One of the favorite quotes of my grandfather was “Be careful. They’ll always loan you more money than you can repay.” Algie Lawing only had an 8th grade education but he spoke prophetic words which I have never forgotten.
Exactly twelve months ago, student loan debt surpassed credit card debt in America. Cheap money and willingness to loan to almost anyone have resulted in student loan debt which now exceeds $1 trillion. This month, two-thirds of the graduating college seniors will have some amount of debt and it is estimated to average $25,250. If they’re lucky, their student loan debt will be roughly equal to their starting salary which is estimated to be $27,000, down from $30,000 only four years ago. But for many others the situation will be much worse.
For the last 25 years, college tuition has increased at more than four times the rate of inflation. Unable to keep up with rising costs, students have increasingly turned to loans which, in turn, have created a debt bubble with striking similarities to the dot-com bubble, the housing bubble and the mortgage foreclosure crisis.
The conventional wisdom that all college degrees translate into higher income is no longer true, especially in certain fields but, as early Facebook investor Peter Thiel recently discovered, questioning education in America is “really dangerous. It’s like telling the world there’s no Santa Claus.” Nevertheless, high school counselors, college admission officers and parents have not been honest about the job opportunities and earning potentials of degrees in art or sociology compared to science or technology. There are real differences in today’s workplace associated with what you studied and learned.
Equally significant is the fact that legislators and college administrators have become conditioned to closing any funding gap with student loans. Thus, when legislators struggle with tight budgets, it is much easier to reduce support for colleges than for prisons. Nationwide, state support for colleges is at a 25-year low or $5,833 per student compared to $7,121 in 2001. An abundance of easy student credit has filled this shortfall but at what long-term price?
Will student debt derail the housing recovery? I believe it will. It is the silent threat to a housing recovery which few in the real estate industry have even acknowledged.
As Trends magazine recently mentioned, debt often delays life-cycle events such as buying a car, getting married, purchasing a home and having children. Twentysomething, Inc estimates 85 percent of college graduates now move back in with their parents, up from 67 percent in 2006. In many cases, these are the same Boomer and Xer parents who took out additional debt to help their children with college costs and now will be further constrained by supporting their children after graduation.
Can today’s recently-minted college graduate repay his or her debt? Maybe a better question would be why did 17 million students go to college at all? As reported by the Mises Institute, in 1992 5.1 million college graduates were under-employed. By 2008, the number was 17 million or roughly 50% of all college graduates which included 80,000 bartenders, 317,000 waiters and waitresses and about 25 percent of all retail salespersons.
A healthy real estate market is founded on the “domino effect.” Young newlyweds buy a starter home; the sellers move to a larger home to accommodate their growing family; the sellers of that home, having grown accustomed to a nicer lifestyle, move up; etcetera. Without a pool of qualified buyers for the developer’s starter home, the real estate dominos do not fall which is exactly the serious threat posed by today’s student loan bubble.
Rest assured this month’s college graduate does not want to move back in with his folks; he simply cannot afford any other options. Rest equally assured, as long as recently-minted college graduates cannot qualify to rent their first apartment, real estate sales market conditions will remain depressingly unchanged.