Viewpoint: Stop Calling Student Loans a “Bubble”!

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Ever since the financial crisis, Americans have begun to see bubbles everywhere they turn. The damage wrought by the real estate bubble has been so extensive that the nation is rightfully terrified that another asset bubble is inflating beneath our noses, preparing to wreck the American economy at the drop of a hat.

Bubble-phobia has now become issue number one for those who reject Ben Bernanke’s aggressive regiment of monetary stimulus, as they think it may be inflating bubbles in everything from real estate to Treasury bonds. But for frothophobes, the most dangerous bubble going today is in higher education. Don’t believe me? A quick Google search will reveal hundreds of stories foretelling of a crisis when the student loan bubble finally bursts.

But let’s get a grip. When you take a closer look at higher education, you realize that while we do indeed have some problems to address, a bubble situation it is not. Here’s why:

1The primary issuer of student loans is the federal government. 

The classic definition of a bubble is when the market value of a specific asset becomes unmoored from its true “fundamental” value, encouraging further price appreciation until the process becomes unsustainable and precipitates a crash. This is exactly what happened in the real estate market in the 2000s, as both lenders and borrowers were convinced that real estate prices would rise perpetually.

(MORE: 10 Tips for Getting the Most Out of College Financial Aid)

The thing is, the student loan industry can’t crash, pop, fizzle, or otherwise suddenly deflate because the Department of Education backs at least 85% of all student loans. Of the remaining loans that are privately issued, 90% have cosigners. On top of that it’s nearly impossible for student loan debt — whether owed to the government or to private lenders — to be discharged during bankruptcy. The upshot is that rising delinquency and default rates on student loans, while troubling in many respects, are simply not a serious danger to bank balance sheets and therefore are not going to cause a banking crisis like the real estate bubble did. If default rates do end up being much higher than the government anticipates, it will lead to losses for the federal government, and may even cause some political turmoil, but it will not add up to a financial crisis.

2. There are significant economic benefits to having a robust higher education system. 

Those who label higher education a bubble often argue that government subsidies, through grants and loosely underwritten loans, are driving up the price of higher education, just like government subsidies of the housing market did. And they have a point. But what they rarely acknowledge is the significant public benefit we all reap by hosting the best university system in the world. Our universities attract high-skilled immigrants in droves. And the research performed at these universities creates the new processes and technologies that generate high paying jobs.

Subsidizing public education mostly through loans may not be the best way to keep these benefits flowing; but there is a legitimate argument that higher education deserves significant public support.

3. For those who graduate, college is a better deal than ever.

Again, let’s go back to the definition of a bubble: They’re a result of over-valued assets. And while there’s been a lot of talk lately questioning the value of a college education, the truth is that purchasers of college degrees are still by and large making out like bandits. A recent Georgetown University study estimated that college graduates, on average, earn $2.8 million more over their lifetimes than they would if they had just graduated high school. And this earnings differential has actually grown since 1999, by 12%. Even if you end up paying the full sticker price of $250,000 for a degree from one of the most elite institutions in the country, the investment still makes a ton of sense.

That’s not to say we don’t need higher education and student loan reform. Far too many young Americans are taking out loans for degrees they never complete. Others are far too optimistic about their future earning potential and take out mountains of debt for a degree that isn’t worth it in the end. And the attitude that every American child should strive to graduate from a four-year liberal arts school is probably misguided.

But at a time when the American worker’s wages are stagnant, and he is beset from competition from all sides, shouldn’t we be extolling education as one of the few ways one can invest in oneself — and not labeling it a dangerous boondoggle?

(MORESchools Suing Graduates for Defaulting on Loans)

44 comments
mfishbein
mfishbein

"The thing is, the student loan industry can’t crash, pop, fizzle, or otherwise suddenly deflate because the Department of Education backs at least 85% of all student loans. "


-What if they can't afford it? The government already has massive amounts of debt and has been pumping quantitative easing since the housing bubble. Also, seems very unfair to taxpayers. 


"On top of that it’s nearly impossible for student loan debt — whether owed to the government or to private lenders — to be discharged during bankruptcy."


-That doesn't mean people will magically be able to pay loans back. 


"Our universities attract high-skilled immigrants in droves.


-And then we force them to leave before they product anything here. 


