College Costs, Mortgages, and Student Debt

The numbers say no. Our aggregate debt figures have come back some, but the overall debt burden is way down from its peak in 2007. And with lower interest rates, debt payments relative to income are reasonable. But the incidence of the debt is changing.

Young adults are graduating with significant student loan burdens. This is happening because the price of a college degree continues to grow faster than inflation. Over the past 25 years aggregate prices have doubled, but tuition costs have gone up six-fold. Tuition and fees at New York University now run almost $60 thousand a year.

Against this backdrop students are borrowing more. Total student debt now approaches almost $1 trillion. Recent college graduates carry an average debt load of more than $25 thousand each. After graduating it’s hard to qualify for a mortgage, even if they find a good job. 10 years ago, people aged 25 to 34 made up a third of all home buyers, while last year they were only a quarter of purchasers.

And first-time home-buyers are crucial to the recovery of the housing market. They enable current owners to trade up. So single-family housing starts are languishing, while multifamily rental-unit construction is surging.

One solution might be to allow first-time buyers to roll their student loans into a mortgage. They’d have to settle for a smaller loan, but at least they could qualify. But that’s just a temporary fix. The real problem is that college costs too much. The solution to this will come from the supply-side: innovative online programs like the MIT.x degree or Khan Academy could enable young people to acquire the world-class skills necessary for today’s global economy without the world-class debt-load that now attends a college degree.

But that will take time and a cultural shift. If employers begin to look favorably on these alternatives and a lower debt-load when they evaluate job candidates, it would be a start. With interest rates so low it’s no wonder college debt is exploding while college savings languish. Something needs to change.

Douglas R. Tengdin, CFA
Chief Investment Officer
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