Is there a way to 'short' higher education?
April 26, 2011 12:22 PM Subscribe
Is there a 'bubble' in higher education? By that I mean, are there too many colleges right now, who are charging too much for tuition, and too many people paying too much for degrees, and taking loans that they will never be able to pay off? And assuming that there is such a bubble, and it were to burst, how would a deeply cynical person invest to make money on the collapse in the way that some savvy people made money on the housing market collapse?
Is there a 'bubble' in higher education? By that I mean, are there too many colleges right now, who are charging too much for tuition, and too many people paying too much for degrees, and taking loans that they will never be able to pay off?
Undoubtedly yes. There's simply no way that tuition can keep rising at the rate it is rising, and eventually there will be some form of mass student loan reform allowing discharging of debts into bankruptcy or the universal ability to take advantage of income-based-repayment even on private loans.
I suppose you could short Sallie Mae or make regular buys of put options on Sallie Mae. However, the end of the bubble might be a long way off. The housing bubble, for example, hit its peak in 2005-2006 or so. All those real estate and bank stocks kept going up, up, up until mid to late 2008, so you would have gotten killed if you shorted back at the "peak."
The best way to invest to make money on the collapse would simply be to avoid investing in ways that would leave you exposed: you might not get rich, but you won't get screwed.
posted by deanc at 12:33 PM on April 26, 2011 [3 favorites]
Undoubtedly yes. There's simply no way that tuition can keep rising at the rate it is rising, and eventually there will be some form of mass student loan reform allowing discharging of debts into bankruptcy or the universal ability to take advantage of income-based-repayment even on private loans.
I suppose you could short Sallie Mae or make regular buys of put options on Sallie Mae. However, the end of the bubble might be a long way off. The housing bubble, for example, hit its peak in 2005-2006 or so. All those real estate and bank stocks kept going up, up, up until mid to late 2008, so you would have gotten killed if you shorted back at the "peak."
The best way to invest to make money on the collapse would simply be to avoid investing in ways that would leave you exposed: you might not get rich, but you won't get screwed.
posted by deanc at 12:33 PM on April 26, 2011 [3 favorites]
Kaplan, a huge for-profit education company is owned by the Washington Post Company and represents a huge chunk of wapo's profits, so you could sell their stock short. Maybe you could take out credit default swaps on bonds issued by universities?
If you want to know more specifically about how people made money on the housing market I recommend Michael Lewis' The Big Short However, the people who made money off the housing bubble collapse had access, experience, and capital that you probably don't so it might not be possible, as an individual, to put yourself in a position to make money, even if you're right.
posted by ghharr at 12:37 PM on April 26, 2011 [1 favorite]
If you want to know more specifically about how people made money on the housing market I recommend Michael Lewis' The Big Short However, the people who made money off the housing bubble collapse had access, experience, and capital that you probably don't so it might not be possible, as an individual, to put yourself in a position to make money, even if you're right.
posted by ghharr at 12:37 PM on April 26, 2011 [1 favorite]
Aside from going short the for-profit education stocks? That's been a popular trade for the last year or so. And in addition to SLM, other financial stocks that play in the student loan arena include NNI and FMD.
I'm sure there are credit default swaps available on student loan bonds, which are packaged in much the same way mortgages are. But you need a prime brokerage relationship to have access to such instruments.
posted by mullacc at 12:37 PM on April 26, 2011
I'm sure there are credit default swaps available on student loan bonds, which are packaged in much the same way mortgages are. But you need a prime brokerage relationship to have access to such instruments.
posted by mullacc at 12:37 PM on April 26, 2011
Response by poster: Well, assume that I only want to put part of a portfolio into shorting the bubble, and that the bubble collapse is eminent. I realize that shorting is risky and that you should always balance your portfolio, etc..
posted by empath at 12:37 PM on April 26, 2011
posted by empath at 12:37 PM on April 26, 2011
Sure - some of the players are public institutions. Short Capella, U of Phoenix and Kaplan. Just remember that markets can remain irrational longer than you can remain solvent.
And that unlike (most) housing, student loans are federally guaranteed, so a sudden, catastrophic crash in the market is unlikely.
posted by bonecrusher at 12:48 PM on April 26, 2011
And that unlike (most) housing, student loans are federally guaranteed, so a sudden, catastrophic crash in the market is unlikely.
posted by bonecrusher at 12:48 PM on April 26, 2011
For another perspective on the education bubble see this post on the Economist.