"significant public benefit we all reap by hosting the best university system in the world"


-The students taking out loans to pay for college don't seem to be reaping the benefits as unemployment rates and wages narrow towards the people without degrees. 


"estimated that college graduates, on average, earn $2.8 million more "


- You have to consider the price and opportunity cost of the investment. Also, not sure that number is really true anymore as labor markets have misallocated to jobs requiring prices, therefore lowering wages and increasing wages of alternatives. 

RickNielson
RickNielson

College is STILL the best place in America to get a high school education!

Let's see....I have over $160,000 in student loan debt, and a current income of $0. My masters degree in Education that added around $60K to my debt load is worth approximately $0.  Good luck collecting on that one. I'm guessing there are at least a million other people in the same boat, but it's probably more like 10 million. College degrees are a dime a dozen, but the average Joe will pay tens of thousands for one.

RandyPizarro
RandyPizarro

1) a degree is much like any other commodity.  More and more appear, the less it's worth.  Flooding a shrinking job market with heavily debited inexperienced college graduates makes the "investment" in college a questionable measure.

2)- Fine and good, the gubmint and banks are protected from insolvency (yeah, sure they are) .  What about the debtors who have ruined their lives with no relief?  The promise of big income to pay off the big debt from student loans never materialized due to a number of factors.  What does the govt. plan to do?  Open up debtor's prisons again?  Even if you enslave these debtors, you'll likely never recover the money.  They'll just live like paupers.  I know many who are in the hole right now, and have been for years.  They just stay renters, never become homeowners, etc. etc.  Life doesn't end if you don't pay back the debt, but in the end the banks, govt. and taxpayers still get stuck with it.

In the end, the banks and govt are NOT protected.  AFter it's all said and done they have to still write it off.


3)  The article fails to mention that the reason why "bubble" is used is that many students, just like home loan programs like FHA are starting to become increasingly delinquent.  It's highly doubtful that they will magically become current unless they do some accounting hocus-pocus (like moving the official delinquency date to 180 days late, like houses)

The biggest concern IMHO is the wasted generation of debtors just before the burst.  They are done with, they spent that money and the banks will never recover it.  They'll just have the taxpayer pay, as usual.


Better get this economy going Obama, time is running out.  We produce nothing except debt anymore.

steve1967
steve1967

I'm not sure I understand the articles goal - maybe it's not a definable bubble, but if the delinquencies get too bad, it really won't matter what you call it - it's a  BIG problem with potentially catastrophic results.  And does it really matter what the "public" benefit of a robust higher education system is if the primary funding mechanism collapses - really?   this appears to be more of a fantasy article than anything remotely informative.  Maybe the purpose is to defend higher ed vs. clarify and explain the loan problem.

Chase2002
Chase2002

This just in! A new Georgetown University study that was funded with tuition money from those who are acquired tuition debt from Georgetown University who is suppose to provide an education base in order to pay for the tuition accumulated from their new skills of learning how to conduct a study at the University of Georgetown states that; those who are conducting the Georgetown University study are able to pay for the debt accrued by attending Georgetown University by conducting studies at the University of Georgetown that statistically show that those who have graduated from the University of Georgetown are adequately making enough to cover their educational costs of learning how to conduct studies.


Everybody just calm down now, Its all going to be just fine!

Chase2002
Chase2002

Umm, why did my margins that float on the LIBOR start blowing up after the bankruptcy laws were passed in 2005. I can tell you! Its called no risk lending. The banks saw it as an opportunity to make fake pools of security investments to steal more wealth from those who actually work. How could my loans be originated from a federal fractional reserve bank and then have outrageous variable interest put on the loans to be sold to someone who will declare bankruptcy to then be bought off for a fraction of the cost by s trust created by the same bank????  Those who have rigged the bankruptcy laws not only in their favor but for no benefit at all to the consumer. SCAM SCAM SCAM SCAM SCAM SCAM SCAM There is some EVIL SH*T GOING ON!

TimWohlford
TimWohlford

So, let's do a thought experiment... You take the top half of every high school class (both in terms of talent and in terms of motivation), and sent 'em all to college. You then marvel that, over the course of a lifetime, people who went to college made more money.  Uh, where is your "control group"?  And **if** that was true under certain job market considerations, will it always be true?  And tell me -- when seminary students and journalism school students are graduating with $50k in debt, what praytell is the economic justification?  

rickcaird
rickcaird

Mathews is one of the reasons Time is going out of business. 

