According to the Consumer Financial Protection Bureau: Total outstanding student loan debt surpassed $1 trillion late last year.

Many folks blame rising tuition costs as the chief driving factor of massive student loan debt. According to the U.S. Department of Education, the inflation adjusted annual cost of undergraduate tuition, room, and board in 1980 was $7,685 and in 2010 it was $17,464. On average, tuition tends to increase about 8% per year - that means that the cost of college doubles every nine years.

But why are colleges and universities charging more for tuition?

Much of the credit belongs to the Department of Education, Federal grants, and government loans for college and university students. The government has taken on the role of subsidizing tuition costs, and as a result, universities are relieved from the market pressure of providing the best quality education at the lowest possible price. By the government trying to make college more affordable for everyone, they have actually driven prices through the roof while diminishing the quality of the product. They have also created incentives for students to take an obscene amount of government loans to finance their education in degrees that will do little to advance their careers or enrich their lives.

I am not saying college is not valuable. It certainly can be. But for those that go to college simply because it is what the rest of the herd is doing may be fleecing themselves without knowing it.

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Listen to Jason's 9min podcast on education and the student loan bubble:

Additional Resources:

The Higher-Education Bubble Has Popped - Doug French

The Student Loan Fiasco: Made in D.C. - Robert Murphy

The First Crack: $270 Billion In Student Loans Are At Least 30 Days Delinquent - Zero Hedge

"As of now, our dreams of owning a home and having a family are gone" - StudentLoanBubble.com

[Mis]Educating America

_As I was watching the recent GOP debate in Las Vegas, I couldn’t help but think of the millions of people that enter the casinos expecting to beat the odds. Some do. However, most do not. There is a reason why gambling is a multibillion dollar industry. Big profits are made as relatively small amounts are lost by the masses trying to beat the system. Of course gambling may be regarded as entertainment, but the relevant feature of gambling for present purposes is that it is a zero-sum game. One person’s winnings are necessarily another’s losses. Wealth is transferred, and the house always wins so long as enough people play the game.

Similarly, politics operates as a zero-sum game. Economist Robert Murphy points out that our current political system is actually a negative-sum game, but even if we could eliminate all bureaucratic waste, we cannot escape the simple truth that when an individual wins political favor, he or she only benefits at the less obvious expense of someone else. There is no such thing as a magical public fund from which political gifts spontaneously generate. No matter how noble the intention or the cause, the benevolent politician is not Santa Claus. All goods distributed by government must first be created or produced by somebody. Whatever is given must first be taken. This is true for corporate subsidies and bank bailouts, just as it is true for transfer payments made to the very poorest members of society.

People by and large accept such a system because they believe they will be able to draw more in political advantage than they lose by way of political plunder. This mentality keeps the population playing the game, and like the casino, if enough people play the game, it is the political class and the politically connected that always win....

Presently, the Italian government’s annual deficit is nearly 4% of national output. In order cover this year’s budget shortfall at current spending levels, Italy would have to raise $72 billion. One way to do this might be to sell $72 billion of gold.

Unfortunately, Italy’s total gold holdings are only worth about $81 billion at today’s prices. That doesn’t get the Italian government very far considering Italy’s current debt has grown to almost $2.2 trillion after years of fiscal irresponsibility. Furthermore, Italy is going to have to come up with $151.55 billion in financing from September to the end of this year just to avoid default, according to Goldman Sachs. It seems the Italian welfare state is insolvent, having spent far more than they have or will be able to generate. The facts do not bode well for the world’s eleventh largest economy looking at a mountain of debt that is over 120% of national output.

The situation in the United States is not much brighter. The U.S. has 3.3 times the amount of gold as Italy, but nearly 6.6 times the amount of government debt. Sure, the U.S. has the largest gold reserves in the world, but the total amount of gold held by the United States is only worth about $270 billion at today’s prices. In other words, all of the gold held in Fort Knox and at the various U.S. mints would be enough to cover about one half the cost of Obama’s newest proposed spending bill.

In fact, at today’s prices, the value of all the gold ever mined in the history of the world comes to a grand total of $5.2 trillion. That is just enough to fund the U.S. Federal government for a little over a year at current spending levels.

The fact that government debt far outpaces the amount of gold reserves may be another signal that gold is undervalued relative to fiat currencies. This could actually turn out to be a golden opportunity to reduce sovereign debt. Perhaps, instead of dumping all of their gold at once to pay down debt, nations like the U.S. or Italy could actually take advantage of their large gold stocks and the public’s new appetite for gold by minting new coins of various weights and then selling them at a premium. The proceeds from the sale of new coins could be used to retire existing debt. As the new coins circulate, the public will be more accepting of gold. Increased demand will give countries like U.S and Italy a larger future income stream from selling their bullion.

Some economists have argued that over-extended governments should sell their assets on the open market to pay down the massive debts they have incurred. I certainly agree. This would reduce government debt and return valuable resources taking from the private sector. Gold reserves should be included in such an auction.

It is unlikely governments will sell bullion to pay debt. It is more unlikely governments will reduce spending in any meaningful way so long as it is easier for the politicians to print colorful paper tickets or make electronic entries to inflate the money supply. The chief problem is that governments do not have nearly enough real resources, actual or projected, to cover the cost of their exorbitant spending.  

History tells us that this age-old political game usually ends with destruction of the currency. It is unlikely the dollar or the euro will fare differently this time around as long as governments are controlling the money.

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Now that we’ve had exactly one month to digest the debt ceiling debacle, followed by the S&P’s downgrade of the US government, let’s take a deep breath and consider the reality of the situation.

The United States government remains very much in the midst of fiscal disaster. The debate over raising the debt ceiling for the 75th time since 1962 was a complete distraction from the real problem: Out of control government spending.

The meager deficit reductions included as part of the debt ceiling deal represent a decrease from the amount of increasing government spending. This was not an overall decrease in spending.

At the end of 2012, the government’s debt will have reached a total of over $16.5 trillion from its current level of $14.6 trillion. Ten years from now the U.S. government’s debt will reach $22 trillion dollars, given the most conservative projections. That is 51% higher than it is today. Today, our government officially spends about 3.4 trillion per year. In ten years, annual spending levels are projected to be 5.2 trillion per year by the CBO.

Given those projections, the government has knowingly promised to put us in debt to the tune of at least $22 trillion dollars. If that is the case, why didn’t Congress just raise the debt ceiling to $22 trillion since that is what they are promising to do anyway?

On August 2nd, our elected officials authorized the U.S. Treasury to borrow and spend an additional $2.4 trillion dollars over the next 15 months - conveniently, long enough to make it though the next election cycle. Clearly, the entire process of raising the debt ceiling for the 75th time since 1962 has been one of smoke and mirrors by both political parties.

But raising or not raising the debt ceiling isn’t the issue. The government is going to find a way to spend the money it wants to spend. Without question, the debt ceiling has proven to be an ineffective tool to constrain out of control government spending. At best, it is an inconvenient formality and an opportunity for cheap political posturing.

The evil here is not in the abuse of continuing to raise the debt ceiling; but rather in the government’s use of debt borrowing to fund spending on programs with which the government has no legitimate authority to be involved in the first place.

The appetite of government cannot be quenched and will continue to consume the wealth and income of those working in the productive private sector as long as we let it. We are caught in the “iron triangle” of politicians, bureaucrats, and special interest groups.

The only real solution to our government’s debt dilemma is to challenge the justifications for the size and scope of Washington’s reach over the lives the American people. The government has shown it has no plans to get its fiscal house in order.

Americans should rediscover the proper role of government and to stop asking the government to do things for us that we are not willing to do ourselves.

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