Matthew Ferrara, Philosopher
 

Forget College: Buy a House Instead

College Lending and Debt – from Wall Street Journal

Its time we bought high school seniors a house, rather than college debt.

It’s time for a radical rethinking of the best ways to prepare our children for the future.

Especially the children with more than 1 trillion dollars in collective debt. Whereas the dot-com bubble and housing bubble mostly hit adult speculators, the popping of the college tuition bubble is going to blast the futures of an entire generation, before they even get their first jobs.

We’ve warned about skyrocketing tuition debt before, here and here, too. Since the end of 2007, just before the financial crisis hit, total student debt has grown by more than 56% reports the Wall Street Journal today. U.S. college debt tops $1 trillion. Over 1 in 10 loans are 90 days late on payments. This is happening at the same time that most households have spent five years deleveraging their credit card, auto and home equity debt.

Just as the housing market gets back on its feet, the Millennial generation is in a lousy position to become first time buyers.

Which presents a huge opportunity for real estate brokers.

High school seniors.

Consider the pitch: For less than the cost of one year of college, high school grads can invest in a homeA tangible asset, possibly an income producing one, that will establish their financial footing early in an increasingly uncertain economyIt’s not just about owning a home at 18 years old; it’s the prospect of paying it off by your late thirties (which is about the time Gen Y gets married and starts having kids anyway).

After five years of recession, that seems to be a far better plan for using their parents’ remaining home equity than racking up more debt!

The average home in America runs $171,000; Four years at Boston College costs $220,000. A 20% mortgage downpayment would cost less than one year of tuition. Even interest rates would be lower than borrowing from Sallie Mae, whose rates run between 5.7% and 11.8%.

Either way, mom and dad will have to co-sign for something. They must choose: Will they invest their remaining equity in a tangible, re-sellable asset. Or do they hope for strong job demand for Post Modern EcoCentric Studies of Shakespearean Sonnets in the future…?

More importantly, consider the wealth position of both borrowers four years later. The college grad emerges with nearly twice as much debt as the high school grad. He still needs to get a job; while the other has had four years of real world experience. The college grad can sleep in mom’s cellar or rent an apartment. The high school grad pays $750 towards owning his own home.

Some parents argue the value of a college tuition exceeds the value of property. That depends. Usually such claims are based upon future earnings potential: But that’s hard to estimate. Many Boomers will tell you their prime earning years came from jobs that weren’t remotely related to what they studied in college. Still, it’s possible that college grads earn more than over his lifetime. Statistically, this year’s high school grad will earn $31,000 compared to $46,000 for the college grad.

But income isn’t the same as wealth. 

College grads starting adulthood with massive debts, at high interest rates, will find their increased earnings eaten up for a long time. They’ll be stuck renting longer, too, as the debt negates savings and disqualifies them for mortgages in a tight-credit lending environment.

Cash flow doesn’t accumulate into wealth if it’s consumed entirely each month.

For fun, compound the image by imagining that college grads will rent apartments from our high school grads who purchased a multifamily home four years earlier. And who’s to say our 24 year old homeowner won’t decide to go back to school later? But he’ll be paying for it out of his own equity. Perhaps he’ll spend less, or spend more carefully, for education. Suddenly $55,000 a year for tuition might seem insane, when it’s his money at stake.

I’d wager he’s almost certain not pledge the fraternity on his own dime.

Since the current cultural buzzword seems to be investment – in roads, in energy, in education – perhaps we should compare college tuition to other investments that could be made with the same capital and borrowing. Investors look for companies with strong balance sheets, not just good cash flows. We need to start thinking of our children’s balance sheets as they enter the real world. All around us are people, companies, even countries, who have plenty of cash. But their wealth is eroding because of their debts.

Cash investors in the housing market are proving the value of asset accumulation daily. They’re putting cash to work; not racking up more debts. They’re building a strong balance sheet. There’s a similar opportunity to create wealth for our young people, too, but only if we’re willing to broaden our concept of investing and investors.

Parents are always hoping to get their children off on the right foot. Why not place that foot over the threshold of their very own home?

And sooner, rather than later.