 Loans can default whether they can be discharged in bankruptcy or not.  "Not dischargable" does not mean "paid" or "performing".


Secondly, even if the loans are 85% underwritten by the Federal Government, that same government is already running a deficit of approximately $2.5 trillion.  It may come as a surprise to Mathews, but anoher $.5 trillion or so, is a big deal..

jamesdagreatest
jamesdagreatest

There is a college you can go to for a very low price and get an associate degree. It's called a community college. My community college will cost a total of  $11,400 That is including just transportation, tuition, and supplies. After scholarships and grants cost  nada. No student loans.

Went with student loans to become a medical assistant. Made payments for several years before paying it back in full with a tax refund. I made the payments even being poverty level income. Paying your bills comes from knowing how to budget no matter what your income. It comes from having duty to your word. Even during times of unemployment with no unemployment checks (because of quitting or being fired) having savings paid the bills. Knowing how and when to cut bills like cancelling cable, cell phones, and other unnecessary bills can keep everybody afloat.

TJDMBA
TJDMBA

People who are unable to pay back their loans will not pay their loans back - plain and simple.  The fact that bankruptcy protection is (improperly) not available to them makes no difference.  The fact that the taxpayers will be stuck with the bill makes no difference.  The US has many FALSE receivables because of the student loan crisis.  For those of you who think there is no student loan crisis, well, sorry to say, you are going to find out there is the hard way.  Oh well.  Keep your heads in the ground while you can I guess.

bradtaylorphotographic
bradtaylorphotographic

Chris, you're missing some critical analysis concerning the state of student loans.  You don't make any remarks as to the inflationary cycle of non-bankruptcy protected loans insofar as they relate to pushing the cost of tuition up.  When banks KNOW that the loans are going to absolutely be repaid because they can't be discharged, they are MUCH more likely to lend to anyone. What does this do?  It increases the money stream, and allows universities to charge higher tuition and administrators to demand higher salaries, regardless of university performance or job placement performance for its graduates.

Furthermore, you call this a "subsidy."  It is absolutely NOT a subsidy because loans must be repaid, with interest.

On the political side, there is less pressure to provide Pell Grants, which are a TRUE subsidy and are a real investment by the government in its people.

Therefore, we are not creating a technical asset-price inflation, but we are creating a huge debt bubble because of the inflationary cycle of student loans which throws the risk-reward scenario out of balance.  This will not abate until we roll back this excessive privatization that socializes the risk.

SteveKruckheimmer
SteveKruckheimmer

There's an "over education" bubble".We’re becoming a nation of overeducated brats, demoralized by unfulfilled expectations, living in our parents homes long past college, and credit card debt – since we spend and live lifestyles as if we earned the money we expected while earning much less – while immigrants take many of the good jobs after having made no investment in our country whatsoever.This does not indicate a bubble, but foreshadows a REVOLUTION!

SteveKruckheimmer
SteveKruckheimmer

Of course the student loan debt can cause a bubble! The bubble caused by student loans can cause a LOT of trouble.For one, it will probably make it harder for future students to get school loans.

Regarding Item #3:Of course many benefit from college, but for others a WORSE deal than ever.Anyone not making at least a B average should drop out and learn a trade, which often pays better than a college degree.

“college graduates, on average, earn $2.8 million more over their lifetimes than they would if they had just graduated high school.”This is another example of how misleading averages can be.Just a few years ago it was $1 million more, how can it be suddenly $2.8 million given the last few years of stagnant wages?Your $2.8 million average includes graduates who become hugely successful as corporate CEO’s – the average should include only wage earners, including doctors and lawyers.The fact is, most college graduates are lucky if they make as much as a plumber – in that light, all that tuition is NOT worth it.

R.s.Rosenquist
R.s.Rosenquist

Bullcrap.  There are so many college graduates out there, the value of a college education has dramatically gone down.  Most people aren't even learning anything significant in college anymore, they just need that $200,000 piece of paper in order to get hired anywhere that has "status".  Most entry-level jobs for college graduates scarcely pay any more than what a decent waiter or bartender can make without taking on any student debt.  It is a massive bubble and a terrible waste of time and money that goes to university administrators who continually find excuses to increase prices 5% every single year.  

