The next generation of home buyers has too much college debt

The cost of college has exploded over the last decade, outpacing even the housing bubble. The culprits are the same wolves, just dressed up a little differently: easy credit, greed, and lots of kool-aid to to around. The toxic combination of high student debt levels and a terrible job market is crippling the financial future of recent college grads. From a real estate perspective, this could impact the starter-home markets for the a decade or more as the next generation of first-time homebuyers is already burdened with too much debt.

Even worse, government-backed student loan debt cannot be walked-away from or discharged in bankruptcy. Many will be saddled with their debts for decades to come.

College Loansharking

Similar to the housing bubble, it was a legislative push to bring a college education to the masses that stimulated demand. Grants and loans became much more widely available over the last 10-15 years. And, safe from bankruptcy discharge, student loan debt became an easy and safe investment.

Like anything else, increased demand lead to increasing prices and, therefore, more stimulus and higher loan amounts. With the economy seemingly booming, few thought twice about taking on huge debts. After all, their college education would lead to a high-paying job.

Colleges used the extra cash to expand in every direction, adding buildings, professors, increasing salaries, and expanding facilities. Fueled by willing investors and government mandate, the price spiral grew quickly.

All of these actions were taken in the name of helping students, but few ever stopped to consider that loaning an 18-year-old kid $40,000 a year might not be “helping” him. In fact, just like housing, the beneficiaries weren’t the borrowers, but the lenders, brokers, and sellers. It is their collective, repugnant greed to blame.

An example from the New York Times:

Meanwhile, universities like N.Y.U. enrolled students without asking many questions about whether they could afford a $50,000 annual tuition bill. Then the colleges introduced the students to lenders who underwrote big loans without any idea of what the students might earn someday — just like the mortgage lenders who didn’t ask borrowers to verify their incomes.

Sound familiar?

Unlike housing, however, the victims are mostly young people. And, unlike housing, the debt cannot go away.

For more about how we got into this mess, check out articles by Mish HERE, HERE, and HERE.

60% is a big number

60% of student loans are either in forbearance or default (with interest piling up). A full 60% of these predatory loans are NOT being paid back. This is a staggering number. A full 60% of recent grads are watching their loan balances grow with less and less hope of ever paying them back.

This generation will have a harder time qualifying for home loans, and will certainly qualify for smaller loans, until these debts are paid off. But we are making NO progress. In fact, the situation is only getting worse.

Common sense suggests a combination of an improved job market and a reduction in new debts going forward will slowly clean up the mess. Unfortunately, both of these trends are still heading in the wrong direction.

First, stop digging

When you’re in a hole, stopping digging is sound advice. But our policymakers would prefer to dig faster, seeking greater access to student loans and increasing Pell Grants. Both will only result in higher tuition and more debt slavery.

But “more people in college” is not the answer any more than “more people in homes”.

For what it’s worth, my solution is the same as my solution to the foreclosure crisis: allow bankruptcy judges to reduce or eliminate these debts.  But this simple solution probably won’t ever happen because it would actually protect and help us, the people. Our government would rather craft policy to help the banks and colleges, hoping to find more creative ways to stick us with the bills.

Will Social Mood Shift?

It certainly did with housing. Owning a home certainly isn’t as prestigious as it was 5 years ago. The government has gone to great lengths to encourage the public to remain interested in housing…low interest rates, tax credits, stopping foreclosures, etc.

Will the demand for college, at the current costs, fall?  As the discussion spreads through more and more mainstream press, one would think that more high-school grads would be hesitant about taking on college debt.

It is certainly possible that, over time, colleges that over-expanded during the boom would get pinched just like homeowners who over-improved their homes.

This will be an interesting story to follow over the next 5-10 years. No doubt, it, along with the housing and tech bubbles, will be one of the stories that ends up defining a this generation.

The real question is how will spending, saving, and risk-taking behavior change for the 20-and-30-somethings going forward. How many times can we be burned and still be willing to borrow and spend enough to keep the housing market and overall economy afloat?

This entry was posted in Macro Trends and Analysis, Social Mood Swings and tagged , , , , , , , on by .

