Student Loan Bubble: Not as Bad as It Looks

Here's a scary headline from yesterday: "Student loans soar 275% over past decade."

It's true. Total student loans outstanding were $241 billion in 2002. Today, it's $904 billion, and it shows no sign of slowing down. "Student loans could be the next housing bubble," former Labor Secretary Robert Reich said in March.

He may very well be right, but there's another side to this story.

Yes, total student loans have surged over the past decade. But what else happened during that time? The number of students enrolled in colleges jumped 40%:

Source: National Center for Education Statistics.

The rise in college attendance has been ongoing for decades, but really spiked in recent years -- particularly among graduate students. As the jobs market dove in 2008, armies of recent college graduates ran to grad school in lieu of an employment market that had no room for them. In 2009, the number of people taking the LSAT (law school entrance) exam jumped 20% from the year before. The number taking the GRE (standard grad school entrance) exam popped 13% last year. "When job creation slows, there's an increase in the number of people who pursue a graduate degree," The New York Times reported two years ago.

Take that into consideration, and about one-third of the increase in total student loans over the past decade can be attributed to more people attending school, not an increase in the per-student debt burden.

What else happened over the past decade? Average weekly wages for those with a college degree increased 24.9%, according to the Bureau of Labor Statistics. That has to be factored in when comparing debt levels. The burden of $900 billion of student debt today just ain't the same as it was a decade ago. And a lot of the debt is being taken on for a good, rational reason: The average worker with a college degree now earns more than twice the wage of a high school grad, and wages for college grads increased faster than those without degrees over the past decade.

A great paper from the College Board puts these figures in the right context, calculating the average student debt among recipients of bachelor's degrees, per borrower, adjusted for inflation:

Source: College Board, Trends in Student Aid, 2011.

Is there an increase? Yes. Is it stratospheric? For the most part, no. In real (inflation-adjusted) terms, average per-borrower debt increased from $19,500 in 2001 to $22,000 in 2010 for students at public schools, and from $23,000 to $28,100 at private schools. The College Board offered more perspective:

  • "From 1999-2000 to 2009-10, average debt per borrower among public college bachelor's degree recipients increased at an average annual rate of 1.1% beyond inflation."
  • "From 1999-2000 to 2009-10, average debt per borrower among private nonprofit bachelor's degree recipients increased at an average annual rate of 2.2% beyond inflation."

That's hardly bubble territory. Mortgage debt during the housing bubble was increasing at more than 10% above the rate of inflation. And a lot of the rise in student debt above the rate of inflation can be rationalized by the fact that average wages for college grads have grown faster than inflation.

So what are we missing here? For-profit schools, such as Apollo Group (Nasdaq: APOL  ) and DeVry (NYSE: DV  ) .

College Board explains: "Students who earn their Bachelor's degrees at for-profit institutions are more likely to borrow than those who attend public and private nonprofit colleges, and those who borrow accumulate higher average levels of debt."

In 2009 (the latest year there's information on), only 16% of students at for-profit schools were debt-free, and 65% had more than $28,000 of student loans. At public schools, the same numbers were 40% and 14%, respectively. Iowa Sen. Tom Harkin shares another startling statistic: For-profit schools originate about 10% of student loans but account for nearly 50% of defaults. That's where there's excess, and maybe even a bubble.

Make no mistake: College is getting more expensive, and debt is going up any way you slice it. But for debt among students at not-for-profit schools -- which makes up the majority of college attendance -- it's hard to say we're at a bubble just yet. The numbers haven't changed that much in the past decade.

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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. 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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  • Report this Comment On June 01, 2012, at 11:53 AM, midnight8x wrote:

    No offense Morgan but you are missing some basic common sense issues that make this crisis far worse than people realize. For every 1 of my friends who recently graduated who find a job that pays at least $60k a year in the field they majored in there are dozens and dozens of friends who are working at retail stores, small shops, as assistants, cleaners, etc. all earning about $30k a year max. You take the cost of monthly expenses; rent, car, utilities, food, clothing, and now add in the monthly payments to student loans and you have millions of struggling students all over the country. All their income goes to paying off those things, none of it goes to investing or saving so now we have a long term crisis. The ones who are the future to our economy aren't creating or innovating, they're paying off debt they can't keep up with. They can't claim bankruptcy on these loans and now you have a growing bubble of defaults. I'd much rather prefer your optimism but just wait, hate to say I told you so.

