Byron King

A month ago, at an investment conference in Baltimore, my colleague Eric Fry asked if I think there’s another “bubble” out there that’s going to pop. My reply was that I believe the “education” bubble is destined for doom. It’ll be just one more thing to smack down the US economy, and makes for another reason — as if we need more — to hold precious metals as portfolio protection.

In the US, there’s over $1 trillion of “student loan” debt on the books. This is money that people borrowed from banks and government agencies (Sallie Mae comes to mind). The funds flowed through the “education” landscape and cash flow mills, paying for faculty, administrators, buildings, overhead and much else.

This gusher of student loan money over the past two generations (!) has been a key factor — THE key factor — in the super-inflation of the cost of education. That is, the more money that goes for loans and grants, the more leeway and incentive the schools have to raise tuition and let internal costs soar.

At the student level, some people borrowed to pay the tuition at impressive universities, where they received things like medical degrees and Ph.D.s in physics. Good for them.

But at other times and places, students borrowed funds to attend school and major in things for which there’s not much of a demand in the true, competitive economic marketplace. You know what I mean, right? Courses with the word “studies” appended to the end come to mind.

How bad is the student loan situation? Currently, around 9% of student loans are “slow pay,” if not in technical default. That’s after two years of alleged economic recovery from the crash of 2008-09. To make matters worse, it’s next to impossible to discharge student debt, even in bankruptcy.

So I don’t have a warm feeling about this student debt bottomless pit.

Let’s think it through. We have a generation of young people, many of whom with sizeable student debts, along with their underwater basket weaving degrees and such. They are unable to obtain the jobs they believed their degrees would accord them.

So there’s a lot of resentment and bitterness, which I witnessed firsthand during a recent walk through the “Occupy Pittsburgh” crowd downtown. I saw a lot of protest signs concerning student debt. It’s a very raw nerve.

The bottom line is that a lot of US young people will never find suitable employment that aligns with their education. Consequently, they’ll never earn enough to repay their student loans. Yet due to the banking lobby, and how that particular cabal has gamed the legal system, the indebted young basket weavers of the nation can’t get a classic “fresh start” in bankruptcy.

Something has got to give, and I believe we’ll see some sort of crash in the student loan markets. The student debt sector has failure built into it, down to the debt-DNA.

Also along the lines of the education bubble popping, I’ve been pondering where and when the first pin would penetrate the latex. Just this week, I believe we may have seen it: The Penn State scandal.

I’ve always had a high regard for Penn State, which is one of America’s great public universities. But if you’re following the news, you’ve likely seen where Penn State President Graham Spanier and iconic football coach Joe Paterno were just fired.

Neither Messrs. Spanier nor Paterno personally committed any indecent act. But they, apparently, knew that a subordinate within the university hierarchy — within the nationally ranked football program — was totally out of line (and I’ll spare you the disgusting details on that).

In a manner reminiscent of how certain churches cover up bad acts — “for the greater benefit of the institution,” goes the excuse — Penn State never properly handled its issues. After a period of time, however, the pot boiled over. A grand jury convened, and people testified.

This week, several Penn State officials and a former high-level Penn State coach were arrested. The Pennsylvania attorney general announced a major prosecution. All around, it’s a bad time for the Nittany Lions.

Yes, this may just be an “isolated” incident of one bad guy doing something bad, and several other people sweeping the issues under the proverbial rug. But the larger story here tells another tale of how some things in the university sector have gotten just too darn big — as in “too big to fail” — until they fail.

With Penn State, we’re seeing Big Football fail, and take down Big Coaching — as in Joe Paterno. This failure is taking down Big University Management too — as in, the president of the institution.

University managements — and, I hope, their boards of trustees — across the country had better be watching the Penn State scandal and looking hard in the mirror. They had better be asking themselves the hardest questions and looking under those lumpy rugs.

This Penn State scandal is not just some issue of having an academically ineligible kid playing linebacker for a few minutes in the fourth quarter. Or even that the star quarterback “borrowed” a Corvette automobile from some car dealer who’s a major football booster.

No, when people start to dissect this Penn State thing, they’ll have to follow the money. At Penn State, Big Football meant Big Money, and it spawned an entire culture that affected everything — permeating the overall university culture.

And while people are dissecting the Big Football money, they had better check out the Big Student Loan money, too — courtesy of government grants and loan guarantees. What ELSE is going on in the dim shadows of the locker rooms and shower stalls, what with all that money at stake? What’s going on with the fundamental mission of the education institutions of this nation?

The Big Money, provided so liberally by the student lending institutions, created lots of excesses and corruptions — great and small — that are just beginning to unwind.

Big Money means that people wind up doing whatever it takes to keep the cash flowing. It means that people will find some way to justify cutting corners, even ethical, moral and criminal corners. Until it all blows up.