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About Greg Fielding

I am a longtime real estate agent who has pretty much seen it all during the housing boom as bust. With experience in selling high-end property and low-end foreclosures, raw land, short sales, development work, apartment buildings, and working with investors, I bring a well-rounded perspective to my work.I also have started to do some paid real estate consulting. If you have questions or just need some good real estate advice, book an appointment at http://whattodorealestate.com/In addition to selling real estate, my insights have been featured in The New York Times, The Big Picture, and regularly on Patrick.net. I have also done consulting work with ForeclosureRadar.Starting my career, in 2003, I have sold homes throughout Alameda and Contra Costa counties, specializing in Danville, Alamo, Blackhawk, San Ramon, Dublin, Pleasanton, Walnut Creek, Lafayette, and Orinda. I live in Danville with my three kids.


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43 thoughts on “The next generation of home buyers has too much college debt

  1. Joe

    “For what it’s worth, my solution is the same as my solution to the foreclosure crisis: allow bankruptcy judges to reduce or eliminate these debts.” You have got to get to a hospital to get your brain scanned. How stupid. Think about it – if we eliminate all the debt for the morons and have only responsible people pay their bills, what are we left with BEING RESPONSIBLE IS THE SAME AS BEING A SUCKER. Mr. Fielding you are a JACKA_S. What an idiot.

  2. Sarah

    If student debt got forgiven it would be a travesty. I got accepted to several extremely prestigious universities but after much careful consideration went to a run of the mill state college, took a mcjob, and stayed at home with my parents – precisely because I did not want to get into debt. I would be aggravated beyond measure if those that just incurred student debt just got those debts forgiven. They would then be walking away with a more prestigious college degree and a great college experience, all at mine and other careful non-splurging responsible citizens expense.

  3. Jon

    Allowing the discharge of student loan debt is not quite as dumb as it sounds. Essentially, the banks would decide who goes to college or not, based on future earning potential. They might require the parents to co-sign on the loan and hold them responsible if the student walks away. It would work the same way as buying houses; the banks decide who is apt to pay it all back. I’m not sure that’s such a bad thing either. Some people who go to college are just wasting their time.

  4. Annie

    Debt is one of the reasons why my son and my other kids are staying close to home. Between my husband and I and his part time job his tuition and books are covered. He will leave school and start his life with NO DEBT! Meaning he can move ANYWHERE in the country and work. You can’t even imagine how many parents I know, after 4 years of having their child away, are moving the “kids” back home. They can’t AFFORD a place to live and the student loan payments at the same time. Had a “graduate” helping us out at GAMESTOP who is in the same boat!

    We need to teach KIDS and PARENTS that the bragging rights of “sending your child off to college” is all a farse to fat cat out of state colleges who degrees are not worth the $150K in tuition. Does it not phase parents that “kids in other states are running to your state college for an education?”

  5. Thomas Brookside

    “It is their collective, repugnant greed to blame.”

    It is not “repugnant greed” if the government steps up and offers a guaranteed return and you, you know, take the return.

    It wasn’t the lenders who made the debt non-dischargeable. It was the Congress. The Congress was annoyed because it passed a law guaranteeing the debt, and so the lenders made the loans the Congress WANTED them to make – and then students defaulted, so the Congress was left with the bill. The intelligent thing to do would have been to stop guaranteeing the debt, so that banks would take future earnings potential into account when making these loans. But the Congress wasn’t willing to do that, because it “wouldn’t be fair to people who want to study the humanities” or some such nonsense. They decided to take the route of making the debt nondischargeable instead. And so now the students are screwed.

    There was no “repugnant greed” here. There was simple political incompetence and an unwillingness on the part of the Congress to face reality.

  6. Rob Smith

    I don’t think being able to include student loan debt in bankruptcy is rewarding irresponsible behavior, because I don’t think the students are the irresponsible parties in this situation. For decades, kids have been sold by colleges and government on the idea that to be a success, you need a college education. For them, going to college was responsible behavior. The problem came when colleges, in order to accomodate (fleece?) the millions of students (suckers?), many of whom had no business being in college, started designing degree programs that offered a diploma, but no marketable skills (I’m sure everyone can name a few, so I will refrain). Then the colleges realized that most folks couldn’t afford their prices, so they brought the banks in to offer “easy financing”, and then the banks brought (bought?) there buddies in the government in on the scam. So, what you have is a bunch of suckers, who finally realized they’ve been scammed, looking to the government for recourse, only to find out that the government was in on the fleece.