  • Report this Comment On June 01, 2012, at 12:07 PM, TMFMorgan wrote:

    No doubt true in some cases, but still anecdotal. Median wages for those ages 20-24 (most recent grads) have increased at a virtually identical rate as per-borrower student debt over the last decade.

  • Report this Comment On June 01, 2012, at 12:10 PM, TMFMorgan wrote:

    Further, the current unemployment rate for those with a bachelor's degree is less than a percentage point higher than it was a decade ago. That does dilute some of the difference, but not much.

  • Report this Comment On June 01, 2012, at 1:50 PM, yonkmember wrote:

    Hi Morgan,

    Interesting analysis, as usual. I am a scientist and find the salaries for scientists and engineers to be greatly outpacing the debt levels required to obtain such a degree (anecdotal/small sample size, but I have seen papers written about the very low unemployment rates for people in these areas at least) and the salaries are increasing at a faster rate. I am curious as to whether there are discrepancies between the different subject matters in this regard. Have you seen any data that breaks down the issue by subject matter?

    I was paid a stipend when obtaining my Ph.D. that covered my tuition and left me financially sound enough to cover all necessary expenses--this is common in the physical sciences, but I do not know how common it is for other areas. It also taught me to live below my means. Although it wasn't easy, I see now the benefits were much greater than just my degree and a better salary.

  • Report this Comment On June 01, 2012, at 2:12 PM, playtothebeat wrote:

    One of the problems I'm seeing is people incur debt to go to college thinking that just by getting a degree, they will automatically have a well paying job. Many of my friends did not take advantage of what their colleges offered - career advice, job fairs, networking opportunities, etc. They assumed that just by having a degree on their resume will lead them to a high paying job. That may be the case in a strong economy (I doubt it), but it's certainly not the case today.

    After graduation, they end up with jobs that pay less than they expected or jobs which are not in a career field they are interested in. This leads them to see college as a bad investment, which then leads them to complain that student debt is a horrible idea, etc.

  • Report this Comment On June 01, 2012, at 2:19 PM, Jgrimm4 wrote:

    I graduated college with $34k in debt. I worked two jobs bar tending and selling cellphones from a kiosk in a walmart. I paid off all my loans way before they were due. I hate excuses. Try this first...no iPhones, no new cars, no dining out, no big screen tv, not that nice apartment you like, no cable tv, etc etc etc... How about those retail folks get another job at night delivering pizza? oh the humanity.

    Our people and our government have a spending problem.

  • Report this Comment On June 01, 2012, at 2:40 PM, whereaminow wrote:

    Ok here are some things to consider.

    It doesn't help to say that "well sure loans are up, but that's because more people are going to school!"

    We know that. That's the problem. The market is trying to tell us that it doesn't need more college grads (in a certain context), yet we keep pumping them out. That's the problem.

    Now that doesn't mean "college is an evil liberal conspiracy!" It just means that what kids are learning in college isn't necessary to the market. So, more of that unnecessary stuff isn't any better either.

    But probably the biggest mistake here is an assumption that is implied in your debt ratio comparison. You're implying that debt ratios from the previous time period (1999-2001) are normal or correct amounts. So when you say "well, things haven't changed much in a decade", that statement is only relevant if we are certain there was no loan bubble 10 years ago.

    With the tremendous layers of government intervention in higher (de-)education, this is a bubble that is decades in the making. It's going to keep going on, as long as the academic bureaucracy can fight against innovation, and as long as the American people continue to believe the brainwashed nonsense that "everyone must go to college to have a shot!"

    At some point, it'll give. At some point...

    David in Liberty

  • Report this Comment On June 01, 2012, at 3:00 PM, alstry wrote:

    The joke about the above analysis is that since we are running such a massive PUBLIC deficit today, unlike in 2002.......we are essentially forcing the students to borrow money to go to school and we are no borrowing their money for compel them to work to pay back their students loans.

    Not a bad gig for the "adults"....borrow trillions of dollars of the students PUBLIC money to pay them barely enough to cover their expenses and pay back their massive debt.

