d10-Higher-Education-Bubble-The-Next-Bubble-To-Burst

Interesting article today, 10 Aug 2009, in the baltimore examiner, about the comming student loan bubble, and how it is about to burst.

It's every investor's dream: buy into a theme before any one else has caught on; ride it all the way up until it gets bubbly; sell to the suckers who bought at the top.

It's like buying housing names in 2004 (as we did), only to sell and go short in 2007 (as we did). . . or oil prior to the rise to $147 (again, as we did). . . or even dot-coms before the bubble burst.

Yep, we've become all too familiar with the term "bubble" in recent years — that unsustainable phenomenon pumped full of irrationality and over-valuation only to burst and trigger monumental downturns.

We've seen it happen in Treasuries, financials, commercial real estate, autos, and credit. We watched in tortured silence, as an over-extended housing bubble popped, triggering a seismic credit meltdown.

And pretty soon we'll have bubble bubbles, where our heads explode over the financial chaos.

And now. . . unbeknownst to many, as we deal with banking and housing issues. . .

Higher Education will be Next

So say Joseph Marr Cronin, secretary of education in Massachusetts, and Howard E. Horton, president of Boston's New England College of Business and Finance.

And there is a fear of mergers, closures. . . even bankruptcies of colleges that took on too much debt, based on a unbalanced system of student loans paying for rising tuitions.
And we agree. The next bubble to burst will be higher education.

No doubt about it.

You see, higher education is big money for institutions and lenders alike. . . and they're in big trouble.

What most people who are not involved directly in higher education fail to understand is that these institutions and lenders are in the same sinking boat that banks and other financial companies are in. Assets are drowning. And debt and costs are rising.

So is it really surprising to then learn that applications for community colleges and other public institutions have skyrocketed some 440%? Or does it surprise you that non-traditional online colleges are becoming successful at challenging higher-priced private schools?

Not at all.

Get this: According to a Forbes.com article, college tuition has increased by more than three times the rate of inflation over the last 20 years, despite flat-lining U.S. wages. The average tuition at a private four-year school is up 6.6% yearly in 2007 to $23,712, according to the College Board. . .

And it could haunt students and America for years to come.

Couple tuition with living expenses and students (and in most cases, their parents) are looking at about $50,000 for a year of school. For the bubble to not pop, tuition must drop. . . or there will be limited demand at pricey schools.

But the schools aren't the only ones suffering from this education meltdown.

The Lenders Could Get Crushed, Too. . . by Two Things

One: The education bubble, fueled by easily-lent money and over-borrowing, has created yet another bubble: student loans.

The last days of college are supposed to be the happiest time of year for thousands of students. Instead, there's trouble ahead for graduates who are competing in the toughest job market in years.

Only 19% of them can find a job, as compared to the 50% in 2007 and the 25% in 2008.

And then there are those graduates, like my friend Mikey — who will have to start paying back $1,150 a month for student loans, on top of a mortgage and mounting credit card debt — and who simply can't find a job.

And thousands more are in the same sinking boat; thousands more that won't be able to pay back student loan debt.

As usual, the numbers tell the whole story. According to the College Board in early 2009, total student loan borrowing more than doubled between 1998 and 2008. The numbers are staggering. We're talking about $85 billion in loans, as compared to $41 billion ten years ago.

Privately funded student loans have risen, too, from 7% in 1998 to 23% of all student loans in 2008. It makes for quite a brew for cash-strapped Americans this year, who are already saddled with unemployment and loss of income. Sallie Mae, for example, had a delinquency rate of 9.4% in Q3 2008, as compared to a rate of 8.5% just a year earlier.
I'm willing to bet that rate gaps higher as the months go by.

The student loan market has been, is, and will be riddled with trouble. Expect higher default rates, as students can't pay back these loans. Still, we'll look to profit from their demise.

ED note. Yes, Companies like Sallie Mae will look to profit from those students who are unable to find a job. And they too will join the ranks of those of us who are in default and whose lives are ruined, because we cannot escape the esculating debt, as it grows beyond our ability to control.