Don’t sell your gold.


Byron King,
for The Daily Reckoning

Byron King

Byron King is the editor of Outstanding Investments, Byron King's Military-Tech Alert, and Real Wealth Trader. He is a Harvard-trained geologist who has traveled to every U.S. state and territory and six of the seven continents. He has conducted site visits to mineral deposits in 26 countries and deep-water oil fields in five oceans. This provides him with a unique perspective on the myriad of investment opportunities in energy and mineral exploration. He has been interviewed by dozens of major print and broadcast media outlets including The Financial Times, The Guardian, The Washington Post, MSN Money, MarketWatch, Fox Business News, and PBS Newshour.

  • Bruce Walker

    The Penn State scandal demonstrates the power of prayer. In this case, the answered prayers of Bishop Robert Finn of the Kansas City Diocese. How fortunate for Finn that a scandal far ecliping the local scandal has now distrated everyone’s attention. Now, if Bishop Finn can only beat his indictment, he will be on his way redemption.,,..,,,–Or at least in his own delusional eyes.

  • Robbins Mitchell

    “Penn State Loans The Student Prick Bubble”

  • smith

    I remember a few years back getting the latest beg-a-thon literature from my alma mater. It went on to explain how my money would be put to great use, and gave the example of the rock wall, olympic size pool with 8 adjoining jacuzzi hot tubs. Well, I hadn’t donated before that and figured they must be doing ok without my money.

  • phelps

    I never thought Paterno would join the anything to win crowd, but the money is just too tempting for most to pass on. There was a time when guys like Larry Johnson would have never made it to PSU, but the need to win overcame high character players.

  • Tybz

    I thought the first half of your article was excellent, and I totally agree. One only has to read biographies pre-1970 to know that many people “bused tables over the summer” to pay their way through college – debt free!

    However, I think it was a stretch to try to bring in Joe Paterno to prove your point. Truly, he is innocent until proven guilty. Maybe he is guilty; I don’t know.

    But my point is: You didn’t need to bring him up to prove your point about student loans.

  • Dave M

    If the student loan bubble does pop what will become of the thousands of unemployed faculty?

    My guess is they will try to jump over into the various branches of the government and invent new positions for themselves.

  • CommonCents

    I don’t see the correlation.

    Student loans are way out of control and university tuition’s are too.

    But what Joe did, followed the law but did not hold himself to the higher standards he set, does not relate to the student loan soon to be debacle.

  • Parr

    Well said Tybz,

    Remember back in the early ninties when that day care center scandal took place. For weeks it was on the news with witnesses testifying and rumors and the cops digging around for the bodies of animals sacrificed for some devil worship or something. One staff a 20 year old girl who worked there only six weeks ended up being prosecuted along with the other “evil doers” and child attackers. The next Prosecuting Attorney QUIETLY dropped the cases and no animal remains were ever found. Hysteria it seems and some crazy “jump on board” witnesses. We do not need that here on DR. I am looking for good directions as the financial world appears to be collapsing. I can supply enough hysteria on my own just looking at my 401K. Good information on the student debt though. I had pretty much factored my second job teaching graduate students in to last for the rest of my life. That may go away too. Thanks Byron that I did not see that coming! Always a good post.

  • phelps

    It wasn’t a stretch to bring in Paterno. Winning football programs bring thousands of students to those schools each year. Student loans are how too many of those kids, who are too much in love with Paterno got to PSU.

  • Fish

    The student loan crisis deepens and many of the top graduates that are due to be any nation’s up and coming hopes are already underwater. There ought to be some sort of meandering out of the menacing water. Many of the “Bigs” considered too big to failed have been bailout by taxpayers’ fund. To be equitable, why not go ahead with a massive scheme to bailout those brilliant grads who are potentially
    too brilliant to fail? After all, they are
    any nation’s rising stars, pillars of tommorrow.

  • Anon

    The purpose of a University is to provide:
    1)parking for the faculty
    2)sex for the students
    3)sports for the alumni
    Not necessarily in that order. And that’s what has to change.

  • Rusty Fish

    Not that extreme. parking, sex, sports?

  • Benton H Marder

    There is a connection among the aspects. We think of college sports as some sort of opium for the people. They don’t look at the real miasma of academia which the spoutings of the Occupation have exposed. Also, little attention is paid to the common use of ClifNotes and the racket of selling essays to students on the Internet. Add on the rest, and we begin to see the reality of the college education bubble that is overdue for popping. In sum, coillege education has become an enormous scam for lots of the victims. They wind up hugely in debt with few marketable skills plus their minds are horribly distorted. The sad point is that many of these youngsters will never understand that they’ve been had.

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