Will rising interest rates pop the student debt bubble?

It has already been a tough year for education stocks.

By Wall St. Cheat Sheet Apr 26, 2012 1:36PM

Image: Graduation cap (© Brand X Pictures/Photolibrary/PHOTOLIBRARY GROUP LTD)The massive and still growing student debt bubble continues to raise fears. Last month, the Consumer Financial Protection Bureau reported that America's total student debt outstanding is around a whopping $1 trillion. In comparison, the total amount outstanding on credit cards is about $800 billion.


Now, the student debt load is moving back into the spotlight as interest rates are scheduled to rise.


Interest rates on subsidized Stafford loans are set to double from 3.4% to 6.8% on July 1, unless Congress intervenes. The lower rate was part of the College Cost Reduction and Access Act of 2007. Although President Obama and presidential candidate Mitt Romney both support temporarily extending low interest rates, Congress continues to debate how to fund the lower rate. According to the Congressional Budget Office, keeping the lower rate is expected to cost $6 billion for one year.


Similar to the housing bubble, loose lending standards and low interest rates have driven the cost of college much higher over the years. The College Board reported last year that the average in-state tuition and fees at four-year public colleges jumped more than 8% in the fall. However, more students are realizing the burdens of a heavy debt load and are seeking less overpriced alternatives. The Wall Street Journal reports, "Many predict any rise in rates could push more families to seek out less-expensive colleges -- furthering a shift that is already underway. Roughly 22% of students from families making $100,000 or more a year attended a community college during the 2010-11 school year, compared to 12% the year before, according to the latest data from student lender Sallie Mae."


On Tuesday, shares of Capella Education Co. (CPLA), an accredited online academic institution, plummeted almost 9% after reporting a 23% decline in first-quarter profits. The for-profit college reported a 5.9% decline in total active enrollment from the year before and expects new enrollment growth this quarter to decrease by a "high single digit." DeVry Inc. (DV) also reported a decrease in profits and enrollment in its latest quarter. Profits fell 28%, while new undergraduate enrollment at its DeVry University dropped 19.7%. Total enrollment decreased 15.1%.


It has already been a tough year for education stocks. Shares of Capella Education and DeVry have declined 13% and 19% year-to-date, respectively. Meanwhile, Apollo Group, Inc. (APOL) and Career Education Corp. (CECO) have dropped 36% and 14%, respectively. Although keeping interest rates low may provide temporary relief, it will not solve the student debt problem. Investors considering education stocks should proceed with extreme caution.


Eric McWhinnie is an editor at Wall St. Cheat Sheet. As of this writing, he did not own a position in any of the aforementioned stocks.


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5Comments
Apr 26, 2012 3:44PM
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While my son was in college a lot of his friends were living very "high on the hog" on student loans. He was amazed at how much some of these kids were getting. I kept reminding him they were LOANS and someday would have to be paid back. I'm sure most of these same kids, or their parents, are now struggling to repay those loans. While my son struggled financially while in school, I'm very happy he graduated debt free and now after several long months, is actually employed in the field he studied for. My fear now is these student loans will result in yet another bailout paid for by the taxpayers.
Apr 26, 2012 2:51PM
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Average loan is about $25,000. How many of these people who will be crying the blues will some day spend more than that on a car loan with comparable rates?
Apr 26, 2012 3:18PM
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Good tip on the stocks. Although the drop in the average education level certainly hurts us as a nation, how much more can we afford to spend?

 

Apr 26, 2012 6:21PM
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The salaries at the top are so top heavy, I'm surprised they make any profit.

Apr 26, 2012 4:47PM
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Bunch of babies, crying now after 4+ years of blowing money on a degree that was worthless now want someone else to pay for their mistakes.

Always the same tune.  "It's somebody else's fault,  I shouldn't have to pay for my mistakes or bad choices."

Goes for welfare, unlimited unemployment, bailouts, bad loans, paying to much for their house, having to many kids,  buying a bad investment...     

Suck it up, it's your fault and your problem.
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