The problem is that there are no other routes to better occupations and higher salaries anymore, except for those who have odd skills (athletes, rock stars, starlets willing to reveal all) - which most of us don't have. Education has not stopped delivering its expected returns, not in terms of income or (un)employment. It has stopped delivering on the promise of a middle-class job = professions and managerial occupations, for which a BA was sufficient inthe 60s, and for which an MA is now necessary. So this leads to education inflation = middle-class kids seeking MA degrees and professional degrees, where a BA might have sufficed a generation ago. I don't see any decline in the willingness of parents to sacrifice for their kids.posted by euphorb at 12:49 PM on April 26, 2011 [4 favorites]
Is the value of higher education overinflated? Arguably.
Is there a "higher education bubble"? Not in the way there was a housing bubble or a tulip bubble or any other kind of asset bubble.
Why?
Because education is not really "tradeable." Sure, it can be "transferred" from teachers to students, but students can't transfer their degrees to potential buyers, i.e. there is no "secondary market" for education. As such, it's impossible to "short" the education "bubble," because there is no real market for the "asset" being valued.
Remember, pretty much all economic language is metaphor. Explicitly so. Revolutions in economic thought have far less to do with the discovery of new and better empirical theories than they do with the introduction and adoption of new metaphors. So while the first modern economists like Quesnay, Smith, and Ricardo thought that the discipline of economics was tracing the movement of some absolute store of value through the economy much as water moves through a system of pipes, contemporary economists think prices are more like information theory and are applying computational tools to price theory.
But whatever your preferred metaphor, it's critical to remember that the metaphor is still just a metaphor and not be deceived into thinking that the language we use actually describes the economy as such. We can talk about a "market" in education, but that doesn't mean there actually is one in any kind of rigorous sense.
Around the fringes of this, sure, it's possible to short the few publicly traded corporations that have some significant stake in the maintenance of the current educational regime, but the vast majority of those players are either private individuals or non-profits.
posted by valkyryn at 1:08 PM on April 26, 2011 [12 favorites]
Is there a "higher education bubble"? Not in the way there was a housing bubble or a tulip bubble or any other kind of asset bubble.
Why?
Because education is not really "tradeable." Sure, it can be "transferred" from teachers to students, but students can't transfer their degrees to potential buyers, i.e. there is no "secondary market" for education. As such, it's impossible to "short" the education "bubble," because there is no real market for the "asset" being valued.
Remember, pretty much all economic language is metaphor. Explicitly so. Revolutions in economic thought have far less to do with the discovery of new and better empirical theories than they do with the introduction and adoption of new metaphors. So while the first modern economists like Quesnay, Smith, and Ricardo thought that the discipline of economics was tracing the movement of some absolute store of value through the economy much as water moves through a system of pipes, contemporary economists think prices are more like information theory and are applying computational tools to price theory.
But whatever your preferred metaphor, it's critical to remember that the metaphor is still just a metaphor and not be deceived into thinking that the language we use actually describes the economy as such. We can talk about a "market" in education, but that doesn't mean there actually is one in any kind of rigorous sense.
Around the fringes of this, sure, it's possible to short the few publicly traded corporations that have some significant stake in the maintenance of the current educational regime, but the vast majority of those players are either private individuals or non-profits.
posted by valkyryn at 1:08 PM on April 26, 2011 [12 favorites]
It isn't exactly a bubble because it isn't a fungible asset. I can't take my diploma that my parents paid 120k for 10 years ago and flip it to you for the 170k it would cost you today. What is going on is that like healthcare, education demand is something that has historically been shown to be price inelastic, so schools just took price and took price (granted like healthcare that has also been lots of cost push) - but just like everything else, at some point price matters. And it isn't going to be the elite schools that see it first, or the low cost providers at the public schools. Its going to be the marginal "decent" schools that have priced up to compete with the elite schools. Look out for a place like GW to see what happens to enrollment at some point. Either they stop raising prices, or they stop filling slots. Non-profit schools are essentially fixed costs businesses - far more than the for profit guys - so if they stop filling their classes, or have to cut price - well lets just say there might be some attractive real estate on the market.
Everyone loves to point to the for-profit guys as those most likely to get hurt by this, but I think their issues are sort of unrelated.
I think shorting NNI, FMD would be decent, but you have absolutely no idea when people figure out that spending 250k to send their B student child to school is a bad idea. Shorting the bonds is about default rates for people currently in school - and don't forget student loans aren't like credit cards or mortgages in most states - they aren't dischargeable so they won't behave the way you expect them to
posted by JPD at 1:08 PM on April 26, 2011
Everyone loves to point to the for-profit guys as those most likely to get hurt by this, but I think their issues are sort of unrelated.