    Let's see how long the "educated" students take to figure out this ponzi scheme? Madoff lasted 30 years. This one has been going on 10...but it is much more public as the system collapses right before our eyes.

  • Report this Comment On June 01, 2012, at 3:24 PM, CoreAndExplore wrote:

    I would love to see a breakdown of income for new grads by degree, that would be a depressing graphic for liberal arts folks (myself included).

    I'm three years out of college, have had 6 jobs since graduation, finally got a salaried position in the field I want, and then lost it after a few months due to serious illness (stress-related, in fact). I have driven a junker '93 Honda Civic for the last 5 years, abstained from any kind of iPhone or the like, do not have cable, never dine out. While I have managed to pay off all my credit cards every month in full (until very recently) and even make monthly contributions to my Roth IRA, my position is untenable and unsustainable. This time is a depression for my generation, much less a recession, make no mistake.

    I also agree with whereaminow's point regarding perspective: student debt load has been at critically high levels for well over a decade, so comparing today's levels to those of 10 years ago definitely doesn't give the whole picture. It would be great to see how things have evolved over the last 3 decades or so.

  • Report this Comment On June 02, 2012, at 2:34 PM, dfrndez wrote:

    1. This is selective data in that it is only looking at the last ten years which may or may not be all that is needed to hint at a bubble but is far from representative of the pervasiveness of educational inequality during my lifetime.

    2. You cannot ignore for-profit institutions. These type of schools are increasing their prescence and make up a sizeable portion of the outstanding student loans and more importantly the defaults. If there is a bubble now or in the future these schools are what will be the main driver. These schools boast over half the number of oustanding loan defaults despite representing only 10% of the total student population. The graduation rates are abysmal (5% for some like Univ of Phoenix). The ROI for society is zero. While the market has pummeled these schools over the last 12 months I don't see how they can't further go down.

  • Report this Comment On June 02, 2012, at 8:45 PM, TMFCop wrote:

    Morgan,

    Looks like we're going to be disagreeing a lot these days.

    We've got more people going to college these days in hopes of getting a better paying job...just as everyone else is going to college in hopes of getting a better paying job. Yet as BLS says, the only jobs that are really growing are part-time jobs: they just hit a record 28 million!

    And it's showing up in delinquencies. Apparently as every other form of debt is showing delinquencies declining, student loan debt delinquencies are on the rise! Loans that are 90+ days delinquent jumped to 8.7% in the first quarter and more than a quarter are 30 days past due (27% actually).

    Student loan debt has surged $663 billion since 2003, according to the Fed and delinquencies remain ahead of mortgages, auto loans, and HELOCs.

    Interestingly, dropout rates are soaring too. The number of borrowers who graduated has dropped from 77% in 2001 to 71% in 2009 according to the Washington Post.

    And while people with degrees may have lower unemployment rates, BLS says unemployment amongst 20-24 yr olds is at 14% while Bloomberg says for 18-24 yr olds its 46%!

    The fact is, student loan debt is a huge, huge bubble that will be popping very soon. You are right about one thing: things aren't as bad as they look...they're worse.

    Rich

  • Report this Comment On June 02, 2012, at 11:27 PM, valari25 wrote:

    Nothing gets fixed until bankruptcy can wipe out student loans. When the lender has all the power and can ruin your life until the day you die in order to collect, there is no incentive to reform the student loan system. Start by getting the federal government out of the student loan business.

  • Report this Comment On June 03, 2012, at 12:25 AM, TMFMorgan wrote:

    <<And while people with degrees may have lower unemployment rates, BLS says unemployment amongst 20-24 yr olds is at 14% while Bloomberg says for 18-24 yr olds its 46%!>>

    Yes -- much, much, much lower. Those age 20-24 with a bachelor's degree have an unemployment rate of 6.8%. For those the same age with a high school degree, it's 20.1%.

    I don't think we disagree by pointing out that delinquencies are high and rising: as is written, a lot (half) of that is linked to for-profit schools, which I think are mostly a joke and look awfully like a bubble.