Ultimately, supply and demand dictate.  Everybody demands an opportunity for a better life, which college promises.  So the price goes up.     We pay it anyway... and then the supply of college graduates is so high, the price of college-educated labor falls.  You'll take that job for $30,000/year after graduating anyway, won't you?  How else are you going to pay the student loan debt? ;-)

It's absurd.  Companies actually looking for intelligent employees ought to look for people who weren't stupid enough to go to college.

BenOver
BenOver

The author of this column is right.  It is not a bubble, it is a friggin 200 foot TSUNAMI!

BobJan
BobJan

There's a "bubble" in the Congress and it's gonna blow.

TonyE
TonyE


"A recent Georgetown University study estimated that college graduates, on average, earn $2.8 million more over their lifetimes." Over a forty year period, that would be an extra 70000 a year - on average. There's something very fishy about that statistic (and I graduated from Georgetown, so you would think I would be biased.)

CarlDarby
CarlDarby

I would suggest Mr Matthews read the recent NY times article about the cost of veterinary education. The debt to earning ratio for new graduate veterinarian is so bad that the only way they can survive is to sign up for income based repayment plans which will lead to a HUGE tax bill for these grads after 20 years.When they cant pay the huge tax bill the government will be left holding the debt. If the government wants to suppoet education it shouls give money directly to the universities and make that money be EARNED by universities showing they can control costs and provide a valuable product to the students. The way it currently stand the universities are on a MASSIVE spending spree with all the readily available federal loans.Anyone wanting a higher education can get loans and with IBR they dont have to worry about repaying the loans.This is a house of cards that will collapse under its own weight 

sixtymile
sixtymile

If education is an asset and it becomes overvalued by students who are speculating on their future income potential, then there can still be a bubble-effect, which may be an "education bubble". And if the debt on any overvalued asset is not discharged the result is still harmful to economic liquidity, if in a somewhat different way than home mortgages. Easy credit reduces downward pressure on any asset, which seems to apply to this circumstance.

BorisIII
BorisIII

There is a lot of former college students and college grads making too little amount of money to pay all their bills and college debt also.

DeweySayenoff
DeweySayenoff

I don't believe in hand-outs and I think those who get loans should pay them off.  But I also think loans from the government for an education should be non-profit.  I also think that private firms should not be allowed to offer student loans on terms other than what the government offers.  And it can be made to work if someone looks at the bigger picture.

Student loans can come from anyone and their terms vary.  Their terms shouldn't vary at all. The government should only charge interest at the rate of inflation and no more.  The same for private equity firms. This may be a loss leader but in today's computerized world, it's a much smaller overhead to track and record the loan and accept payments (the terms or repayment may require on-line payments to keep the overhead of check processing to a minimum, for example).  But for private equity firms, the fact is that by providing reasonable loan terms in a timely manner, they engender goodwill and trust from a person who is more likely than the average person to be able to qualify for - and pay off - other loans at much more profitable terms for the firm.  By giving a person a break on terms of a loan at the start of their career, a life-long, lucrative loan relationship can be established.

That's looking at the bigger picture.  

Yes, it runs counter to the "get a profit for this quarter" mentality among businesspeople these days, but it's smart business to establish good relations with customers especially when doing so doesn't cost you as that much, if anything at all.

The government may hold the majority of student loans, but the point of a student loan is to allow a person the opportunity to increase their earnings potential without decreasing their overall income.  The way it works these days, the student loan reduces the graduate's ability to contribute their income to the economy.  Bottom-up spending is what creates demand and increased demand generates new jobs.  One wonders what would happen if that trillion dollars of student loan debt were erased, putting that money back into the pockets of people who are very likely to be spending it rather than investing it (Let's face it, if you NEEDED a student loan to get through college, you're not wealthy enough to be investing money elsewhere.)  A trillion dollars pumped into the economy all at once (more or less) with the burden of that debt no longer resting on the shoulders of those who acquired it.

