Billionaire businessman and Maverick’s owner Mark Cuban sat down with Inc Magazine to talk about the student loan bubble, how it’s affecting the economy and what the worst case scenario may be. Cuban blames the crisis on colleges driving tuition prices up because students could afford to pay more based on the availability of student loans.
Cuban compared the student loan crisis to the housing bubble. Difference is, if the system collapses, lenders can’t come back and repossess your college degree, so the focus will turn to the colleges, as it should. Year after year, the total cost of college (tuition, fees, room and board) are rising faster than the rate of inflation consistently.
He discussed that as the student loan bubble continues to grow, this will force a cap on student loan guarantees. In turn, Cuban said, “And when that happens you’re going to see a repeat of what we saw in the housing market. When easy credit for buying or flipping a house disappeared, we saw a collapse in the price of housing and we’re going to see that same collapse in the price of student tuition, and that’s going to lead to colleges going out of business.”
Cuban went on to list the effects on the economy from mounting student loans including graduates not being able to buy a home or car, rent an apartment, buy clothes and do all those normal things college graduates once did. He said that anything that’s not an absolute necessity is flagging because there’s simply no money left over after student loan payments.
We’re already seeing some colleges hit hard when students can’t borrow what they need. Over the past couple of years, historically black colleges and universities (HBCUs) have been hard hit by tightened parental PLUS loan criteria enforced by the Obama administration. Morris Brown University in Atlanta filed bankruptcy and other schools are struggling.
There has also been increased pressure on colleges, universities and trade schools over their cohort default rate (CDR). A school with a CDR of 25% or greater for three years running or one year at greater than 40% can lose their eligibility for Pell Grants and student loans. What’s unfortunate is that CDR calculations only take into account the last few years of graduates and how promptly they pay their loans. But it may be more apt to look at their overall default rate.
Either way, if colleges continue to push students through on borrowed funds because they can’t make their operations more cost-effective, Cuban is right and there’s a crash coming. With the housing bust, many homeowners that were over their heads in debt simply walked away from their homes. That could potentially happen with student loans as well. There is recourse for unpaid student loans, but garnishment isn’t feasible for those that are unemployed, don’t work steadily or bounce from gig to gig.
Only time will tell but Cuban does seem to have a knack for understanding money and economic forces, so he may be on to something.
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