Tel: 800-253-2350

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.