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The loan is a liability, the degree is the asset. If the degree is unable to land the person a job, or the earnings of the job over the career do not stack up t

The loan is a liability, the degree is the asset. If the degree is unable to land the person a job, or the earnings of the job over the career do not stack up to the price of the degree, then it is an "upside down investment" just like a house with negative equity.

uiri 10y ago
A house isn't an investment either though. An investment is an asset which is expected to go up in value faster than inflation. Housing prices track inflation. This is, on average, generally true; I'm not talking about a specific local market here. In order for something to be an investment, it must generate a return. After transaction costs, property taxes and other upkeep expense, the RoI of real estate is not great. Real estate has low liquidity, low diversification and high leverage requirements. Shelter is an expense. Like many things, you can own it or you can rent it. Owning it means you're holding an asset that (hopefully) won't depreciate but it is also unlikely to meaningfully appreciate (outside of certain local market conditions that are the exception rather than the rule). Back to the original point: in order for an education to be an investment, the degree - the asset - must have a reasonable expectation of going up in value over time. The value of your degree goes down over time as you gain work experience; its peak value is right after you graduate. An argument could be made that the return on investment is a rise in earning potential but that too is a one time boost. A degree also shares all the bad qualities of housing as an investment: high leverage, even worse - zero! - liquidity, and low diversification. It might make financial sense to borrow money in order to fund a degree, but that by no means makes education an investment.
- curtis 10y ago
  > A house isn't an investment either though. An investment is an asset which is expected to go up in value faster than inflation. Most people who own homes only own the one they live in. If they did not own that home they would have to pay rent. So to figure out the overall value of the investment, you'd need to add up not just all the money it's going to cost the owner, but also subtract all the money the the owner did not have to pay in rent.
  - uiri 10y ago
    Let's say we have two individuals - Alice and Bob - who each own a house. Each house has the same price on the real estate and on the rental markets. If Alice lives in Bob's house and pays rent to Bob and Bob lives in Alice's house and pays rent to Alice, their balance sheets are the same as if Alice lived in her own house and Bob lived in his own house. Excluding the rent income and rent expense (which offset), their cash flows are also identical to the situation of each living in their own house. Now, it is possible that you would not rent a place similar to the one that you buy. In this case, your savings are equal to (rent expense otherwise incurred) - (unrealized rental income). I think that the latter will tend to be higher than the former. This will result in a net loss for owning. This loss is simply the price the owner pays for occupying a nicer place and does not really have much to do with owning vs renting.
    - barrkel 10y ago
      Alice and Bob don't help or hinder your argument in any way. It just seems like a non sequitur. Selection of choice to rent vs buy typically isn't driven by net wealth change considerations; rather, it's an investment in an area, because the transaction costs of house purchases are much higher than changing rental leases, and thus you need to stay in a bought house longer to spread the costs. In particular, houses bought for living (rather than rental) are more often selected for life-changing events, like starting a family, or downsizing when children have left the family home. Further, your bald assertion that unrealized rental income will be greater than rent expense otherwise incurred - if I read this right, it means you think people will buy a more expensive property than they would rent - I think is wholly unjustified. I think you've got it exactly backward, and that's certainly the case in my rental vs purchasing history: I've always rented places that I couldn't afford to buy. When I was younger, I valued being closer to the heart of the city (London in my case). That meant denser living, apartments, etc. When I chose to buy, I couldn't afford to buy the places I'd been renting, but also my values had changed: I wanted somewhere with more space, not least because I had more stuff (like motorcycles, which meant a garage; and an office distinct from the living room; etc.)
      - 10y ago
- wtvanhest 10y ago
  I think your idea of an investment is different than mine. I dont own a home, but one reason i am tempted to buy one is to match liabilities (future rent) with assets. A house allows you to hedge rent growth. The big challenge with houses is that they are leveraged. That makes the situation complex in that the equity investment you make can become way more or way less valuable with smaller underlying price moves in the house. Investments can go up or down in value. There are no sure thing investments. Just choices with various lnevels of risk and tradeoffs. Imo, student loans are not constructed in a way that makes them an investment since the optionality is removed from the borrower.
