The Birth of the Student Loan Bubble
Nov 8th 2012 11:30AM
Updated Nov 8th 2012 11:36AM
On this day in economic and financial history...
Nov. 8 has a special place in the history of economically important American legislation. Two notable acts were signed on this day, each with a different focus and impact on the United States.
The first major act was Franklin D. Roosevelt's establishment of the Civil Works Administration on Nov. 8, 1933. It was designed as a faster alternative to the mammoth Public Works Administration -- a way to get millions of unemployed American men back to work quickly so that they could support their families for the impending winter. FDR remarked on the day of establishment that the CWA would put 4 million unemployed men back to work, with 2 million joining the direct employment rolls of the U.S. government within a week and the other 2 million "as soon thereafter as possible." This would be roughly equivalent to the government employing an additional 10 million people today, although the cost would likely be somewhat higher than a simple rate-of-inflation increase from 1933.
The Great Depression had no shortage of unemployed manual laborers, and the millions of new government employees went swiftly to work, building widespread upgrades to American infrastructure. A Slate report urging President Obama's stimulus program managers to emulate the CWA offered the following eye-opening statistics:
- $1 billion was spent over five months, equal to about $16 billion today.
- Less than 2% went toward administrative overhead.
- 80% of the funding went directly to employee payrolls.
- 12 million feet of sewer pipe was laid.
- 255,000 miles of road were built or upgraded.
- 40,000 schools and 1,000 airports were built or substantially upgraded.
The incredibly rapid pace of the CWA paid immediate dividends and served as a model for the even larger and more ambitious Works Progress Administration, which was created two years later. The CWA and the WPA helped the economy, and the Dow Jones Industrial Average (INDEX: ^DJI) began to recover from the wretched collapse that had begun in 1929. Within four years of the CWA's establishment, the Dow would double before government cutbacks sent the stock market tumbling again in 1937.
Putting college within reach
The second of the major economically important pieces of legislation enacted on Nov. 8 was the Higher Education Act, signed into law by President Lyndon Johnson on Nov. 8, 1965. President Johnson said of the new law: "This legislation ... will swing open a new door for the young people of America. For them, and for this entire land of ours, it is the most important door that will ever open -- the door to education." The Higher Education Act created the system of federally financed student aid that assists millions of young Americans with their tuition costs each year. It includes the disbursement of Pell grants and the framework for direct federal student loans such as the Stafford and Perkins loans.
This act is not without its detractors. With total student debt in the U.S. rapidly approaching $1 trillion, economists and notable investment analysts have called student loans the next big bubble. The Higher Education Act also helped finance the for-profit education industry, which has staggering withdrawal rates and in many cases offers a lower return on investment than degrees earned from state-sponsored colleges.
As the investing world wakes up to these realities, former highflying for-profit colleges have all followed the same path downward. In the past year, Devry (NYS: DV) and Corinthian Colleges (NAS: COCO) are the only two major for-profit-focused institutions that have not lost more than half of their value in the past year. Education Management (NAS: EDMC) , which runs the Art Institutes of late-night advertising infamy, has slipped a staggering 84% over the past 52 weeks.
President Obama promised to expand the government's financial support to students and institutions alike as part of his re-election platform, and he has already overseen a dramatic expansion of the Pell Grant program during his first four years in office. However, education reformers such as former Harvard president Derek Bok question the effectiveness of President Obama's efforts. Time will tell whether the Higher Education Act can stand the test of time, or whether the weight of more than a trillion dollars in student loan debt proves too much for the American economy to bear.
I can see right through you
Every broken bone, dental exam, and CT scan you've ever undergone had its origin on Nov. 8, 1895. That day, German physics professor Wilhelm Roentgen discovered "a new kind of ray" while experimenting with a series of tubes, and he called them "x-rays" due to their unknown properties. The electromagnetic rays are still called "Roentgen rays" in some parts of the world and have become essential to modern medical practices.
X-rays contribute significantly to modern human radiation exposure, contributing the equivalent of anywhere from three days' worth of natural radiation exposure to nearly three years' worth of exposure with a single scan, depending on the procedure. An estimated 183 million X-ray procedures are performed each year in hospital radiology departments, and the annual growth rate is estimated at about 5.5%, so the radiation exposure can quickly add up in the population.
Dow component General Electric (NYS: GE) generates more than a fair amount of revenue and profit from X-ray-based medical-imaging devices through its health care division.The company's digital X-ray systems have been credited with up to 70% improvements in physician productivity over older analog X-rays, and GE also offers a range of CT scanners and radiography systems.
GE's widely diversified operations can be difficult to keep up with, which is why the Fool's best analysts have created a premium research service to help GE investors (and would-be investors) stay on top of the conglomerate's major moves. If you're looking for an efficient yet informative way to keep track of GE, subscribe to our premium report now. You'll get a full year of exclusive updates and detailed analysis, so click here to get started. You'll be glad you did.
The article The Birth of the Student Loan Bubble originally appeared on Fool.com.Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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