 

  • Charlie

    Great article. If you have someone who is smart and can make a living without going to college then this makes sense.

  • ironman2819

    This article is totally wrong… it omits that college grads make more than non grads and more employers are preferring college grads in hiring qualifications for open positions.

  • Ironman, thanks for your comment, but I didn’t omit that at all. In fact, I still encourage kids to go to college, but just not at 19 years old, and not if it means collecting tens (or hundreds) of thousands of dollars of debt. If you read the article, you’ll see that my comparison is really what happens in the *first four years* after high school. In one scenario, you have a kid emerge with four years of work experience AND an asset (house) rather than four years of NO work experience and a large pile of DEBT. With regard to college grads “making more” than non-grads, that’s true to some extent, but it usually does not occur until much later in life: Few college grads make a lot of money out of school in their 20s; and that earning potential would still exist for any 20-something who goes back to school at 22 or 25 or 30. The key is to consider whether you think it’s better for young people to accumulate so much debt early in life, or build an asset. Think about it.

  • ironman2819

    Sorry Mathew my opinion stands as you make NO MENTION of income comparisons or employer preference… so you did omit those facts completely.

    …and the differential is not a an occurrence later in life, its a statistical fact right out of the gate from day one!

    You might want to think about it the next time you blog…. because opinions mean nothing when you can’t back them up with statistical facts.

    …and that pretty graph that shows billions of dollars in federal loans each year and a trillion in total loans… that means that MORE PEOPLE ARE GOING TO COLLEGE!

    But you’re a salesman… and carefully crafted talk and marketing and speculation all looks good, but has no substance.

  • Ironman, I guess I’ll try one more time.

    First, it is my opinion; it’s an opinion piece. That’s what my blog is. I’m not trying to back anything up with statistics. I’m making an argument that using a year’s college tuition to buy a house puts someone in a better financial position in four year than accumulating four years of debt (especially for a degree in the humanities). Yes, that’s my opinion, but it’s a proposition I’m offering: “that the use of the money in my scenario yields an asset with a mortgage that can build wealth just as nicely as a college degree can.” In fact, two generations of Baby Boomers and Seniors built plenty of wealth, amongst some of the lowest percentages of college attendance.

    Now, let’s also examine your position: You say the graph shows more people are going to college; this is true, but it proves no point other than more people than ever are accumulating debt; the increase in college attendance runs parallel to the guarantee of college loans by the Federal government AND the unemployment rate. But it does not prove the point that going to college “is better” in itself than buying a home an getting a job instead. You’re arguing from an outcome to a proposition; you’re asserting a consequence, rather than offering an alternate explanation of the facts. And the only fact remains that more college kids than ever are graduating with historically high levels of debt.

    It certainly doesn’t prove they are getting better or more jobs – in fact, youth unemployment in America amongst 20 years olds is very high right now. College tuition is not giving everyone who attends high paying jobs. Since you want “facts” only, check out http://jobs.aol.com/articles/2012/09/06/2012s-college-grads-start-careers-with-higher-salaries/ where it indicates average graduate salary only $44,000; and if you’re in the humanities, only $36,000. That wage can be had if you get a job as a Lawrence, MA Firefighter (see http://www1.salary.com/MA/Fire-Fighter-salary.html) or a School Bus Driver in Seattle, WA ($34k, http://swz.salary.com/SalaryWizard/School-Bus-Driver-Salary-Details-seattle-wa.aspx).

    One more suggestion: If you’d like to have your arguments taken seriously, I suggest you drop your smarmy attitude and ad-hominem attacks. They make you look mean-spirited and silly; of course, perhaps that’s your objective – just go around to blogs and write annoying replies. If so, feel free to do it again – and I’ll be happy to ban you. On the other hand, if you have a point to make, make it with some dignity and self control.

    – MF

  • ironman2819

    You want smarmy… you got it… you hack!

    Quoting an article from AOL…. could you possibly back that up with something from myspace?

    Oh my… being banned by a used car salesman with snakeoil in his trunk…. how can I possibly go on?

  • Gee, Thomas, why am I not surprised…. But I assume you’re happy with who you are; so, good luck with that.

