Posted by: crudbasher | November 28, 2012

College Loan Defaults, Gangnam Style!

Every once in a while my brain puts together several seemly unrelated concepts and makes something cool. Kind of like peanut butter and chocolate. So let me tell you a story about 1 trillion dollars, higher education, physics and a slightly overweight South Korean rapper. Kids, don’t try this at home.

I think many people would agree that you don’t change things when everything is going great. Success tends to breed a certain complacency and an inability to see past the immediate future. It is certainly rational to think that since everything has been going well it will continue to do so. Sir Issac Newton observed this with his First Law of Motion:

An object at rest stays at rest and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force. (emphasis mine)

I think a lot of colleges ignore that part in italics. Do we have any unbalanced forces now in higher education? Let’s get back to that.

Colleges have been gorging themselves fat on the vast amount of money pumped into the market by the US government, the vast majority of which is loans. Here is a graph showing what I mean.

(H/T Zerohedge.com)

That’s over the last 10 years. Amazing. But so as long has the money keeps flowing then everything will be ok right? Well, no actually. Loan defaults are skyrocketing. Here’s a much scarier graph.

(H/T Zerohedge.com)

As you can see, the amount of loans over 90 days late has spiked. Why is this? Two years ago in June, I wrote a post called Why the surge in college enrollment is not a good thing. In it I wrote this:

I know this could be considered controversial but not every high school grad will succeed in college. So let’s jump ahead 2 years and look at the headlines shall we?

“Record number of students dropping out of college”
Record number of student loan defaults (emphasis added)
“Government needs 40 Billion dollars for student loan bailout”

The current dollar amount of loans in default is $42 Billion dollars and climbing rapidly. As I predicted, the consequences of easy loans is now starting to be felt. Still, who cares right? There is a new crop of high school seniors every year and nobody is talking about decreasing the amount of loans so everything should be good right? Well, here’s the problem: the students have to want to take out the loans. What if they decide not to? Would that be an unbalanced force acting on higher ed?

It’s amazing how fast ideas get around the Internet these days. This video is now the number 1 viewed video of all time on YouTube with over 800 million views.

It’s like a train wreck; I want to look away but I can’t. :) Ok we get lots of crazy videos passed around but what is significant is how fast this video became number 1. The blue line is the views of the previous number 1 and the red is how fast Gangnam Style overtook it.

(H/T youtubetrends)

That is a dramatic example of how much more connected we are now. Ideas can spread faster every day so stories of students in default will tend to spread quickly. If even 20% of them decide to stay home in the fall, or take free online classes, many colleges would be in trouble.

The gravy train is almost over folks, time to start planning for what comes next because higher education is about to be hit with the irresistible force of disruptive change.

 

See more data on Zerohedge.com.

 

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