May 30, 2010

A HIGHER ED BUBBLE? This sounds familiar:

So in an eerie echo of the mortgage crisis, tens of thousands of people like Ms. Munna are facing a reckoning. They and their families made borrowing decisions based more on emotion than reason, much as subprime borrowers assumed the value of their houses would always go up.

Meanwhile, universities like N.Y.U. enrolled students without asking many questions about whether they could afford a $50,000 annual tuition bill. Then the colleges introduced the students to lenders who underwrote big loans without any idea of what the students might earn someday — just like the mortgage lenders who didn’t ask borrowers to verify their incomes.

Ms. Munna does not want to walk away from her loans in the same way many mortgage holders are. It would be difficult in any event because federal bankruptcy law makes it nearly impossible to discharge student loan debts. But unless she manages to improve her income quickly, she doesn’t have a lot of good options for digging out.

With only a few exceptions (like being admitted to Yale Law School or CalTech) I strongly recommend avoiding student loans. And I wonder — when you’ve got an industry whose prices have skyrocketed on a combination of consumer ignorance and cheap credit, what happens when consumers wise up, and credit gets harder to come by?

UPDATE: A reader emails:

One rather interesting thing about that article comes right at the end. The woman they profile makes $2,300/month after taxes, pays $750/m in rent and would have $700/m in loan payments if she was paying in full (which she isn’t because she’s in night school). They then claim that paying both the rent and the loans would leave her little in the way of money to live off of. By my math, she’d have $850/m to live off of, which is plenty for a single person who’s at all sane with their spending.

I suspect the real issue here is that she’s never learned how to manage money. That would explain her debt, her degree (in Religious and Women’s Studies, which is a good choice if you want to work in Fast Food) and her current situation. Note she’s blaming Citibank for giving her the money (which they shouldn’t) but she signed the papers.

Unfortunately this is far too common a story today, but the issue is as much the fault of the students and their parents as it is of the Banks and Colleges.

-Adam Maas

Who’s an adult, back in school after over a decade in the workforce and living on much less than $2,300/m USD after taxes.

The Higher Ed establishment has been selling college as a matter of emotion, self-fulfillment, and entitlement rather than economics. Nothing new about that — sports cars are sold the same way — but one doesn’t depend on the sports car to generate the income needed to pay off the sports car loan . . . .

ANOTHER UPDATE: Reader Brian Abbott writes:

I really think your exceptions for when student loans are appropriate are a bit excessive. I put myself through engineering school at Virginia Tech. Between the relatively low tuition and the low cost of living there, I was only $12,000 in debt once I was done. Within 3 years of graduation, I had that all paid off.

Student loans aren’t a bad thing as long as you keep them in a reasonable range (i.e. less than the cost of a car) and you’re majoring in something that’s actually in demand and pays well (i.e., not law, education, or basically anything else that starts with “Bachelors of Arts”).

Well, maybe. But the point is that it needs to be a case where you can clearly make enough money to pay the loans off. And because student loan debt is non-bankruptable (and at lousy interest rates, these days), you need to be much more certain about your ability to pay it off than with other debt.

MORE: Reader Brock Cusick writes:

The cost of education should prepare to fall much further than housing post-crash. Prices in competitive markets fall when costs fall, and the cost of building a house hasn’t changed all that much. The same cannot be said of education.

StraighterLine – $99/mo. + $39/course for college credit.
KhanAcademy.org – Free. (I know someone getting their MBA at Columbia who does the Khan exercises rather than attend class, because they explain the subjects better).

The cost of storing and disseminating information (even educational information) has dropped to zero. The web makes it interactive. Colleges should prepare to be disintermediated just like the newspapers.

Gulp.