  7. Noah

    Correct me if I’m wrong, but didn’t the government just pass some new laws regarding student loans. My understanding is if a student keeps up with the payments, after 20 years the loan is forgiven. If that’s the case, a student will never be saddled with student loan debt for life.

  8. Mirco

    In Italy we did something like this, but in a saner way.
    The government give the loans directly and then is repaid.
    But the loan is without interests and the borrower can only be forced to pay 1/5 of his net income until the debt is repaid.
    This is true for all debts.

    With debts mounting because of compound interests, the borrower will easily become unable to repay the debts under the current economic conditions (hyperinflation would help, I suppose).
    Without the ability to payback the loan, the borrower will have no incentive to look for and work for an higher income. So he will be forced to keep low pay jobs and government handouts.
    A win-win situation for the statists.

    FYI, in Italy there is no personal bankruptcy So walking away from any debt is not easy. When you become insolvent, you are put in a list by the banks and stay there for seven years. Obviously, people on the list will not be able to borrow anything. The only exception are employed people that sign “1/5 cession” where the lender will automatically take up to a 1/5 of the paycheck even before the lender see his money. It is the employer will automatically pay the lender in the same time he pay the employee.

    I think this is the less damaging way to do things right enough.
    The lenders (the banks) are paid. The government is paid back (without further interests). The borrower pay back his loan. All of them did the wrong thing. It is unfair only one (the borrower) is left with the lemon to suck.

  9. Greg Fielding

    No Joe.

    If the debts could be discharged, fewer loans would be made, demand would lessen, and prices for all of us would come down.

    Supply and Demand 101.

  10. Greg Fielding

    “So, what you have is a bunch of suckers, who finally realized they’ve been scammed, looking to the government for recourse, only to find out that the government was in on the fleece.”

    Well said.

  11. broke n broker

    where are the parents of these kids? older and wiser go hand in hand (that is if the kid is not too hard headed to listen). no way i would tell my kid to take on mountains of dept to hopefully find some non existent job.75% of recent college grads are unemployed or rediculously under employed.

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  13. D

    Both my wife and I went to college and graduate school, funded primarily through student loans. She then became extremely ill and has been unable to work since graduation. Our student loan bills, at minimum payments, are $1,800 per month. That’s close to $20,000 per year, post-tax dollars.

    Thankfully, I worked extremely hard and was exceptionally lucky to get a high paying job where we can afford to pay our loans. But, we certainly can’t buy a house. I wonder how all my colleagues who were not so lucky can afford to pay their loans.

  14. TheOldMan

    $50000 of college debt for an engineering degree is not the same as $50000 of college debt for a (women, gender, black, etc)-studies or art history degree. The engineering degree is an investment, the others are a loss.

  15. supersaver

    Now you want me to give my hard earned taxes to ivy leaguers with too much debt?? How about giving everyone equal amount?? Why just give these private school babies this money?
    .

  16. supersaver

    well what is it then? If banks write something off you either take a loss or are compensated for it. Its the housing thing all over again….gov’t will have to repay the banks for all these bad loans..yes thereby giving these slackers a free ride on my work!

    People that go to NYU, CMU, etc know exactly what they are getting into. They chose to go to a lavish, expensive, private school …just like buying a 600K 2 bedroom condo right? there are many lower price schools out there…most should try going to community college and actually learning something

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  18. supersaver

    “In fact, just like housing, the beneficiaries weren’t the borrowers, but the lenders, brokers, and sellers. It is their collective, repugnant greed to blame.”

    I take serious offense to that. I am a life long democrat, but believe in helping the disadvanteged….but when you have people going uptown then begging for help I have no sympathy. This gal first went to NYU–in Manhattan—now she moves to San Fran — two of the most expensive cities in the world!
    Help the orphans and handicapped –able bodied fools should be on their own.