I think shorting NNI, FMD would be decent, but you have absolutely no idea when people figure out that spending 250k to send their B student child to school is a bad idea. Shorting the bonds is about default rates for people currently in school - and don't forget student loans aren't like credit cards or mortgages in most states - they aren't dischargeable so they won't behave the way you expect them to
posted by JPD at 1:08 PM on April 26, 2011
You might want to take a look at College, Inc
Lots of people are taking on student loans to get bullshit degrees from for-profit private institutions that will get them nowhere economically, and leave the saddled with debt that even bankruptcy court can't erase.
You cold find a way to bet on all those people defaulting on their loans because there are no jobs for them and the quality of the education they got was BS, short University of Phoenix stock maybe.
posted by Pirate-Bartender-Zombie-Monkey at 1:16 PM on April 26, 2011 [3 favorites]
Lots of people are taking on student loans to get bullshit degrees from for-profit private institutions that will get them nowhere economically, and leave the saddled with debt that even bankruptcy court can't erase.
You cold find a way to bet on all those people defaulting on their loans because there are no jobs for them and the quality of the education they got was BS, short University of Phoenix stock maybe.
posted by Pirate-Bartender-Zombie-Monkey at 1:16 PM on April 26, 2011 [3 favorites]
Is there a 'bubble' in higher education? By that I mean, are there too many colleges right now, who are charging too much for tuition, and too many people paying too much for degrees, and taking loans that they will never be able to pay off?
Yes.
posted by John Cohen at 1:33 PM on April 26, 2011
Yes.
posted by John Cohen at 1:33 PM on April 26, 2011
The Guardian carried an article about this today: Are degrees the new sub-prime bubble? It relates to the situation in England, but addresses the first part of your question directly.
posted by Jehan at 1:40 PM on April 26, 2011 [2 favorites]
posted by Jehan at 1:40 PM on April 26, 2011 [2 favorites]
Finland and South Korea consistently top the charts in the periodic survey of OECD countries that tracks the efficiency of educational systems. If you are willing to subscribe to the view that a well educated populace will do better than an ignorant one then I would recommend you invest in these places.
posted by rongorongo at 1:47 PM on April 26, 2011
posted by rongorongo at 1:47 PM on April 26, 2011
You can short the for-profit chains if you want BUT the real bet there would be that the federal government would stop subsidizing loans for those schools. Given that the current administration has expanded federal involvement in student loans, and given the political firestorm that would result in trying to limit student loan use at for-profit schools (which in a lot of cases serve people from lower socioeconomic status groups, who need the loans the most and theoretically could benefit the most from higher education), that's a risky bet.
I suppose you could try to guess that there would be (another?) expose of one of these chains in the NY Times or on 60 Minutes that would cause the government to essentially shut them down, but I wouldn't hold my breath... or invest my money...
(Alternatively: You could rack up a lot of student debt getting lots of advanced degrees, pay as little as possible, and hope for some sort of bailout. I think most of the talk about this is wishful thinking from people who are overwhelmed with debt, but you never know I guess.)
posted by SuperNova at 2:27 PM on April 26, 2011
I suppose you could try to guess that there would be (another?) expose of one of these chains in the NY Times or on 60 Minutes that would cause the government to essentially shut them down, but I wouldn't hold my breath... or invest my money...
(Alternatively: You could rack up a lot of student debt getting lots of advanced degrees, pay as little as possible, and hope for some sort of bailout. I think most of the talk about this is wishful thinking from people who are overwhelmed with debt, but you never know I guess.)
posted by SuperNova at 2:27 PM on April 26, 2011
I suppose you could short Sallie Mae or make regular buys of put options on Sallie Mae. However, the end of the bubble might be a long way off. The housing bubble, for example, hit its peak in 2005-2006 or so. All those real estate and bank stocks kept going up, up, up until mid to late 2008, so you would have gotten killed if you shorted back at the "peak."
But always remember: The market can remain irrational longer than you can stay solvent.
posted by honkeoki at 2:35 PM on April 26, 2011 [2 favorites]
But always remember: The market can remain irrational longer than you can stay solvent.
posted by honkeoki at 2:35 PM on April 26, 2011 [2 favorites]
By that I mean, are there too many colleges right now,
No, because the number of colleges now has not increased substantially and recently. In 1980 (that is, thirty years ago), there were 1,957 4-year schools. By 1990, this had risen to 2,141 and by 2000 to 2,450. Since then, by 2007 it had increased only to 2,675.