It's not fiscally sound of course, but the economy would LOVE it.

bjr
bjr

The danger in the rising level of educational debt is not the bubble, it's the fact that our best and brightest are so saddled with debt that they are delaying household formation, home purchase, and the other financial instruments which banks should be selling.  American young adult (>35 years) debt is down nearly 14% between 2001 and 2010, because debt service-to-income ratios are too high for current underwriting standards.  Also, while I think you're right about the default risk being less of a factor for the government, loan deferment is at an all-time high.  This is a problem because deferment is finite and incomes are not rising.  A default spike is coming.  Student loan defaults make cost of credit exorbitant.  A 4% car loan becomes a 17% car loan if your FICO slips 100 points.  That means no new car.  If you don't meet underwriting standards you can't access the FHA 3.5% down-payment home loan, which is the only low down payment option currently.  Student loans aren't a bubble, they're a lead weight around the necks of the auto industry, the housing recovery, and the general economy.  Not a pop but a long, slow, fizzle.

thewholetruth
thewholetruth

Obama should do the right thing and the people should demand  a wiping out of all pass student loan debt

1. The Banks were bailed out

2. Wall St was bailed out

3. The Car industry was bailed out

Give the students who are the working class people of today a fighting chance, give those who could not pay their loans a fresh start.  Complete Amnesty, All Loans from  1980 to 2010 should be bailed out.    


What a boast this would be for the American people. There are doctors who still owe over $200,000 from the 1990's  and admit they still can't pay it off

JohnDavidDeatherage
JohnDavidDeatherage

In the traditional sense, bubbles are asset prices that have risen dramatically and then collapse.  Student loan debt is not an asset so it can't be a bubble...  But students have taken on dramatically more debt than in the past.  This is a crisis in the early days.  Students can't default on their loan debt so they will default on other obligations.

College educations may not be worth the time and money for many students.  By making student loans cheap and easy to attain, the government is making the problem worse.

AlanCollinge
AlanCollinge

Wow.  Another smug, elitist, woefully underinformed analyst trying to convince us that all is well.  Time magazine, USNWR, USA Today...is there a shortage of good reporters these days, or is this sort of McAnalysis the way you roll now?

I think there's a bubble forming in shitty journalists, who consider a couple of google searches, and two phone calls (to student loan "experts" paid either by the lending system or the government) sufficient research to publish in a national magazine on the topic. 


Can't wait for that bubble to burst. 



natewhilk
natewhilk

@bradtaylorphotographic "It increases the money stream, and allows universities to charge higher tuition and administrators to demand higher salaries" 

 This x100. We're all getting screwed except the universities, and they're laughing all the way to the bank. ENOUGH!

TimWohlford
TimWohlford

See my email to you.  Have a nice day.

TimWohlford
TimWohlford

@JessicaThompson Your work, first of all, needs and executive summary somewhere. Even a well written academic paper would have a summary, both at the beginning and ending.  Second, you do admit that the prices for college keep on rising, and one must beg the question, "At what point does the present value of the earnings increase fail to equal what is paid out, both in terms of college costs as well as the lost wages for 4 years?"  Some of us argue that, for many students, we've crossed that point.  Tell me -- just how much money is "enough" for educators?  Cause I've never heard of any amount being "enough" and have always heard them decry any slowdown in spending (And isn't that what this "bubble" talk is all about?) being disastrous.  

TimWohlford
TimWohlford

@TonyE I noticed that shoppers at Macy's tended to make a lot more money, and have a high net worth.  Therefore, using the same logic as the college advocates, I claim that EVERYONE needs to shop at Macy's, cause it will translate into higher wages and higher wealth.

Christopher_Matthews
Christopher_Matthews moderator

@CarlDarby You are confusing anecdotal evidence with hard statistics. The average college debt load is $27,000. Of course there are people out there who are taking on too much debt. But should we deny those who use the program responsibly access to it just because a few don't?

That being said, I agree that it would make more sense to simply fund public universities more aggressively. But given the choice of the loan program we have now, and denying those who need them access to loans, I choose the former.

TimWohlford
TimWohlford

@thewholetruth "The Right Thing" was to do none of the 3 things you mentioned.  To paraphrase what (I assume) your mother told you, 4 wrongs don't make it "right".  Or, for that matter, "a right."

BobJan
BobJan

@thewholetruth I think that the right answer from those doctors should be "I don't want to pay it off" because then I can't drive a BMW and my family won't be able to afford to ski at Vail, Colorado every winter. Garnish their wages. That'll pay off their debt. There, problem solved. "Next".

