Friday, July 2, 2021

40-year home mortgages, 9-year car notes, and 25-year student-loan programs: This will end badly

Interest rates, as the tv hucksters constantly remind us, are near historic lows. So now is an excellent time to refinance your mortgage--maybe take out some equity to upgrade the bathrooms, take a little vacation, or purchase a home entertainment center.

Or maybe it's time to buy a new vehicle--perhaps a premium class crew-cab pickup, an Audi, or a BMW.  At today's interest rates, the monthly car note won't be that high--especially if you finance your new set of wheels over six, seven, eight, or even nine years!

How about those student loans? You don't make enough money to pay off your college debt under a standard 10-year repayment plan because you have other bills to pay.  But that's no problem. You can sign up for an income-based repayment plan that will stretch out your monthly payments over 25 years.

Twenty-five years is a long time, but maybe the federal government will forgive all that student debt--including yours. After all, what's $2 trillion among friends?

So is everybody happy with their new homes, fancy cars, and impressive college credentials? If so, enjoy the feeling because it won't last much longer.

Inflation is on the move, and who believes it is transitory as our Treasury Secretary tries to reassure us. Wages will probably rise to cover inflation for some employees but not for others. And if you a retired person on a fixed income, inflation will soon erode your standard of living.

That vacation cruise to Greece that you've always dreamed of? Maybe you'll just go to Oklahoma's Boiling Springs State Park this year--a lot cheaper.

Of course, you can't fly to Boiling Spings because airfares are way up, and car rental rates are just short of obscene.  So you will have to drive.  But you should do it soon because gas prices are on the rise. Oil is already back up to $75 a barrel.

So maybe you'll skip a vacation this year and enjoy your backyard--grill a few steaks or hamburgers. But that's becoming more expensive too. A premium steak at the grocery store can cost you $25 a pound.  But hot dogs are cheaper--especially the ones that aren't all beef.

There's nothing the people living in flyover country or modest urban neighborhoods can do about the scary shifts in the national economy.  We will have to tighten our belts, pay off our debts, and cut back on our lifestyles.  

It won't be fun, but we will probably all be OK if we don't do something stupid like refinance our home over 40 years, buy a car on a 9-year note, or borrow $100,000 to go to college.  But most of us are too smart to do something reckless like that.   Right?

You will own it outright in only 9 years!


40-year home mortgages: Is that a good idea?

 The chickens have come home to roost.  The federal government allowed millions of homeowners to suspend payments on their mortgages during the COVID crisis. Now that moratorium is ending, and all those missed payments are now due.

Many American homeowners--maybe most of them--cannot pay a dozen mortgage payments at once. I know I could not.

So what will the feds do? According to a Houston Chronicle story, the government is thinking about allowing mortgagees to refinance their home loans over 40 years. Interest rates are low right now, and monthly payments on a 40-year mortgage would be less than payments on a 30-year or 20-year mortgage.

Is that a good idea?

No, it is not. Most people who refinance their homes over 40 years will never own their residences. Essentially, they will become renters. 

Of course, many people will sell their houses long before they pay off their mortgages. If they are lucky, the value of their home will have gone up, and they can pay off their mortgage and have enough remaining equity to buy another home.

But here is the problem.  Home prices are going up right now because of low interest rates--only about 3 percent. Also, some Americans are worried about inflation, and they are scrambling to put their money into hard assets--a second home perhaps.

But interest rates won't stay low forever, and the housing market will eventually cool. Everybody knows that.

Thus, a couple who finance their home for 40 years at 3 percent may be forced to sell it someday when mortgage rates are higher--say 6 percent. Buyers who take out mortgages at the higher rate will be making bigger monthly payments on their home purchase--even if the cost of the house does not go up.

So what's going to happen? Many people who finance their homes over 40 years at 3 percent interest will not be able to sell their homes for enough money to pay off their mortgages. 

In the years to come, hundreds of thousands of homeowners who can't sell their homes after interest rates spike upward will simply walk away from them.

But hey, what do I know? I'm just a retired professor who lives in the very heart of flyover country.

But I have seen this movie. I bought my first home in Anchorage, Alaska, in 1981.  Conventional mortgage rates were 11 percent at that time, but the State of Alaska subsidized home loans to get the interest rates down to 9 percent.  

In a further act of generosity, Alaska subsidized low-priced homes--homes selling for $80,000 or less--at 6 percent. The required down payment was low--only 5 percent. Such a deal! Developers put condos and even mobile homes on the market that cost--guess what? $79,900.

Unfortunately, the Alaska economy went south when oil prices slid to $13 a barrel.  People were thrown out of work, and home values plummeted.

Many Alaska homeowners could not sell their property for enough to pay off their mortgages.  So what did they do?

They mailed their house keys back to the bank and simply walked away.  

That, dear readers, is what will happen all over the United States if people start financing their homes at artificially low-interest rates over 40 years.

Thursday, July 1, 2021

Bentley University launches a bachelor's degree in Diversity, Equity and Inclusion: Is this program for you?

 Bentley University, a private university in the Boston area, offers a new major this fall: Diversity Equity and Inclusion (DEI). Gary David, a sociology professor, was part of the design team for the new program. 

According to the Chronicle of Higher Education, David said that he:

wanted a major that moved DEI away from compliance--where institutions, companies, and nonprofits feel they need to or are required to meet certain diversity standards--and toward opportunity, with graduates working on ideas and programs to improve society with diversity, equity and inclusion at top of mind.

So--is Bentley's DEI program a good major for you? Before you decide, ask yourself these questions:

First, are there entry-level jobs for people who get a DEI degree from Bentley? 