  • Report this Comment On June 03, 2012, at 12:44 AM, TMFMorgan wrote:

    <<The number of borrowers who graduated has dropped from 77% in 2001 to 71% in 2009 according to the Washington Post.>>

    That, too, is overwhelmingly a function of the rise in attendance at for-profit colleges, which have a higher drop-out rate (78% vs. 35% at private schools and 45% in public schools)

  • Report this Comment On June 03, 2012, at 1:19 AM, TMFMorgan wrote:

    And just to be clear again: This article doesn't state that there's not a bubble in student loans; just that the vast majority of the excess and "bubble" activity is specially in the for-profit sector.

  • Report this Comment On June 03, 2012, at 1:19 AM, TMFMorgan wrote:

    specifically*

  • Report this Comment On June 03, 2012, at 6:30 AM, TMFCop wrote:

    Good points, Morgan, and I had actually meant to note that WaPo had shown for-profit college students had much greater problems than other institutions.

    The statistics typically cited are that for-profit students make up 10% of the college student body, consumer 25% of the federal student aid, and account for 50% of the delinquencies.

    Of course, I think Harkin has cause and effect wrong so his broadsides against the industry are misguided (but that's a topic for another article :) ).

    Still, I don't think we can lay all the growth in student loan debt at the feet of for-profits and the real cause has been the easy-money policies of the government, just as with subprime mortgages -- which it's trying to make even easier. And if the proposals for outright forgiveness are pushed through, the end result will be horrendous.

    We're creating a class of people who will be debt slaves to their student loans, working to pay them back, since student loan debt can't be discharged in bankruptcy.

    Naturally, I think getting the government out of the student loan business would help things immensely, as would removing it altogether from the education racket. YMMV.

    Rich

  • Report this Comment On June 03, 2012, at 7:27 PM, devoish wrote:

    Rich,

    As always I would like you to identify the country that uses your economic model of removing itself altogether from the education racket so we could see how successful it is at educating its population.

    keep in mind that raising taxes for education has resulted in 75% of US kids graduating high school and you have to beat 95% to do better than countries whose Governments are involved in the education racket.

    Good luck.

    Second;

    <<Total student debt levels are around $870 billion. Average student debt stands at $23,300, but the median debt — a more telling figure — stands at $12,800.>>

    <<So after that flurry of graphs and data, what is the takeaway? First, the overwhelming majority of young people do not have student debt, and a significant chunk of those with student debt are not young people. As such, I think it is misleading to equate student issues with youth issues. Second, the highest percentage of households with student debt tend to be middle-to-higher income (in the 40-90% income percentile), and those with the most student debt have the highest incomes. In all of this, it also important to remember that college graduates as a whole come from relatively affluent backgrounds, have relatively affluent futures, and enjoy other economic privileges over their non-degreed counterparts.>>

    - http://mattbruenig.com/2012/04/30/more-data-on-the-student-d...

    Solutions to college debt?

    <<The first and most blunt option is to have the federal government pay for college directly from general tax revenue. As Mike Konczal pointed out, the federal government already heavily subsidizes higher education via tax deductions of various sorts. When these various subsidies are added together, they come very close to the amount of money that would be required to simply pay every college student’s tuition upfront. Thus, we could eliminate the higher education subsidies and redirect the money towards direct tuition payments.>>

    or

    <<The final option I will consider here is — I think — the best one, and one which some other countries rely on. We could make education free by levying a surcharge tax on everyone with a college degree. Under such a system, all college is free at the point of delivery, but all those who graduate are made to pay an extra 5% of their income, or some other amount, for the rest of their lives. This seems to have precisely the distributive impact one would desire. It eliminates student debt altogether; it taxes those who have benefited from college education to pay for the higher education system; it does not tax money from the 70% of people without a college degree; and, it ensures that those who benefit most from their college degrees — as measured by income — pay the most back into the system.>>

    http://mattbruenig.com/2012/03/25/on-the-politics-of-student...

    Best wishes,

    Steven

  • Report this Comment On June 03, 2012, at 7:44 PM, devoish wrote:

    Finally, I think Morgan is exactly correct to target for profit schools as the problem, as was the President of the United States for targeting for profit lenders who added no value to the guaranteed college loans they were passing through and profiting from.

    Best wishes,

    Steven

  • Report this Comment On June 03, 2012, at 7:50 PM, CaptainWidget wrote:

    The tail doesn't wag the dog.