- snowwrestler 10y ago
  When you buy a house, your investment basis is not the total value of the property. It is the cash outlay you make to acquire the property: the down payment, plus the delta between your monthly payment and the rent on an identical property (since you've got to live somewhere). For most people this is a lot less than the total value of the property. Which means that even if the property only appreciates at the rate of inflation, your investment will grow faster than inflation. Voila: the power of leverage. > The value of your degree goes down over time as you gain work experience; its peak value is right after you graduate. I'm not aware of any evidence that this is true. What we know is that on average, folks with college education earn more over their lifetimes than those without. I've never seen any sort of reporting that degrees depreciate "right off the lot" like cars. Anecdotally I'll point out that most people list their college education on their resumes for their entire careers. And my employer calls the university to verify a degree on a resume before extending an offer--no matter how long ago it was received. And that's just the paper; it doesn't even account for the value of the actual education itself to a career.
  - jimmywanger 10y ago
    > Which means that even if the property only appreciates at the rate of inflation, your investment will grow faster than inflation. Incorrect. You're also paying interest on the loan, which is usually pretty close to inflation. No matter how you slice it, you're pretty close to breaking even. Also, you're not getting paid interest on the cash outlay you make the acquire the property, which is another loss. > Voila: the power of leverage. Leverage is just a tool you have, that can come back and bite you. If you leverage your investment by 10X, the real increases and decreases in value (adjusted for inflation) are 10X what they would be if you had not leveraged your assets. If you lose 10K of value on a 100k house that you put 20k down on, voila, the power of leverage. You just lost 50% of your investment. > I'm not aware of any evidence that this is true. The longer you go in your career, the less people care which school you went to because you have a work history that people can use to more accurately judge your productivity. If you're right out of college, your degree works as a proxy to that. For most jobs, if you've already worked in the industry for 10 years, the salary you'll receive is roughly the same with and without a college degree, and the difference is even less between "good" and "bad" colleges. The earnings over career is a red herring, where right out of college, you get an initial salary boost.
- AnthonyMouse 10y ago
  > Housing prices track inflation. The problem is they don't. Especially in urban areas, housing prices have historically risen faster than inflation, leading to the absurd prices and rents we now see in many cities. This has created a bit of a crisis now, because many people have bought housing expecting it to continue to beat inflation, but the prices are already absurdly high and further significant increases are unsustainable. The result is that housing was an investment, and might continue to be for a few more years as long as the vested interests can continue to inflate the bubble, but at some point there is a pop coming.
- cardiffspaceman 10y ago
  > An investment is an asset which is expected to go up in value faster than inflation. An investment isn't defined away because it is likely to fail. It can be a bad investment if that is the probability. An investment isn't in general defined by wisdom. Stocks have been invested in when inflation was high enough to make them bad investments in the short term, but in some such cases they worked out in the long term.
- razorunreal 10y ago
  An investment isn't necessarily something that is expected to go up in value, it is something that is expected to make you money. If I buy a house and rent it out, and the value of the house also tracks inflation, it made me money through rent. If I owner occupy I receive that money in the form of lower expenses, but that's just details. Similarly, if my education increases my lifetime earnings by more than it cost me then it is a good investment, regardless of where in my career I make that return. The idea that my education must increase in value over my career in order to be considered an investment is very, very strange. You can argue that these investments are frequently bad, but it doesn't make sense to argue they are not investments.
- ensignavenger 10y ago
  But you also get the benefit of using the house while you own it, so if you give that a financial value, it may very well be a good investment (vs renting)... or it may still be a bad one- depends on a lot of factors.
bdcravens 10y ago
It's entirely possible to take on student debt without ever getting a degree. Some of the numbers I've seen suggest about 30% dropout rates with student loan debt.
tptacek 10y ago
How is that any different from a short sale investment?

