Monday, February 6, 2017

Some thoughts on Bubbles and Student Loans

"The market can stay irrational longer than you can stay solvent" - John Maynard Keynes

These words from the famous economist John Maynard Keynes come to mind whenever I think I see some type of bubble in the stock market or elsewhere. The saying refers to the risk of taking a short position, or betting that a particular investment will go down in value. When you simply purchase an investment, your risk of loss is your purchase price and your potential gain is unlimited. When taking a short position, you profit as the investment loses value and lose as the investment gains in value. In shorting, your gains are limited to the point that the investment goes to $0 but your risk of loss is unlimited.

Michael Lewis' book turned movie, The Big Short, popularized short selling by showcasing investors who won big betting against the U.S. housing market in 2008. The Greatest Trade Ever showcases other traders who made even larger gains on similar types of trades. One thing that was common between both stories was the serious risk of insolvency many of the investors faced as they continued to pay premiums waiting, and waiting, and waiting, to be proven correct. They knew that the housing market couldn't continue rising indefinitely, yet it continued to defy their predictions almost to the point that they (and their investors) could no longer handle the continued losses.


It seems like every week I come across an article predicting the rise of another bubble. There's the 'Auto Loan Bubble', the 'Housing Bubble' (again), and don't forget the 'Student Loan Bubble'.

"An investment in knowledge pays the best interest" - Benjamin Franklin

For hundreds of years, this mantra has been repeated in this country and for the most part, I tend to agree. Education can be the key to a better life and can allow for significantly higher lifetime income. What is missed from this simple quote though, was clarified by John Adams who said:

"I must study politics and war that my sons may have liberty to study mathematics and philosophy. My sons ought to study mathematics and philosophy, geography, natural history, naval architecture, navigation, commerce, and agriculture, in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry, and porcelain." - John Adams

Interpreted for our day and age, I take this to mean that education is great, but don't study something that doesn't have a financial return unless you don't need a financial return. If you build a legacy sufficient to sustain the next generation, then by all means, allow them to study something they love that may not pay the bills, because you've got that covered for them. If you don't have this luxury and do actually need your education to provide a return, then you need to study something that has value in the marketplace.


Where we run into problems is the belief that an education is worthwhile at any cost. I recently was reading about the astounding levels of debt the average dentist owes. The author of this article finds the average dentist just starting out has an average of $450,000 in student loans with an income of just $120,000 without even taking into consideration the cost of buying into a practice or other borrowing such as a mortgage. Add it all up and it's not difficult to find a dentist with over $1,000,000 in total debt. An income of $120,000 sounds great, but it doesn't go very far with debt levels approaching 4x annual income.

Is this a new thing? One of my favorite fiction authors, Michael Crichton, started his career going through Harvard Medical School (which later helped him as a writer for the hit TV show E.R.). While he was a student there, he wrote Five Patients where he walks through the hospital visits of 5 hospital patients in the 1960s. The book was first published in 1970 and I read it 40 years later in 2010. Even though the book was 40 years old, I was surprised how relevant some of the stories were and was shocked that some of the same problems that existed in the medical field then, persist to this day. I specifically remember that he highlighted that in order to enter the medical profession one had to either come from a well-off family or have a strong tolerance for high levels of debt.

I've been saying for years that it doesn't make sense that students are able to borrow as much as they do and that reform is imminent, yet for years I've been proven wrong. Thankfully I haven't made any investments based on that theory. If people have been saying this as far back as 1970 though, are we truly close to the bubble bursting?


  1. Yet banks and credit unions continue to lend to anyone with a DDS or DMD behind their name, and the bubble continues and gets worse

  2. I keep thinking it can't get worse, and continue to be proven wrong. All this debt could have something to do with my most recent dentist experience. I went in for a cleaning and walked out with a recommendation that I get 10 fillings...even though I've never had a cavity and a different dentist 6 months ago said I didn't have any. Guess where I'm not returning?

    One sign of hope for those of us stuck paying the bills is that the rise of high-deductible health plans seems to have more people questioning how much medical services in general actually cost.

  3. Although I am not a Keynesian, I really like the quote. Mr. Market truly has a mind of his own.

    I was quite surprised to read about the average (and astronomical) student loan debt for new dentists. I would think it would be high, but I would not have guessed it would be that high.

    I had a similar experience as you with my dentist and I am now in the market for a new one. Each time I went in for a cleaning, they would incessantly push x-rays and additional services down my throat (pun intended). I finally got tired of it and decided not to return.

    Thanks, also, for the Benjamin Franklin quote as well. I have to remind myself of this often as I stare down the barrel of $60k in student loan debt.

  4. Could you imagine trying to pay off $60,000 in student loans with an income only $16,000? That's basically the average dentist coming out of school based on's (not statistically significant but directionally accurate) sample.

  5. Nope, I definitely cannot imagine that! I know what the monthly payment is on my loan and cannot imagine having to deal with the monthly payment on a student loan balance of $450k, even with an income of $120k.