    The amount of college student is going up because of the proliferation of federal backed student loans, not the other way around.

    More people are going to college because it's subsidized and they don't see the real cost. The increase in college students is, not coincidentally, from poor performers in HS who will likely not graduate.

    Having a new class of people with 1/3 of a college education and billions in debt is NOT good for prosperity.

  • Report this Comment On June 03, 2012, at 9:56 PM, devoish wrote:

    <<The amount of college student is going up because of the proliferation of federal backed student loans, not the other way around.>> CaptainWidget

    Which is a success of the Government backed lending program. The failure is in allowing a private financial industry to get a cut of Gov't spending for delivering no added value.

    As opposed to the failure of a free market economy.

    Best wishes.

    Steven

  • Report this Comment On June 04, 2012, at 9:07 AM, Tuxster12345 wrote:

    I know you're referring to the overall scheme of the student debt crisis, but your article title is quite arrogant. Try selling it to the average overleveraged college student.

    How much student loan debt do you currently carry?

  • Report this Comment On June 04, 2012, at 9:18 AM, Tuxster12345 wrote:

    Jgrimm4:

    If you had yet to pay off your student loan debt, you wouldn't be so arrogant as you are toward those who are struggle under their student loan debt.

    You and perhap some others are surely the exception and not the rule.

  • Report this Comment On June 04, 2012, at 9:19 AM, Tuxster12345 wrote:

    I don't know you or someone else comes up with the titles of these articles - yes, I know they are meant to be less than prosaic and to catch attention - but this one is quite arrogant.

    Try selling your article to the average over

    How much student debt are you currently carry?

  • Report this Comment On June 04, 2012, at 1:08 PM, Marksad14 wrote:

    Interesting article, and though accurate, it only focuses on student loan debt itself, and does not take any other parameters into account.

    I recently completed an MBA at NYU, as well as a certificate in Real Estate at NYU Schack (Sustainable Development), and one thing that is unrealized and often overlooked (as in this article) are the general demographics surrounding such data. Truth be told, when "adjusted for inflation," the "mean" and "median" student debt level per person has barely crept up in the past decade. This is good research, and is very good to show people, because I most commonly see articles comparing current debt levels to levels from the 90s and 00s in a side-by-side manner. I honestly don't know how people like that are even employed or allowed to post inept articles as such.

    Anyways, what is completely disregarded here is the inflation and demographic data that DOES NOT at all compare to a decade ago. Housing has more than doubled in arbitrary value in most markets, or almost tripled in larger markets in this ten-year window. General commodities have more than doubled. (Food prices over 112%; Gas prices over 405%) And, "adjusted for inflation," salaries HAVE NOT increased 24% over the past decade for college grads. I know where your number comes from, but what you have neglected to tell the audience is that number only includes "employed" college grads. So what would the number be if ALL college grads were included in the computation??? I think it's time to recalculate.

    The horrible truth about this is that there is a problem with the whole idea of student loan borrowing. No other industrialized nation in the UN forces their citizens to take on mounds of student debt before even starting their careers (unless they choose to attend a private university). It is all subzidized in one form or another. Our problem isn't "spending habits, cost of education or the amount of people going to college," it is the fact that our country has turned college into a money-making scam. We aren't producing skilled people for the workforce; if anything we are preparing people for indentured servitude for the next 10-25 years of their life while they "try" to find the best-case scenario of a job/career that can most-efficiently pay down their debt. This in no way will spur the economy, influence innovation or help the economy grow.

    Furthermore, how on earth is a student in this day in age, with current (stagnant) salary levels, the price of housing, price for general (necessary) utilities, and price of food, able to absorb all of the new real estate product that is out there, and that will continue to become available while more and more people become deceased? It's hard enough with all of the factors listed above, right? Now, factor in a student loan payment to that expense sheet, and tell me how that is suppose to happen? The reality is that it won't happen. The student loan debt bubble is going to cause the housing market to stagnate, and then crash over the next 10-15 years. Slowly but surely it will happen. We are at an unsustainable debt level in this day in age, especially when considering total debt-to-income ratios for the country - we've gone from a nation that carries a 67% DTI ratio 15 years ago to over 112% today. What does that mean? That means people spend more than they make, because they have no choice.