uiri 10y ago

A house isn't an investment either though. An investment is an asset which is expected to go up in value faster than inflation. Housing prices track inflation. This is, on average, generally true; I'm not talking about a specific local market here. In order for something to be an investment, it must generate a return. After transaction costs, property taxes and other upkeep expense, the RoI of real estate is not great. Real estate has low liquidity, low diversification and high leverage requirements. Shelter is an expense. Like many things, you can own it or you can rent it. Owning it means you're holding an asset that (hopefully) won't depreciate but it is also unlikely to meaningfully appreciate (outside of certain local market conditions that are the exception rather than the rule). Back to the original point: in order for an education to be an investment, the degree - the asset - must have a reasonable expectation of going up in value over time. The value of your degree goes down over time as you gain work experience; its peak value is right after you graduate. An argument could be made that the return on investment is a rise in earning potential but that too is a one time boost. A degree also shares all the bad qualities of housing as an investment: high leverage, even worse - zero! - liquidity, and low diversification. It might make financial sense to borrow money in order to fund a degree, but that by no means makes education an investment.

curtis 10y ago
> A house isn't an investment either though. An investment is an asset which is expected to go up in value faster than inflation. Most people who own homes only own the one they live in. If they did not own that home they would have to pay rent. So to figure out the overall value of the investment, you'd need to add up not just all the money it's going to cost the owner, but also subtract all the money the the owner did not have to pay in rent.
- uiri 10y ago
  Let's say we have two individuals - Alice and Bob - who each own a house. Each house has the same price on the real estate and on the rental markets. If Alice lives in Bob's house and pays rent to Bob and Bob lives in Alice's house and pays rent to Alice, their balance sheets are the same as if Alice lived in her own house and Bob lived in his own house. Excluding the rent income and rent expense (which offset), their cash flows are also identical to the situation of each living in their own house. Now, it is possible that you would not rent a place similar to the one that you buy. In this case, your savings are equal to (rent expense otherwise incurred) - (unrealized rental income). I think that the latter will tend to be higher than the former. This will result in a net loss for owning. This loss is simply the price the owner pays for occupying a nicer place and does not really have much to do with owning vs renting.
  - barrkel 10y ago
    Alice and Bob don't help or hinder your argument in any way. It just seems like a non sequitur. Selection of choice to rent vs buy typically isn't driven by net wealth change considerations; rather, it's an investment in an area, because the transaction costs of house purchases are much higher than changing rental leases, and thus you need to stay in a bought house longer to spread the costs. In particular, houses bought for living (rather than rental) are more often selected for life-changing events, like starting a family, or downsizing when children have left the family home. Further, your bald assertion that unrealized rental income will be greater than rent expense otherwise incurred - if I read this right, it means you think people will buy a more expensive property than they would rent - I think is wholly unjustified. I think you've got it exactly backward, and that's certainly the case in my rental vs purchasing history: I've always rented places that I couldn't afford to buy. When I was younger, I valued being closer to the heart of the city (London in my case). That meant denser living, apartments, etc. When I chose to buy, I couldn't afford to buy the places I'd been renting, but also my values had changed: I wanted somewhere with more space, not least because I had more stuff (like motorcycles, which meant a garage; and an office distinct from the living room; etc.)
    - 10y ago
wtvanhest 10y ago
I think your idea of an investment is different than mine. I dont own a home, but one reason i am tempted to buy one is to match liabilities (future rent) with assets. A house allows you to hedge rent growth. The big challenge with houses is that they are leveraged. That makes the situation complex in that the equity investment you make can become way more or way less valuable with smaller underlying price moves in the house. Investments can go up or down in value. There are no sure thing investments. Just choices with various lnevels of risk and tradeoffs. Imo, student loans are not constructed in a way that makes them an investment since the optionality is removed from the borrower.
snowwrestler 10y ago
