As the Powerball jackpot zoomed to $700 million last week, a couple of far younger colleagues took to social media to fantasize about winning it. Their daydreams of riches didn’t include buying yachts or trips to exotic lands, though. They just wanted to pay back their student loans.
That sure took the fun out of teasing them about the foolishness of playing the lottery because there’s nothing funny about looking up from the bottom of a deep financial hole due to student loans and seeing no way out for years.
There’s an old line about a lottery that is well worth repeating: It’s not a form of legalized gambling, it’s a form of legalized swindling.
Maybe the only thing heavily indebted young grads would appreciate hearing is the reassurance that they didn’t do anything wrong in borrowing money to pay for their educations, no matter how painful the monthly payments seem now.
Student debt can be a form of smart borrowing, and here’s a simple rule of thumb for knowing what that is: it’s borrowing to pay for something that will have value for a long time, and when there will be more than enough income to pay back the loan.
What you buy can’t just be something that lasts a long time, either. Just under their framed diplomas is Grandpa and Grandma’s pet rock, still on the shelf and still not worth anything. It wasn’t worth anything the second it left the store in 1975.
This thinking about value is a little like a business owner deciding on a capital investment. Here the term investment doesn’t mean something the business hopes to sell later for a profit, but maybe a new machine that gets paid for up front and produces for 10 years.
A house certainly seems to meet that test. A car loan can make sense, too, although it’s possible a car’s resale value will decline faster than the loan balance. So be cautious.
Clothes? Nope. Sunday brunch? Absolutely not. This stuff is all consumption. Don’t borrow money to pay for it, and yes, adding the bill to a credit card balance is borrowing money.
Generally, Americans have done a good job of reducing debt and using borrowing to fund worthwhile investments in recent years. As of the last count, by the Federal Reserve Bank of New York, by far most of the more than $12.8 trillion in outstanding household debt as of the end of June is for home mortgages.
What really stands out in the data is the long and steady upward climb in outstanding student loans. There were apocalyptic news articles 15 years ago about crushing student debt burdens, but as percentage of all debt, student loans have more than tripled since then.
Student loans are now up to about $1.34 trillion. The borrowers are feeling the strain, too; more than 11 percent of student loans are at least 90 days past due or in default, according to the New York Fed.
Some of these struggling borrowers made a mistake, coming out with a degree that didn’t help much in the job market. Many more were probably just unlucky, perhaps as a family crisis derailed their plans to graduate and they have had to go to work at whatever job they can get.
But if the question is whether higher education is an investment, something that can still be producing value over a long period of time, that answer clearly remains yes. That makes borrowing money to pay for it a fine idea.
It’s easier to end up in a financial bind than it used to be, though. Costs for higher education have generally risen faster than the rate of inflation for as far back as I can remember, and the sticker price of a year at a top shelf college is approaching $60,000.
Securing a good-paying career can be more challenging than it was 15 years ago, too, as shown by the authors of one of the most depressing research papers to cross my desk in recent years, called “The Great Reversal in the Demand for Skill and Cognitive Tasks.”
There was a clear break in the labor market around the year 2000, the authors found, as the demand for jobs that required reasoning, creativity and strong management skills started to decline. Not finding great paying jobs that needed these skills, more and more college grads took what jobs they could get, pushing lower-skilled workers down the income ladder or out of the workforce altogether.
That paper wasn’t the last word on a dynamic economy of course, but it was another reminder of what you don’t want to be in 2017, and that’s without a degree, certificate or higher skills.
Another paper that came out about the same time as the Great Reversal study confirmed that young people needed higher education more than ever. Young people with a college degree outperformed their peers without degrees on lots of measures, the authors from the Pew Research Center found, from job satisfaction to household income.
These were young college graduates with student loans to repay that generally lived a richer lifestyle than people their age who hadn’t gotten a degree. And the margin wasn’t close.
So the cost of getting a degree has increased but the “cost” of not getting one did, too. That means these millennials should feel confident that these payments they are making are paying for a real investment. But maybe they deserve at least a little sympathy if they start to complain that they seem to be facing more financial headwinds than their parents did.
It still doesn’t justify ever buying a lottery ticket.