President Obama signed an executive order yesterday extending student loan relief to an estimated 5 million borrowers, capping their monthly loan payments at 10% of their monthly income. Another apparent something-for-nothing program, this makes for great politics but it does nothing to solve the real problem of the economics of higher education - or the lack thereof. It ends up being just another government shell game that shuffles the costs around without doing anything to reduce the underlying costs or to improve the return on that investment. I think we've seen this movie before - the so-called affordable care act.
Yeah, this has little to do with real estate except I'll probably find some way to tie it in along the way. But this blog is about the economics of real estate and making smart financial decisions so when I see something that just doesn't make economic sense I'm inclined to pontificate on it. I've actually written about why college tuition is so high before and that's half of the real problem here, not how to pay for something that shouldn't cost that much in the first place.
What seems to be lost in this whole discussion is the fact that the average crushing student debt that everyone is moaning about is only $27,000. That's right...I said ONLY. It's the cost of a really nice car. There are really only two possible explanations as to why a college graduate can't pay off a $27,000 loan: 1) They aren't managing their money properly or 2) Their college education isn't providing a decent return on a $27,000 investment - and a decent return in this case is only somewhere between 4 - 7%. (BTW, that's below the return you should get on a real estate investment. There's your real estate connection.)
Regardless of which problem it is the government should not be stepping in to facilitate either kind of bad decision making because every government subsidy always and everywhere ends up misallocating resources. You can't escape it. (Yeah, I'm opposed to the mortgage interest deduction in case you were wondering. Another real estate connection.) I couldn't believe that this program has actually been in place for a while and that yesterday's action only expanded it's scope. Capping monthly payments at 10% of income basically sanctions getting a college degree in order to work at Starbucks - at the taxpayer's expense. Obama's most recent budget put the cost of this expansion at $7.6 B but, when asked, Education Secretary Arne Duncan said "We actually don't know the costs yet. We'll figure that out on the back end."
The economics of higher education is already verkackt because of all the subsidies in place. First, you have all the money left to the universities by those dead greedy rich guys that provide tons of financial aid. Then you have all the taxpayer subsidies to city and state institutions that lower the price (but not the cost) of in-state tuition. The real problem is that when it costs $240,000 to educate someone but they don't have to pay that cost they make bad economic decisions - about whether or not to go to college, about where to go to college, about what to major in, and about how hard to work in college.
I'm horrified by the examples I see in the media about the graduates who can't pay off their student loans on a $30,000/ year income. Please explain why we are spending $240,000 so that someone can earn $30,000/ year - basically a college degree provides no incremental value. To this day I remember a conversation I overheard when I was in Austin, TX and riding the UT shuttle bus. The bus driver was complaining to a friend about the fact that he had a PhD in something like medieval folk literature but the only job he could get was driving that bus. The basic tone of the conversation was not that he screwed up but that society owed him a better job. All I could think about was how much money someone wasted on him.
Why does everyone need to go to college, regardless of what degree they get? Something is really messed up when society thinks that the only self-respecting job involves a college degree. I caught a few minutes the other night of the 15th rerun of a Friends episode where Phoebe's brother talks about dropping out of college to care for his triplets. The joke, followed by the laugh track, was that this college turned out to be refrigerator college. Why was that a joke? Have you had your refrigerator repaired recently? Do you have any idea how long it takes to get the guy to come to your house, because there is a shortage of these guys, and what they charge? What about getting your car repaired? Or your heating/ air conditioner system? These are damn good jobs that pay a lot better than working in Starbucks with a degree in art history but apparently society looks down upon them.
My father never got past the 6th grade and my mother never went to college but they ran a dirty but respectable and profitable auto body repair business that provided a great lifestyle for a family of 4. I applaud Peter Thiel for encouraging young people to quit college and make an impact.
What Could The Government Do To Really Make An Impact On The Student Loan Problem?
Let me run a few ideas past you and feel free to provide your own in the comments section below.
- Lead an initiative to figure out why it costs $60,000 to provide one year of college in an effort to cut that cost in half.
- Collect data and make it broadly available on what the return is on a college education - by school, by major, by GPA - so that students can make intelligent choices about how to approach college.
- Provide extensive career planning assistance at the high school level so that students can determine if college even makes sense for them and how to approach college if they do choose to go there. This would include a healthy dose of the alternatives to college.
I think any of these initiatives would do more to solve the student loan problem than what was just signed into law, though they don't provide the immediate political gratification of something as sexy as student loan relief.
But in the end we can debate this all we want and the politicians can play all their games but you know what? The market is going to make the real decisions. Eventually fewer people will go to college and colleges will learn to cut the necessary corners and the cost of college will become affordable.
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