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Tuesday, April 12, 2011

Are College [Student] Loans the Next Bubble?

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By Greg Romey:

There is a common phrase in the entertainment industry that describes when a show has abandoned its core premise and introduced the absurd to revive viewer interest. It is called “Jumping the Shark.” I believe this phrase can be representative of business, as well. Here is my definition of when business has jumped the shark: the point where an industry has reached the markets whose needs were not being met and, to maintain growth, uses methods to create artificial demand.

This has been the case with for-profit secondary education. Many articles have been written about the problems associated with the for-profit model (article1, article2) so there is no need to regurgitate information that has been so well documented. What is important to analyze is this transition from an industry filling a need within a society to one that preys upon it.

The transition to that point does not occur abruptly as when a car runs out of gas or traffic light changes color. It is quite subtle but nonetheless very obvious when looked at from a longer timeframe. It results when the marketing and sales approach is no longer focused on attracting people who qualify as the initial target market. In this case, cuts to the community college system has left many would be students in the lurch and provided a market opportunity to for-profit schools (article, video) . With the influx of new schools and rapid growth of established for-profit institutions, like University of Phoenix, the market has been met … and then some.

Since the initial growth phase is usually quite profitable and attracts investment, continued expansion needs to be maintained for stockholders. The inevitable question is how can profits continue when a market is saturated? It seems that the next step is to approach fringe markets that were never the target market. How about we find a way to put someone with a limited income into a house … or better yet, provide them with a college education that creates debt that never goes away. Who cares if they get foreclosed on or fail to obtain a degree because they are not prepared for college? After all, I got mine.

It is quite easy to prey on the fringe market. These services are generally marketed to include messages about wealth and prosperity – a place the fringe market strives to get to. You too can own a home and become part of the middle class! Get an education that will propel you to a high paying career, for it is the only thing standing in the way of buying all of the goods you see on TV! The feeling of inferiority based on income level is so pervasive that it does not take much marketing savvy to generate interest.

So how do you wring out a sponge that is barely wet? You dip it in the governmental trough until it is fully saturated. You can qualify for a student loan, just fill out these papers and here are some tips on increasing your approval chances. Sound familiar?

The question before us as a society is, do we want this type of capitalism? We have benefited immensely from a capitalistic system that rewards companies for meeting market demands and people who work hard. Yet our economy has evolved and created a chasm between rich and poor, hollowing out the middle class. Money is power and with it comes governmental influence that provides an advantage to corporations and hinders any challenges to the status quo. The consumer base has been depleted, the wells have run dry and interesting new processes have been introduced, like credit default swaps and easy access to college loans, to siphon out the remaining droplets of cash.

The shark has jumped out of the water and we are running for the hills. Maybe we will find the housing market over there also.

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