Personal Debt, Student Loans and Real Estate

UCLA’s Anderson School of Economics reported yesterday that the economy is not growing and in fact, that it is “not even normal… it’s bad.”  Not exactly the warm and fuzzy one might expect given the overwhelming indications from Wall Street and Main Street that things are getting better.  In their commentary UCLA economists actually state that rising student loan debt will lead to delayed home purchases by young people, as they have to face the prospect of paying off student loans.  This in turn will slow growth and restrict our nation’s Gross Domestic Product.  GDP is the value of all goods and services produced by the country and is the primary measure of our nation’s economic health.  This subject is very close to my heart as both a parent of two college kids and as a real estate professional.

On the night I graduated from high school, it was spring 1980.  As I proudly removed my graduation robe and changed into my civvies for what was sure to be a night of rambunctious partying, my dad slipped me a hundred dollar bill and said that I shouldn’t worry about college, he was going to pay for it.  When I asked him how I could ever repay him, he replied, “Just do the same for your kids.”  Little did I know that his five figure commitment to me, would mean a high six figure commitment by me.

College today is obscenely expensive.  Tuition has skyrocketed, as has student housing and books.  Did you know that many professors write their own books for their classes there by obligating their students to by ultra-expensive books that cannot be purchased anywhere but the on campus student bookstore?  And then there is the whole student loan debacle.  During my freshman year, in December 1980 to be exact, the prime rate stood at 21.5%.  Simultaneously, my dad’s law practice was struggling.  So when I had the opportunity to take out a$2,500 student loan at 7%, my dad said, do it, and he’d pay me back.  That $2,500 loan would pay for my entire year’s tuition, housing and books.  I ended up taking out a student loan each of my four years.  Sadly, shortly before my graduation, my dad passed away.  Over the next 10 years with the help of my wife, we paid off my student loans.  We popped champagne the day we sent in the last $118 check to Sallie Mae.

Fast forward to today, prime rate stands at 3.25%.  When the real estate market collapsed 5 years ago, my daughter was heading off to her freshman year and my debt to my father came full circle; it was my turn to pay for college.  Sure, while the market had boomed I had socked some money away using a 525 college fund and a 401K, but as the market crumbled, so did our household income and we were forced to use our savings to pay our obligations and keep our business going.  That’s what savings is there for, we reasoned, and we survived.  But college couldn’t wait.  Neither could my son who graduated just two years after my daughter.

With two kids in college, we did (and continue to do) what American families are doing every day, we took out student and parent loans to pay for college.  Imagine my surprise when the guaranteed loan my daughter could get was only $5,000 (when her UC Santa Barbara tuition costs nearly $15,000) and the interest rate was 7.5%!  Let me put this in perspective: I took out a loan in 1980 for $2,500 which covered tuition, housing and books, at an interest rate of 7% when prime was 21.5%, but my daughter could only take $5,000 paying just a third of tuition, not housing nor books, at an interest rate of 7.5% when the prime rate is 3.25%.  Makes a lot of sense, right?  Ask Elizabeth Warren, the freshman senator from Massachusetts, who is trying (against significant Republican resistance) to tie student loan rates to prime, if it makes any sense.  Let me answer this, it doesn’t.  Shackling our kids with debt just to remain competitive with the rest of the world, makes zero sense here in the most affluent nation in the world.

The significance of UCLA’s Anderson School of Economics prediction that today’s youth will be saddled with historically high levels of personal debt, constricting our national GDP and overall economic prosperity, cannot be understated.  This is in stark contrast to today’s improving picture where personal debt in 2013 is at the lowest level since 2006.  My generation is deleveraging (reducing our borrowing via credit cards etc.) but our children’s is not.

There’s so much talk about Social Security going broke and Medicare becoming insolvent, but these concepts are nothing if the economic future of our nation – our youth, cannot afford to buy homes, buy goods and drive our economy due to impossibly high student loan debt and the ever increasing cost of higher education.  If something isn’t done about this and done soon, we can expect this: reduced growth and declining GDP and little money to fund all the social programs many of us will ultimately depend on.

About Tim Freund

Tim Freund has been a licensed real estate agent/broker since 1990. He spent 14 years as a new home sales rep, ran his own boutique resale brokerage for 5 years and is currently an Estates Director for Dilbeck Estates/Christie's International Estates in Westlake Village, Ca. Tim is a Certified Residential Specialist (CRS), an Accredited Buyer's Representative (ABR), a Corporate Mobilty Specialist (CMS) and a Senior Real Estate Specialist (SRES). Tim has successfully negotiated a loan modification for a client and is a professional short sale negotiator. Tim has been married 28 years, has 2 children, is a native Californian and has been a resident of the Conejo Valley since 1991.
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One Response to Personal Debt, Student Loans and Real Estate

  1. West De Young says:

    I love your posts Tim, they are very informative and educational. Thank you for taking the time to do the research. I also appreciate your literary style. Keep up the great work…west de young

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