There's been a broad and slow secular trend towards increased numbers of colleges, but there simply has not been any increase that's remotely consistent with a bubble.
who are charging too much for tuition,
Maybe. It's certainly been increasing. I don't think it's nearly as simple as "Schools noticed that demand is inelastic." For one thing, tertiary education is very labor-intensive and its capital requirements are often dealt with sort of off-budget, so the really rapid increase in health-care costs have hit education much harder than it's hit more material-intensive or capital-intensive businesses. For another, a whole goddam bunch of the tuition increases you've seen in public colleges has been pretty well direct replacement of lost state funding.
and too many people paying too much for degrees, and taking loans that they will never be able to pay off?
The number of people who take out $200,000 loans to go to BigPrivateSchool because they don't have the money but somehow don't get any other financial aid is, while not zero, small. Among people who take out loans, the average total loan for 4 years of college is, in the most recent information I can find, about $25K, or broadly equivalent to a new Accord. Playing with numbers, about 1.6% of students at public universities graduated with more than $50K in debt, and that includes out of state students. Anyway, while tuition and loan amounts have been increasing, it's hard to reconcile these numbers with it being remotely common to have loans that are too large to be paid off.
posted by ROU_Xenophobe at 2:58 PM on April 26, 2011 [2 favorites]
No, because the number of colleges now has not increased substantially and recently. In 1980 (that is, thirty years ago), there were 1,957 4-year schools. By 1990, this had risen to 2,141 and by 2000 to 2,450. Since then, by 2007 it had increased only to 2,675.
There's been a broad and slow secular trend towards increased numbers of colleges, but there simply has not been any increase that's remotely consistent with a bubble.
who are charging too much for tuition,
Maybe. It's certainly been increasing. I don't think it's nearly as simple as "Schools noticed that demand is inelastic." For one thing, tertiary education is very labor-intensive and its capital requirements are often dealt with sort of off-budget, so the really rapid increase in health-care costs have hit education much harder than it's hit more material-intensive or capital-intensive businesses. For another, a whole goddam bunch of the tuition increases you've seen in public colleges has been pretty well direct replacement of lost state funding.
and too many people paying too much for degrees, and taking loans that they will never be able to pay off?
The number of people who take out $200,000 loans to go to BigPrivateSchool because they don't have the money but somehow don't get any other financial aid is, while not zero, small. Among people who take out loans, the average total loan for 4 years of college is, in the most recent information I can find, about $25K, or broadly equivalent to a new Accord. Playing with numbers, about 1.6% of students at public universities graduated with more than $50K in debt, and that includes out of state students. Anyway, while tuition and loan amounts have been increasing, it's hard to reconcile these numbers with it being remotely common to have loans that are too large to be paid off.
posted by ROU_Xenophobe at 2:58 PM on April 26, 2011 [2 favorites]
A huge number of people are already shorting the stock of companies like Bridgepoint (just one of zillions of places people are talking about this), a for-profit college, because of investigations. Other companies are being shorted, too.
posted by Mo Nickels at 3:08 PM on April 26, 2011
posted by Mo Nickels at 3:08 PM on April 26, 2011
I don't think you call it a bubble. Because this isn't the kind of thing that bursts, students just pay more for something that is worth less and less. Other commenters are right that for profit schools are encouraging students to get degrees that are worth very little and cost a lot. The bigger problem is that they are encouraging students to take out large loans when it is very unlikely they will be able to graduate. Basically the student takes out loans, droPs out, the school gets paid, and the student owes the government a bunch of money they can't pay back because they don't have the better job the degree was supposed to give them. Other than shorting the stocks of the for profit colleges the only way to benefit is by hiring these college grads for super cheap. Bang for your buck style.
posted by boobjob at 3:30 PM on April 26, 2011
posted by boobjob at 3:30 PM on April 26, 2011
student loans are federally guaranteed
This suggests to me -- if you believe that a large number of those loans are unlikely to ever be repaid -- that the Dollar will end up tanking further. This is based on the assumption that the Federally guaranteed student loans will end up being paid for, somehow, via debt monetization, since the US seems to lack the willpower to pay for things of this nature (again cf. the subprime debacle) more directly.
If you follow this line of reasoning, perhaps you'd want to take some sort of short (or at least bearish) position on the USD? Investing in some sort of foreign currency fund would have the advantage of actually being a long position, so you could hold it indefinitely without making margin, and relatively unlikely to get you wiped out (assuming you pick something like EUR or SEK). It's probably not the "make a killing" move you're looking for, though.
posted by Kadin2048 at 4:47 PM on April 26, 2011
This suggests to me -- if you believe that a large number of those loans are unlikely to ever be repaid -- that the Dollar will end up tanking further. This is based on the assumption that the Federally guaranteed student loans will end up being paid for, somehow, via debt monetization, since the US seems to lack the willpower to pay for things of this nature (again cf. the subprime debacle) more directly.