  19. Walter Sobchak

    Debts that can’t be repaid, won’t be repaid. These education loans can’t be repaid because the people who got them will never get jobs that pay enough to be able to pay off the loans. A write off and a clean slate would be better for every one.

  20. Greg Fielding

    “gov’t will have to repay the banks for all these bad loans”

    Just like housing, I hope not. Anyways, we’re talking about a vastly smaller dollar amount.

    “People that go to NYU, CMU, etc know exactly what they are getting into.”

    Few 18 year olds really understand what they are getting into, especially given that they are told from preschool on that their best chances for success in life hinge on attending a good college.

  21. Greg Fielding

    “Help the orphans and handicapped –able bodied fools should be on their own.”

    I agree. The difference here is that I’m not suggesting these borrowers be treated differently. In fact, I’m suggesting that the special treatment be removed from the situation.

    Here, the special treatment is that, just like a mortgage, the debt cannot be discharged or reduced in bankruptcy. This is special treatment to the lender, which has lead to predatory lending in both cases. I would simply like to see these bankruptcy-exclusions removed.

    This is by no means a hand-out. Bankruptcy is no picnic and you would have to prove to a judge that you could not afford the debts…not everyone who wants too would be able to do this.

  22. Jeff

    As long as the government continues to flood the for-profit education industry with loan dollars, and the risk for these loans is borne SOLELY BY students and the government… THEN the industry has every incentive to:

    * Grow at all costs
    * Compensate employees based on enrollment
    * Influence key regulatory bodies-Manipulate reported statistics and other regulatory measures

    All to Maintain Access to Government Money.

    “It’s about the numbers. It will always be about the numbers.” -Bill Brebaugh, head of University of Phoenix Corporate Enrollment

  23. Tim

    Sadly, most adults don’t understand what they are getting into either. This country as a whole lacks any real financial sense. Kids taking out absurd loans for college while their parents took out an absurd loan to buy a house. Its unfortunate because it doesn’t take a lot of intelligence to add up total costs and compare to what you make (or will make). The problem is everyone just follows the herd and assumes “well if so and so is doing it, then so can I.”

    Even if you get a decent job, 200k worth of debt is ridiculous. It shouldn’t take a genius to realize 200k is a sh**load of money.

  24. Peter T

    When cancellation of student debt is allowed by congress, where will the owner of those notes go to get repaid – right, to congress, because congress gave them a title that could not be cancelled and then congress took that title away and replaced it with a less valuable title. If congress has to repay them, it means I have to repay those lenders as taxpayer, and I am not inclined to support that. The borrowers took the eternal debt, now they should use their education to repay it.

  25. Craigie

    First, one reason why it is difficult to obtain an undue hardship bankruptcy discharge is the availability of income-related repayment plans. If your income is low, you pay nothing, and after many years the loan is forgiven. Originally only available for direct loan borrowers, income-related repayment is now available for all federal loan programs, although the features differ slightly. In any case, most bankruptcy judges will have a hard time seeing it is an “undue hardship” to pay $0 per month, although a few have rationalized that it is stressful to the borrowers to see the balance “hanging over their heads.”

    Second, default rates of federal student loans, even after 20 or 30 years, are very low. Default rates have been declining for decades and will continue to decline in the short term. In the longer term, default rates will increase if the recession continues too long.

    Certain types of schools, which, to-date, represent a small minority of borrowers, exhibit extremely high default rates for borrowers and loans associated with their attendance. However, unless, and until, those schools’ market share increases significantly, we won’t see a “national” default rate, even after 20 or 30 years, of anywhere near 40 percent ( a figure pulled out of the air by some of the most radical, pro-amnesty debtor lobbyists). Even borrowers who already have a past history of student loan defaults — the most risky group — will only show an ultimate default rate of 40 to 60 percent.

    Third, there seems to be a ton of confusion between the federal student loans (guaranteed, direct and “Perkins”) and the private educational loans. These are totally different sets of borrower terms, conditions and benefits and, for maximum clarity, should not be discussed in the same post. Private educational loans were fully-dischargeable in bankruptcy to the same extent as credit card, automobile, mortgage and other consumer debts, until 2005.