Jodun
Jodun

@thewholetruth Funny thing, most of those bail outs were in the form of loans that the recipients had to repay. In many, possibly most, cases the recipients had to submit to close federal regulation of their business until they repaid the loans.

So basically you are saying that what the government should be doing is to increase loans to students (but not forgive the debts, the "bail out" loans were not forgiven) but then the government should step in and tell graduates what they are allowed to spend their paychecks on until their student loans are repaid? Former students would have to submit copies of their pay stubs, bills and requests for spending money to government auditors who would tell them if they were allowed to go partying Friday evening with their friends, or if they had to stay home and put the entire week's paycheck towards their student loan debts?

Yeah, that is a great idea!

bjr
bjr

...or...the government could just refinance both federal and private loans at a current market-oriented rate, say, 3%.  Then invite defaulted borrowers who finished their degree back into the fold by offering them a 12-month "penalty rate" of 5% (still below the typical private rate).  If they make all 12 payments their credit will be well on it's way to being repaired and they are rewarded with the 3% rate going forward.  

I knew what I was doing when I borrowed, but the financial climate of the whole world changed while I was in grad school.  I intend to pay back every penny, but if the government would invest in students the way they invested in the banks and the autos, we'd repay their largess with a stable housing market and increased consumer spending.

Just saying...

DavidLevinsn
DavidLevinsn

Yeah, and the government should give me something too!  ME ME ME ME ME ME ME!!!!!!

C_Ryback
C_Ryback

@AlanCollinge Alan, you forgot to ID yourself as a long-time player in this area.

Mr. Writer, you are technically correct that there is not a macro-economic problem, like OweBama (D) denying borrowing $8,000,000,000,000.00 is really no big deal. Yeah, tell that to a student approaching $40,000 in debt for a B.A.

And getting a degree is a benefit? Yeah -- if it has strong hiring bias (Harvard, Ivys). MegaStateU? Gimme a break. Their big deal: getting a college degree is required to take the GS-7 exam. Duh.

And the Georgetown study? WOW!! The fox says foxes can guard the chicken coop. And OweBama (D) had executive-level experience. And pigs fly out of Bite Me's butt, after he says something smart.

Students -- work hard. Save a lot. Community college. Scholarships. Control costs. Borrow AS LITTLE AS POSSIBLE. Have a good life - don't be a loan-slave.

Chase2002
Chase2002

@Christopher_Matthews @CarlDarby  

Chris, I believe we are all useful intelligent human beings who all have their unique way of contributing to society.  Go grab a shovel and start contributing to real GDP, its the only real way to get us out of this mess. Denial and finger pointing will no longer help us, but just kick the can down the road until the road dead ends at a cliff.

TimWohlford
TimWohlford

Advance  includes The New Yorker, Vogue and Vanity Fair magazines, which was founded by a man who never went to college, and is now headed by the founder’s college dropout son.   Reuters, AP and UPI wire services were founded by men who didn’t go to college.  You aspire to win the Pulitzer Prize, which is named after a guy who never went to college.  William Randolph Hearst, Nellie Bly, Mike Royko, Carl Bernstein, James Scripps (founder of the Detroit News), Matt Drudge – none had / have college degrees. Tell me again -- why do we need college degrees?

TimWohlford
TimWohlford

@Christopher_Matthews @CarlDarby 1)  I owe that much money.  Can I tell you what happens when you get behind? It quickly blossoms by 50%, to roughly $50k.  Then you have the WORST bill collectors calling you.  You can't buy a house. Your tax refunds are seized.  Your wages are garnisheed.  And your stats of "average" neglects the large number of outliers, who are well beyond that amount by 300-400%, and do constitute a problem.  Your logic is based on debatable figures, and the "must go to college" thing flies in the face of the fact that the wealthiest, most successful in our world today did so w/o a college degree.    

AlanCollinge
AlanCollinge

Before you write another column on this subject, Chris, I suggest strongly that you review, at a minimum, the growth in college indebtedness in the past 15 years, that you familiarize yourself with the  true (not cohort) default rates during the same time period, and also simply consider the systemic consequences that removing bankruptcy protections, statutes of limitations, and other fundamental consumer protections from a lending instrument would tend to have, and then look at the student lending system in view of these.  

Then I'd be interested in what you might have to say on the subject.  Until then, leave the cheerleading to the cheerleaders.  You will thank me later for this advice.