When you buy a house, your investment basis is not the total value of the property. It is the cash outlay you make to acquire the property: the down payment, plus the delta between your monthly payment and the rent on an identical property (since you've got to live somewhere). For most people this is a lot less than the total value of the property. Which means that even if the property only appreciates at the rate of inflation, your investment will grow faster than inflation. Voila: the power of leverage. > The value of your degree goes down over time as you gain work experience; its peak value is right after you graduate. I'm not aware of any evidence that this is true. What we know is that on average, folks with college education earn more over their lifetimes than those without. I've never seen any sort of reporting that degrees depreciate "right off the lot" like cars. Anecdotally I'll point out that most people list their college education on their resumes for their entire careers. And my employer calls the university to verify a degree on a resume before extending an offer--no matter how long ago it was received. And that's just the paper; it doesn't even account for the value of the actual education itself to a career.
- jimmywanger 10y ago
  > Which means that even if the property only appreciates at the rate of inflation, your investment will grow faster than inflation. Incorrect. You're also paying interest on the loan, which is usually pretty close to inflation. No matter how you slice it, you're pretty close to breaking even. Also, you're not getting paid interest on the cash outlay you make the acquire the property, which is another loss. > Voila: the power of leverage. Leverage is just a tool you have, that can come back and bite you. If you leverage your investment by 10X, the real increases and decreases in value (adjusted for inflation) are 10X what they would be if you had not leveraged your assets. If you lose 10K of value on a 100k house that you put 20k down on, voila, the power of leverage. You just lost 50% of your investment. > I'm not aware of any evidence that this is true. The longer you go in your career, the less people care which school you went to because you have a work history that people can use to more accurately judge your productivity. If you're right out of college, your degree works as a proxy to that. For most jobs, if you've already worked in the industry for 10 years, the salary you'll receive is roughly the same with and without a college degree, and the difference is even less between "good" and "bad" colleges. The earnings over career is a red herring, where right out of college, you get an initial salary boost.
AnthonyMouse 10y ago
> Housing prices track inflation. The problem is they don't. Especially in urban areas, housing prices have historically risen faster than inflation, leading to the absurd prices and rents we now see in many cities. This has created a bit of a crisis now, because many people have bought housing expecting it to continue to beat inflation, but the prices are already absurdly high and further significant increases are unsustainable. The result is that housing was an investment, and might continue to be for a few more years as long as the vested interests can continue to inflate the bubble, but at some point there is a pop coming.
cardiffspaceman 10y ago
> An investment is an asset which is expected to go up in value faster than inflation. An investment isn't defined away because it is likely to fail. It can be a bad investment if that is the probability. An investment isn't in general defined by wisdom. Stocks have been invested in when inflation was high enough to make them bad investments in the short term, but in some such cases they worked out in the long term.
razorunreal 10y ago
An investment isn't necessarily something that is expected to go up in value, it is something that is expected to make you money. If I buy a house and rent it out, and the value of the house also tracks inflation, it made me money through rent. If I owner occupy I receive that money in the form of lower expenses, but that's just details. Similarly, if my education increases my lifetime earnings by more than it cost me then it is a good investment, regardless of where in my career I make that return. The idea that my education must increase in value over my career in order to be considered an investment is very, very strange. You can argue that these investments are frequently bad, but it doesn't make sense to argue they are not investments.
ensignavenger 10y ago
But you also get the benefit of using the house while you own it, so if you give that a financial value, it may very well be a good investment (vs renting)... or it may still be a bad one- depends on a lot of factors.

bdcravens 10y ago

It's entirely possible to take on student debt without ever getting a degree. Some of the numbers I've seen suggest about 30% dropout rates with student loan debt.

tptacek 10y ago

How is that any different from a short sale investment?