    Private education loans can be underwritten like a mortgage or any type of consumer or business credit product. Except for a brief period where things got out of hand (due to excess liquidity and relatively-new means of liquidity — securitization, ABS, and warehousing) in the mid-2000s, these products have generally been tightly underwritten. The downside, of course, is that, in contrast to a mortgage or car loan, there is no collateral (the co-signers may have plenty of assets though).

    The federally-guaranteed education loans are almost risk-free — default has almost no impact on loan holder or guarantee agency — and this is where the international investors who supplied much of the capital during the 2000s misunderstood the product and got out at the worst possible time for the American marketers (“banks,” nonbank lenders, state lenders, and nonprofit lenders) of the federally-guaranteed student loans. These foreign investors equated a guaranteed student loan with a non-guaranteed subprime mortgage, when, in reality, it was the safest investment around for a financier.

    Fourth, student loans are a symptom, not the disease. The American system of postsecondary education finance is the disease. However, the federal student aid system can definitely be used as a tool to strong-arm schools into fixing the disease, because right now there are probably less than a dozen colleges in the USA which could survive more than a semester without the cash flow provided by the federal student aid programs. That leverage provides a strong carrot and a strong stick. The politically weak federal education dept, though, has always acted as more of an arm of the schools, lenders and guaranty agencies than the boss of them. The U.S. Supreme Court has long held that the expenditure power and the leverage of the strings attached to federal monies are some of the strongest Constitutional powers of the federal govt. Maybe the time has come to make use of them to restrain educational costs. Sure, there will be cries of “socialism,” but why should the taxpayer pay all the bills (many colleges receive 90% of their revenue from Pell Grants and student loan proceeds) and not have some say in how the monies are spent? It would be like a parent serving as mere checkbook for a child without any say in what the child can do for the first 18 years of life . . .

  26. Minion

    Indeed!

    I never would have been able to finish my ME degree working a McJob. It was too hard. Government loans to the rescue.

    The result: 5 years later, I have $35k debt @ 5.8% interest average, and $60k salary.

  27. Greg Fielding

    “Fourth, student loans are a symptom, not the disease.”

    Consider this addiction analogy:

    Debt is the addiction, loans are the drugs, entitlement is the disease, and Uncle Sam is the neighborhood dealer.

    Great comment by the way!

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  29. littleplanet

    About time we woke up to this storm brewing.
    I see a foggy little crystal ball beginning to clear up nicely…a bunch of
    “older” investors sharing in the profits earned by all that remarkably
    compounding interest on all that deferred and defaulted student debt.
    Sure, kids – the ticket to happiness isn’t the education that made you
    a better citizen, it’s the credential that buys the ticket to the job that pays
    your way into the middle class. (and at what a price!) Only problem….the ticket is fast turning into about the same likelihood as winning a Powerball windfall.
    Nice odds.

  30. Jack

    I guess in a manner of speaking, $21,600 is “close to $20,000 of after-tax dollars”. Sometimes I wonder WHAT you people GET for that sheepskin.

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  32. NSS

    That is not bad – $35k debt with $60k salary. If you can some how save enough money just like how first generation immigrants do, then you will be debt free in 3 years or less. To do this you must sacrifice a lot
    1. Share your appartment with another person
    2. Buy a used car and not a new fancy car costing 1000′s more which will always depreciate
    3. Cut down on your luxuries – curtail on your exotic habits

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  34. Jennifer

    Yes Sarah, but you’ve demonstrated through actions that you are smarter than they are, and that’s worth much more in the long run than a prestigious degree.

  35. Dan

    Only on a blog, not in the real world is that more valuable. we have built a society where the top and bottom feed off the middle. If you have “a day’s work for a day’s pay” you are a sucker. If you pay your bills you pay the banks and reward them for the mess they have landed in, and when you pay your taxes you pay everybody else’s tab through government assistance, that was once meant to be a leg up and is now just a place for the entitled to get a lifestyle they can’t afford. The fabric of our society has been damaged. This lays at the feet of the Bush economic team and Alan Greenspan. The current regime has only doubled down. It makes me sick.

  36. Greg Fielding

    Sarah,
    Allowing student loan debt to be discharged in bankruptcy is very different from “forgiving” the debt. Let’s let a judge decide what’s right on a case-by-case basis.

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