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Supply, Demand and the Higher Education Bubble

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In the mid 2000’s, our society saw the largest asset bubble in modern history.  Low interest rates spurred loosening of credit which propelled home sale prices upward.  Operating by simple laws of supply and demand, the abundance of cheap and loose credit meant that there was an abundance of money.  Without a strong constraint on the availability of funds with which to buy homes, there price of homes increases to match the supply.  The crash that began in 2008 was driven in large part of the well of credit drying up.  This caused the supply of money to shrink rapidly.  Again, operating under the simple laws of supply and demand, home prices plummeted. 

For decades, we have been seeing the same process at work in education.  Driven by easy access to low interest credit in the form of Federally backed student loans, the prices of post-secondary education has risen unchecked.  According to inflationdata.com, in 1986, average costs of a 4-year degree was $10,000.  By 2015, costs of a 4-year degree is anticipated to be $120,000.   Between 1985 and 2010, the total cost of education increased more than 485 percent, while the average of all consumer prices increased about 107 percent.

Based on this information, it is apparent to me that higher education costs are a major bubble.  The only reason that bubble hadn’t burst years ago is because the Federal Government has been willing  to continue to lend with reckless abandon.  In 2010, in the wake of ever increasing student loan defaults, combined with a widespread cry for fiscal accountability in government, there finally started some discussions about limited the pool of government funds to be used for new loans.  If and when that pool dries up, finally, there will be a reversal in the cost of a college education.

Unfortunately, this will come too late for those students who will be laboring for decades under the load of loans that in many cases will not result in a large enough income stream to pay them off in a reasonable period of time.

 Supply, Demand and the Higher Education Bubble
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56,000 Broken Promises

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“Things fall apart.  The center cannot hold.”  ~ William Butler Yeats

The economic downturn of 2008 through 2010 hit many people hard.  I would like to share with you a story of one way I was hurt through the downturn.

I have worked closely with real estate investors since 2005.  One of the tools real estate investors use frequently is private money, where one investor or pool of investors lends to others for the purpose of acquiring or fix up a new property.  Instead of going to a bank, these private loans are very useful in jumping on opportunities quickly.  In 2006 and 2007, I made three such loans.  For two of these loans I took advances from credit lines to increase my gains to partially fund the loans.  The third loan came from my individual retirement account.  All told, I lent a total of $56,000 of my and other people’s money.  Each of these investments are no longer performing.  The interest in one loan was exchange for property interest which may never pay me back any part of my investment.  The second loan was put into a business property.  A few months after the loan was made, the business owner started having difficulty and eventually turned over operation of the business to our investment group.  Unfortunately, the owner had eroded much of the value of the business prior to turning it over.  The business no longer has the necessary earnings to make loan payments to me.  It is unknown when this investment may ever start paying dividends.  Today, I learned that my third loan will be lost when the investor declares bankruptcy.

In each of these cases, I had chosen to lend to individuals with great reputations and in deals which looked to be fantastic based on reasonable assumptions.  Unfortunately, this downturn has been exceptional.  Each of these individuals has been either ruined or are treading water.  Each individual has broken a promise to me.  I have lost over $56,000 in principal, several thousands of dollars more in lost interest, and have been left with over $30,000 in debts that became my responsibility.

I cannot blame the others for the debts I had to assume.  I knew the risks involved.  But I am a man who knows statistics.  What are the odds that all of the investments go belly up?  The problem is that when the world goes upside down, chances are, all of them will go belly up and they do.

An unpaid debt is a broken promise.  Whenever such a promise is broken it often leads to the breaking of further promises.  When the income that was promised to me did not pan out, I was no longer able to keep the promises I made.  I have to live with that.  For a person who values integrity, few things hurt more than breaking your word.  It caused me untold amounts of personal pain and problems in my personal relationships.

Learning the lessons of financial responsibility too late put me in a position that I felt I had to put myself in a vulnerable position in order for me to get out from the mountain of debt and obligation that I had built for myself.    My poor decisions early in life set me up for unjustified financial risk taking later in life.  It took losing everything to give me a chance to start over.  I will do it right this time.   I have dedicated myself to help others avoid the challenges I made for myself.  As you read and follow my comments, know that the comments have been fashioned by hard times and difficult experiences.

 56,000 Broken Promises
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