Earlier today, I read an article about the owner of PayPal and his "prediction" about what he's calling the "education bubble." Since he is the owner of PayPal, he gets press, as the article itself indicates. However, his other prediction, that of the real estate bubble, is also touted in the article. That is something that I "knew" about long before the actual meltdown because anyone with common sense could figure it out.
I will digress to that to support my points about education. I worked in the industry for a title insurance company just before and during the real estate boom. As the company grew moon-eyed about the future expansion they saw in the large numbers and extra zeros tagged onto selling and buying prices, I was the naysayer. They looked at me with disdain, who was I but a lowly paralegal? However, that lowly paralegal status was accompanied by a lowly paralegal salary, one that was above the "national average" (a joke of a number if there ever was one). That national average salary, though, spoke loud and clear to me. It told me that housing prices could not possibly continue to increase unless the average salary also continued to increase, which was already not happening. Thus, there would come a time when the average salary could not ever cover the average mortgage, especially within a thirty-year term. For a time, this was fixed with balloon mortgages and that fun little product of interest-only mortgages for the first few years of the loan. Those scared the crap out of me. I mean, you're telling me that you cannot afford a mortgage in a particular amount itself, and that by paying interest only for the first two, three, or five years, you will miraculously increase in income and the house will also increase in value while interest rates (since all of those were, of course, adjustable after the initial interest-free period) would remain low? Sure! And, if I had been unscrupulous, I might have had a few bridges or waterfront Florida properties to sell people.
So, while Mr. PayPal was making this claim in the news (and for the record, I never saw that in the news at the time), I, too, was saying, "the addition and subtraction doesn't work!" You can't take a $60,000 salary and buy a $500,000 house and pay nothing for the first five years but interest and THEN start paying on the principal and interest. That salary cannot support it. Yet, the common belief was that your salary would increase, oh, and that your house would also increase in value, allowing a refinance at that crucial two, three or five-year mark. What? Again, the numbers did not add up for me. I said this aloud to anyone who would listen, yet it fell on deaf ears. I was the silly one, they said. I would see housing values increase and salaries, too.
Then, low and behold, Mr. PayPal and I were proven right. Not only did houses quickly decrease in value, but salaries also decreased in that same timeframe. The common-sense-first-grade-math prevailed. The housing boom and bust drastically effected the middle class since the more expensive houses never saw the drastic increase, nor suffered from the foreclosure mess that ensued since the loans for those houses were never the interest-only kind. The education situation will be the same.
My prediction is this: community college participation will increase at some point in the coming ten years, as well online education. These will be popular for middle class high school graduates for a number of reasons. Parents of the most recent and next ten years of graduates will see the futile nature of a degree from a private college that costs more than the student will make in the first five years after graduation. So many college graduates are living at home burdened by student loans and healthcare insurance requirements. They share cars or use public transportation and delay marriage because they cannot afford the apartment on just two salaries. And, let's face it, being newlyweds at home with mom and dad or in an apartment with roommates is not the romantic vision any of us have.
I see friends looking at college acceptance letters without any financial aid offerings other than loans for themselves and their children with tuition bills upwards of $55,000.00. Even if they can pay half that every year from savings, by cashing in retirement accounts and re-mortgaging their homes (if they have the equity) and their regular salaries, they are still left sharing $100,000.00 in debt upon their child's graduation. If the average first job pays a quarter of that, or less, not counting the cost of health insurance, how does the student or his parents pay that back? It's the equivalent of a person making $25,000.00 a year taking out a mortgage of $100,000.00. Sure, there is deferment and interest-only payment periods for student loans. Yet, doesn't that sound strangely familiar?
To prove my point with numbers, I sought out a mortgage qualification calculator online. When I enter the $25,000.00 salary, which assumes very little credit card debt and a $300 car payment, I only qualify for a mortgage of $48,739, which makes my payment $350 a month. If I keep increasing my salary to attempt to reach that $100,000 school loan debt, it tells me that I cannot get a mortgage for $100,000 unless I make at least $40,000 a year, which is still an $800 a month payment.
Thus, if we translate this to student loan terms, a person who will graduate and make $25,000 a year should have no more than $48,000 in debt. Even this is an exaggeration since student loan debt cannot possibly take $350 of the monthly earnings and still allow a person to rent an apartment, have a car payment, any other debt or save anything at all, never mind the cost of health insurance being thrown in to the mix. The only students who can afford to graduate with $100,000 in debt are those who will enter the job market making at least $40,000. This, again, assumes that a car loan is low, there is no other debt and I'm not sure, still, where health insurance or rent comes from when $800 a month goes to student loans from a $40,000 a year salary.
Unless parents make enough to actually pay for a child's college education, student loans should be examined for the long-term before they are taken on by a family or a student. Community colleges solve this issue for the middle class. They might actually "payoff" in other ways, as well, in the end. Most students who attend community college also work, in some capacity, while in school. This work experience just might help them flesh out a resume once a four-year degree is attained. Living at home and commuting to school might not seem glamorous at a time when an emerging adult wants nothing more than to get out of the house. However, living at home for two years and then finishing college might make it so you can afford to live away from home after finishing four years of college.
With regard to the online option, once a student is working, likely making a car payment to get to and from school, thus also establishing credit and demonstrating responsibility, he or she might not want to give all of that up to go live on a campus. He or she might decide to complete the last two years of his or her degree online or at night which will allow him or her to continue working, making that car payment and then, upon graduation, situate the person for employment that is higher paying than his or her peers who are saddled with enormous debt and no on-the-job experience or training.
While I'm sharing the information here as I consider these options for my own children, I don't fear the rush to community college immediately. Too many of us are fearful of an alternative path to higher education. There will be many students living at home upon losing student status. There will be fewer options for "jobs they love" over "jobs that pay" for many people due to student loans.
A few people, like Mr. PayPal were smart enough to look past the bubble with real estate and are smart enough to realize the more sinister bubble of the higher cost of higher education. This bubble is more sinister because it preys upon parents just as it seduces our children. It will rob not only our future, but also theirs, the one we work so hard to secure, protect and fortify. Your child may not appreciate the seeming drudgery of living at home yet two or possibly four more years while his or her friends leave for exotic locales and post on Facebook what-looks-like-fun pictures of parties with cryptic phrases that hint at shared jokes and memories being made. Yet, four years later, when your child not only lands a better paying job and can "finally" move out, his or her friends will likely be coming home, after that taste of freedom, to the bitter reality of those "FB" moments as nostalgic times compared to the loan bills that start pouring in and the not-so-fantastic paycheck that is somehow supposed to cover those loans.
Then, it will be your child's turn to post on FB about his or her real-life travels to exotic locales, his or her thrill at living on his or her own for the first time and his or her carefree attitude that exists because the student loan bills are easy to cover and/or non-existent. It's a delayed-gratification thing that doesn't much appeal these days. Yet, like Mr. PayPal, I predict the cost of a college education will at some point "burst" and be deemed not so valuable.
(Oh, and remember I'm talking about the cost, not the value. That is an entirely different topic. While I have student loans myself, the value of my education, for me as a person, is incalculable. I don't think twice about what Sallie Mae pulls from my checking account each month. It was worth every dime. Yes, I graduated from a private college, but also took the smarter route with community and state college courses making up the bulk of the first two years of that final degree. For me, it's kind of like buying the $50 EMS fleece jacker instead of the "N" brand for at least twice that amount. The weight of the fleece, not the name on the shoulder is what really makes a difference. I get the benefit and the value this way.)
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