    Cap rates keep rising, interest rates keep plummeting; Why? Because the affect of this unsustainable level of borrowing has finally caught up with the economy, and is now hitting our most secure, equitable product as a nation, our "real" property.

    If the government wants to fix this and ensure our future as a superpower and nation, they must learn how to quickly control and stabilize the student loan lending industry, and bring stability back to a system that is crashing right in front of us. If the housing industry suffers, it will take down our entire economy. Salvaging this mess begins with resurrecting the student loan industry, and giving a new beginning to our generation and our faltering economy.

  • Report this Comment On June 04, 2012, at 1:49 PM, Marksad14 wrote:

    And to add to this, I should clarify my housing comments. The housing prices have doubled (or more) due to, yes, the housing bubble. But most people don't know or even understand what that is. That means that from 1998-2006, Joe Schmo could walk into a bank and get a mortgage for a property (that he never intended on living in) with ZERO down. They would even wrap the closing costs into the loan. And no, not an FHA loan. A standard perm-term loan. As a result, housing values "arbitrarily" crept up over 200% in an extremely short period of time. The people getting these mortgages make the same (and in my instance, MUCH less) than us newly graduated college grads, whether with an associates, bachelors and masters. Yet because of the fly-by-night loans they received, they were able to make their money, set the rental market, and even through a recession, they have still been able to more or less stabilize the RENTAL market through the country. So what does this all mean? (And I have tried to make this as clear as possible for all the readers) Well, it means what we see today. Some of these idiots have defaulted on their mortgages when, even if only for a few months, their house was vacant and/or no rent was coming in. Furthermore, home ownership is at an all-time low, and will dip below 60% this year. It doesnt help when rent accounts for 25-75% of a person's net income.

    In my instance, so everyone understands where I am coming from, I live in a neighborhood in Queens, NY where my rent is $2200/month. I could get a 20/80 25-yr fixed mortgage at 3.5% and my housing payment would be the same, whilst building equity. The problem or roadblock? 20% down on a $700k house is impossible to achieve at current debt-income ratios....and to be honest, I'm probably better off than most because I landed a descent job. But if you factor my $700/month student loan payment into the mix, then it would take me over 10 yrs of penny-pinching just to save the down-payment for the current/arbitrary price of real estate in today's market. Mind you, I make more than double the amount of money than the guy who owns my house, but its irrelevant. And to add insult to injury, I can't deduct student loan interest off my taxes because I make over the capped amount.

    What's the point of this example? Our generation will succumb to indentured servitude and never be able to build for our future like previous generations did, unless something is done.

    In the meantime, rather than bitching and complaining, I have tried to start a business on my own to try and reclaim a portion of the next 10-20 yrs of my life, working for the US Dept. of Ed.

  • Report this Comment On June 04, 2012, at 4:33 PM, Darwood11 wrote:

    Morgan, thanks for the analysis.

    Recent statistics also indicate that college students are graduating with some credit card debt. I'm not sure of the current numbers, but I saw a Sallie Mae report which indicated the "average" college student will graduate with $4,100 in credit card debt.

    Of course, the problem with averages is they dilute the peaks, and I've seen statements by recent college graduates that they were struggling with college loans and credit card debt of $25K.

    http://www.jumpstart.org/ has published some dismal figures about college student financial literacy.

    I am of the opinion the current situation is exacerbated by a confluence of factors, which vary in each personal situation. They include: 1) Higher college debt, 2) Higher credit card debt, 3) College student and graduate financial illiteracy, 4) The rise of the entitlement mentality, 5) The state of the U.S. job market.

  • Report this Comment On June 05, 2012, at 8:04 PM, whatevmatil wrote:

    Any thoughts on the inability to discharge student debt via bankruptcy? What incentive did/do lenders have to make loans responsibility in this kind of enviroment?

    This implies potential problems in my mind - did/do lenders loan money responsibly when the borrower has no way out?

  • Report this Comment On June 07, 2012, at 11:59 AM, ShaunConnell wrote:

    'But what else happened during that time? The number of students enrolled in colleges jumped 40%:"

    ...Lol, that's literally the whole bloody point. It's a college bubble. Everyone and their uncle is going to college, including people who have absolutely no business going to college.

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