If you follow this line of reasoning, perhaps you'd want to take some sort of short (or at least bearish) position on the USD? Investing in some sort of foreign currency fund would have the advantage of actually being a long position, so you could hold it indefinitely without making margin, and relatively unlikely to get you wiped out (assuming you pick something like EUR or SEK). It's probably not the "make a killing" move you're looking for, though.
posted by Kadin2048 at 4:47 PM on April 26, 2011
I work for a public uni, but my inclination is no. In some respects it might look like one:
1. prices (tuition) only seem to go up
2. people leverage highly to to buy the asset (education)
But there's an alternative explanation:
1. tuition prices have traditionally been set below the cost of production and subsidized either directly by local government or indirectly through research grants. The higher tuition reflects the true costs of providing education through PhD faculty.
2. Education pays off. Statistics show that a bachelor's is a good investment. Under such a scenario, it's plausible and socially beneficial for people to borrow against future earnings. Any bubble argument would have to work the numbers of costs vs earnings.
But I understand there's reasons to not be convinced. For profits are free to over promise, under deliver and over charge for things that young people are not in a position to fully grasp. It's certainly plausible that there's a for-profit bubble. Especially since the supply of accredited colleges (and therefore finaid eligible) is supremely inelastic (ten year lag), any rise in demand for old accredited colleges will move the price quite rapidly. If they aren't delivering value to students, and rely on underwriters not noticing, well yea, that's a problem.
Anyways, one way to profit from a decline in the value of education is to hire educated labor for productive use. Consulting agencies in specific fields (software, law, accounting) you think are overvalued would be another place to short. If you could short law school debt specifically, that would probably be a good move. Problem is with the boomers entering old age, there's going to be ever growing demand for medical care to be met by a smaller group of caretakers than previously, and that's a large chunk of professional education debt.
posted by pwnguin at 10:13 PM on April 26, 2011
1. prices (tuition) only seem to go up
2. people leverage highly to to buy the asset (education)
But there's an alternative explanation:
1. tuition prices have traditionally been set below the cost of production and subsidized either directly by local government or indirectly through research grants. The higher tuition reflects the true costs of providing education through PhD faculty.
2. Education pays off. Statistics show that a bachelor's is a good investment. Under such a scenario, it's plausible and socially beneficial for people to borrow against future earnings. Any bubble argument would have to work the numbers of costs vs earnings.
But I understand there's reasons to not be convinced. For profits are free to over promise, under deliver and over charge for things that young people are not in a position to fully grasp. It's certainly plausible that there's a for-profit bubble. Especially since the supply of accredited colleges (and therefore finaid eligible) is supremely inelastic (ten year lag), any rise in demand for old accredited colleges will move the price quite rapidly. If they aren't delivering value to students, and rely on underwriters not noticing, well yea, that's a problem.
Anyways, one way to profit from a decline in the value of education is to hire educated labor for productive use. Consulting agencies in specific fields (software, law, accounting) you think are overvalued would be another place to short. If you could short law school debt specifically, that would probably be a good move. Problem is with the boomers entering old age, there's going to be ever growing demand for medical care to be met by a smaller group of caretakers than previously, and that's a large chunk of professional education debt.
posted by pwnguin at 10:13 PM on April 26, 2011
student loans are federally guaranteed
This suggests to me -- if you believe that a large number of those loans are unlikely to ever be repaid
Just because they are guaranteed doesn't mean them defaulting will end up costing some huge sum of money relative to par. Don't forget they are also non-dischargeable. Either you die or eventually the government gets paid back. Its not like the guarantees written by fannie and freddie. Not to mention ths sums involved are much smaller.
posted by JPD at 6:00 AM on April 27, 2011
This suggests to me -- if you believe that a large number of those loans are unlikely to ever be repaid
Just because they are guaranteed doesn't mean them defaulting will end up costing some huge sum of money relative to par. Don't forget they are also non-dischargeable. Either you die or eventually the government gets paid back. Its not like the guarantees written by fannie and freddie. Not to mention ths sums involved are much smaller.
posted by JPD at 6:00 AM on April 27, 2011
This thread is closed to new comments.
posted by box at 12:32 PM on April 26, 2011