  • Cypherlock

    Concur with the author. Graduating with $150k+ in debt is a financial disaster for decades to come, and grads will be stuck doing work they hate to pay off that massive debt plus the bills.

    Forget college debt, don’t do it. Instead learn a trade, stay away from debt, invest that money, and in ten years the person without debt will be far, far ahead if they invest and spend conservatively. Could easily acquire enough money to retire early as well, instead of slaving to pay off abominable tuition loans.

  • william jordan

    Add a working wife into your equation, two incomes are required for middle class income anyway.

  • Evan
  • Christian Sterner

    Interesting perspective Matthew. I love the bootstrap mentality that is being advocated. I, for one, paid for my own college, working 30+ hours a week during school and then paying loans after school. The thing is, I think college made me a way better student of the business game. It’s not that anyone cannot learn on their own (especially these days), but I think the collective mentality (and network) of college/university is unto itself a huge advantage. And, as I person that hires people for high paying jobs (in relation to median salaries), I’d be lying if I said I do not look for people that went to college. I do think that you are completely right to say that kids should not go to college as early: at best, their parents paid for school and they cannot fully appreciate it. At worst, they struggle to get through school and then have to realize early that there’s a game they weren’t aware that they were playing: they were getting leveraged all along by bankers with an extraordinary trusted sales force (college admins).

  • I agree that college remains an important experience for most people, including for their future careers. And I continue to advocate for it, just later in life, not right out of high school. Financially it makes more sense to build an asset first; psychologically it seems to make more sense for most “non-engineering/non-medical” degrees to get some real-life experience and maturity first, too.

    There’s also the increasing evidence that what most people study in school doesn’t take them very “far” into the workforce as it once did. In the 1960s, you could study to be an accountant and be an accountant for the rest of your life. in the 2020s, it’s more likely that you’ll be retraining for different careers every 7-8 years. That’s going to require a different approach than the classic “go to college, buy a house” order of operations that was established last century. And it’s going to need more money/assets to sustain, so what better way to prepare for future learning needs than to build credit and assets early in life, rather than debt.

    Thanks for discussing! I appreciate the comments.

  • This is a conversation I had earlier this week with my economist friend. My new girlfriend has as much student debt as I have home debt. We both make about the same amount of money but I save a bit on living expenses, live in a better neighborhood, have a garage and a pool. I have also been able to leverage my investment by renting out 1 or 2 of my spare rooms.

    My numbers here are largely bullshit but roll with me here:
    The average college grad makes about 17,000/year more than a HS grad.
    The average student debt payment is about 2,904 a year.
    Making the difference 14,096

    The house next door to me without a pool and a slightly smaller floor plan rents for about 550 more per month than my mortgage. So there is 6,600/year savings.
    I rent out rooms for 400/month = 4,800/year

    Assuming I only rent out 1 room the whole year the savings/earnings is 11,400 if I rent out 2 rooms that’s a 16,200 difference actually exceeding the income of my college counterpart.

    Obviously this does rely on fluctuating markets but I’d argue that so does the job market and the cost of schooling. Also not everyone is in a position to rent out a room in their house. One last thing to consider is that my house is a tangible asset that I can potentially sell for a profit, something you can’t do with a college education.

  • EDAQUASURE

    I agree with you 100%.
    I am sick of hearing “the college graduates make more money myth”. It is total bullshit.
    People never factor in the income lost for the four years at college PLUS the interest paid PLUS it will take longer to pay off their first house because they don’t have extra income Plus they will have to borrow money to buy a car etc etc.So they give the banks alot more money in interest over their lifetime.They may make more but they throw away way more money and are constantly stressed out and in debt.
    Like the old saying goes,it’s not what you make,it’s what you keep.
    I never fell for this.I never went to college and paid off my first modest house by the time I was 30 working a regular job.
    I will do the same for my son except he will have it easier than I did,since I can help him pay it off even sooner.
    $100,000 plus interest for a piece of paper that guarantees nothing or $100,000 for an asset that at minimum holds it’s value and you need to have anyway to live.It’s a no brainer.