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