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A friend and I were talking a little about finances, debt, and planning, each having a goal to buy a home in the next couple years.
A friend mentioned that his student loans were a huge burden on his finances. Currently, the loan payments are $900 a month. My friend has a huge student loan debt (6-figures). At this stage in his career, his pay is pretty decent, upper middle class in many metros, in ours it is barely middle class at around $80k. My friend is in his late 30s, and is not expecting any huge windfalls anytime soon. He’s also not seeing an end to the loan payments either.
Rent and loan payments represent about 50% of his take home pay.
In our city, an average one bedroom condo is about $250,000. A 3 bedroom town home in a decent school district is $700k. And that is still packaged with a long commute to most job centers.
With the huge amount of debt, student loan debt and otherwise, we are carrying,we have to delay big purchases. It reduces future and current purchasing power.
We are at an age now, where in previous generations, people would be “settled” into marriage and parenting.
Now, most people I know, even well paid ones, can’t even thing about making the leap into home ownership, due to the combo of high prices and existing debt.
Zero impact. The money you pay back to the bank gets relended to others that spend it on the economy (be it immediate, or by paying for another piece of parchment at a spendy school who then pays salaries and those people spend money).
This whole myth of paying back banks retards the growth of the economy is out of control.
Sure your friends life would be better if he had no loans, but the economy only falters if you stop paying your debt, or if that debt is forgiven (the forgiven debt doesn't just disappear like mortgages at the end of monopoly, someone is going to take a loss, and that loss will be passed into the people.
Zero impact. The money you pay back to the bank gets relended to others that spend it on the economy (be it immediate, or by paying for another piece of parchment at a spendy school who then pays salaries and those people spend money).
This whole myth of paying back banks retards the growth of the economy is out of control.
Sure your friends life would be better if he had no loans, but the economy only falters if you stop paying your debt, or if that debt is forgiven (the forgiven debt doesn't just disappear like mortgages at the end of monopoly, someone is going to take a loss, and that loss will be passed into the people.
This couldn't be any more false. The reality is that student debt is having a substantial impact on the demand for housing. Young people are straddled with so much debt that they can no longer manage to leverage a mortgage to purchase a starter home. As a result, home ownership for the 25-35 year old demographic is quickly approaching a historical nadir. This is bad because real estate growth is closely linked to retail growth.
I think we're really close. We hear pundits & pols saying we have to do something, which in their view is always "give away money" by forgiving student loans, offering more grants, etc.
All of the pundits miss the real issue.
Every student who did well in Econ 101 knows every time a good or service is subsidized, consumers consume too much of it & producers produce too much of it. This results in a distortion of the efficient allocation of capital. Once the efficient allocation of capital has been tinkered with, these distortions inevitably lead to a lower GDP than would otherwise occur absent the distortion. Given several white boards & some not particularly advanced mathematics, I can prove that overall as a country we are worse off than we otherwise would be if we didn’t have those distortions.
Higher education is no different from other goods and services in this regard. By virtue of subsidizing the cost of higher education in the USA, as a society we both produce and we consume too much of it – probably far too much. We see the results of this market distortion all around us: both the cost & the price of higher education go up faster than the general price level, the competition to get into college is extremely fierce, and far too many graduating college seniors across the country face a career path that starts with asking customers “…Would you like fries with that?”
Just as with other goods and services, the subsidies we provide for higher-ed results, at a macro level, in every one being a bit worse off. As an aside, an interesting senior econ thesis topic might well be an estimation of just how much worse off we as a country are as a result of this distortion in the efficient allocation of resources. Just how negative is the ROI?
At the same time, most educators, college administrators and many parents & alums take it as an article of faith that more is better – more financial aid is better, more alumni donations are better, more grants to the mission of the college are better, more research grants are better, and more foundation contributions are better. When we point to individual students who benefit, we are all moved. It is clear financial support has direct links to changing real people’s lives for the better. Similarly, financial subsidies result in a benefit for faculty & administrators, but we usually don’t highlight that benefit, preferring to focus on the students. There is a big leap, however, from the notion of any individual deserving student receiving financial aid to pursue an education (and career) that she/he would not otherwise be able to pursue, and the macro view that we are introducing distortions in the efficient allocation of capital that ineluctably lead to a lower GDP and standard of living for all of us relative to a world without those distortions.
This brings to mind a conversation I had with the late Milton Friedman on this topic some 35 years ago. He of course agreed with the observation of the market distortions and their consequences introduced by financial subsidies, but he also observed something else. He noted that throughout history, true advances in every discipline (arts, sciences, technology, medicine, government, etc) are the result of the efforts & breakthroughs of a tiny fraction of people engaged in that endeavor – and he went on to quip that college of course encourages a tremendous amount of indiscriminate breeding in a very discriminating gene pool, noting he had met his wife in college. Dr. Friedman then changed the subject. He knew which side of his bread was buttered.
At the end of the day, we are both producing & consuming far too much higher ed. It is an interesting parallel to the root cause of the housing bubble - tinkering with the market to encourage an "ownership society" where people far down the economic ladder could jump on the bandwagon of housing price increases. The price of housing always goes up, right?
It's crippling the economy. You're going to start seeing Generation Y completely rejecting the consumerist economy en masse, because they can't afford to buy housing or new cars.
The real application of the law of supply and demand in this situation is this: If the supply of guaranteed money is nearly infinite, the demand of universities and colleges for more of it will be nearly infinite. Thus, the cost of higher education continues to rise exponentially.
It also prevents recent graduates with business aspirations from taking a risk and starting one. Instead, they must work for someone and placing a priority on paying down the student debt. Some of our brightest and most innovative are stuck working to pay down that debt. Sure, some will find very well payed positions in well established companies. On the other hand, what they could have contributed to society in terms of new business and innovation may never be realized.
It takes the right mixture of capital, drive, and timing to start and set a good path for a business. Student debt screws with that mixture.
Indirectly.. perhaps. I'm sure it does impact the economy.
The only step really necessary was ICR/IBR. Now people that can't find jobs that pay well right out of college aren't screwed. The vast majority eventually find high paying jobs allowing them to consume more for their entire lives.
This couldn't be any more false. The reality is that student debt is having a substantial impact on the demand for housing. Young people are straddled with so much debt that they can no longer manage to leverage a mortgage to purchase a starter home. As a result, home ownership for the 25-35 year old demographic is quickly approaching a historical nadir. This is bad because real estate growth is closely linked to retail growth.
So they screwed the pooch getting debt, and your solution is more debt?
How does a mortgage differ from rent? Especially in retail.
And since it's a starter home, they'll never own it, they're just paying rent to the bank, and their fragile finances are on the hook for all the repairs that come with ownership.
It also prevents recent graduates with business aspirations from taking a risk and starting one. Instead, they must work for someone and placing a priority on paying down the student debt. Some of our brightest and most innovative are stuck working to pay down that debt. Sure, some will find very well payed positions in well established companies. On the other hand, what they could have contributed to society in terms of new business and innovation may never be realized.
It takes the right mixture of capital, drive, and timing to start and set a good path for a business. Student debt screws with that mixture.
Indirectly.. perhaps. I'm sure it does impact the economy.
If they were the brightest college would have been free. I'm not even all that bright, and even I was able to get a full ride scholarship.
Too many mediocre people are growing up thinking they are exceptional, and that leads to too many people taking out piles of money to pay for a degree from a third tier school, and these third tier schools are little better than no college at all.
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