The answer to that question is yes. Diversity is on the mind of every college president, whether that person leads an Ivy League institution or a small liberal arts school.  Nearly all major universities have a DEI officer at the senior executive level (vice president or associate provost). Schools are also hiring DEI-trained people to work in student services, student housing, and Title IX offices.  

UC Berkely, for example, spends $25 million a year on equity and inclusion and has 400 employees running programs to enhance diversity across the university.  

Second, how much will it cost to get a DUI degree from Bentley?  

Tuition, books, fees, room, and board at Bentley total approximately $76,000 per academic year--or about $300,000 for a four-year degree.  That's pretty damn expensive. Of course, you may qualify for a scholarship or tuition reduction of some sort, which will reduce your costs. 

Still, every student who does not come from a wealthy family will probably have to take out student loans to get a DUI degree from Bentley. That means Bentley graduates will enter the job market with a lot of debt.

Third, is DEI the career for you?

Finally, students should consider whether DEI is the right career choice. On the one hand, there are jobs in this field--from entry-level to executive positions.

On the other hand, once a person begins a career in DEI, it may be hard to switch to another field. Someone who wants to become a professor, for example, will need more than a DUI degree from Bentley to get a faculty job. 

Also, everyone surely understands that People of Color (POC) are more attractive candidates for DEI jobs than--for example--a white male who hails from rural West Texas.  I feel sure that a survey of the senior DEI executives at major U.S. universities will find many more POCs than non-POCs.

In my view, a person wishing to make a career in DEI would probably be better off skipping Bentley's DEI program (with its $300,000 price tag), getting an undergraduate degree in a mainstream major, and then going to law school.  

Christopher Manning, USC's first Chief Inclusion and Diversity Officer

Wednesday, June 30, 2021

A young college student who works in a Texas kolache bakery: Why I know she will succeed in life

 My wife and I recently traveled to Waco, Texas, to attend a dear friend's funeral. Our drive home to Baton Rouge took us through College Station, the home of Texas A & M University.

We had left Waco early in the morning without eating breakfast, and we were hungry. I pulled into a gas station near Texas A &M, which happened to house a kolache bakery.

If you've never eaten a kolache, you should search out a bakery that makes them. Kolaches are a yeast-roll pastry topped with fruit or stuffed with sausage. They originated in Czechoslavakia and came to Texas with the Czech immigrants who settled in central Texas in the nineteenth century. Texans are crazy about the Kolache, which is sometimes called a Texas donut. 

 I walked into the kolache bakery and ordered two cups of coffee and three kolaches stuffed with sausage, cheese, and jalapenos. I was served by an attractive young woman who welcomed me with a smile and a friendly greeting. 

The kolaches were delicious.  They were each topped with a thin slice of jalapeno that had been baked into the yeast roll. That little jalapeno slice was something extra--both a garnish and a message that these particular kolaches were stuffed with hot peppers. 

While we were eating, the young woman began conversing in Spanish with another employee who was diligently mopping the bakery floor.  I imagine they were brother and sister. How quintessentially Texan: a family-owned Hispanic bakery that specializes in Bohemian pastries. 

I noticed then that the woman who served me was wearing a t-shirt bearing the name of Texas A & M's Mays Business School. Undoubtedly, she was a business major at the university or an MBA student.

That woman will make a success of her life. How do I know?

First, she has basic work skills. Although selling pastries is a menial job, she did it cheerfully and professionally. She has the workplace skills that will serve her well, whether she spends her whole life selling kolaches or working for Goldman & Sachs.

Second, she is bilingual.  Texas is now a bilingual state--not at the level of Canadian Quebec, but the Lone Star State is rapidly heading in that direction. This woman's language skills will serve her well throughout her life.

Third, she chose to major in business--a major that will probably lead to a good job. Not for her those vacuous programs in the social sciences, liberal arts, or ethnic studies.  

Finally, this young woman is working while in college and probably has minimal student loans or perhaps no student debt at all.

I wish more college students were like the woman who sold me three kolaches. We would be a stronger nation if young people graduated from college with this woman's work skills, language proficiency, and an academic major that will prepare them for a good job.  

PS: Purists call a sausage-filled Czech pastry a klobasniky, but most Texans refer to both fruit-filled and sausage-filled pastries as kolaches.

Is this a klobasniky or a kolache?

Saturday, June 26, 2021

Will a degree from a fancy, private college improve the quality of your life? Maybe, but maybe not.

 I occasionally see television and print advertisements for weight-loss programs. Invariably, these ads show a slim, young, attractive woman with perfect teeth or a handsome young man with great hair and six-pack abs. We are encouraged to believe that these beautiful people were once fat.

But we know better. We know that no matter what diet plan we go on, we will never be as beautiful as the people in the weight-loss ads.  We'll buy the product and still have crooked teeth and a little flab around our bellies.

America's private colleges are like the weight-loss companies. Enroll at our prestigious institution, study on our cool campus, interact with our brilliant but kindly professors, and you'll be on the road to a fabulously better life.

For example, here is some puffery from Quinnipiac University's website:

From your first day, Quinnipiac’s expansive resources and passionate professors will help you flourish and build a foundation for success. You’ll create your first memories as a Bobcat on this campus, and find supportive resources throughout your journey.

How much will this journey cost you? Only about $70,000 a year in room, board, fees, and tuition.   That's more than a quarter of a million dollars for a bachelor's degree.

But, hey, you'll probably get a scholarship of some kind, and you can take out student loans. And if you need more cash to finance your studies, your parents can take out a Parent Plus loan.

Just remember, no matter where you go to college, you will still be you. And there are probably many people willing to help you reach your dreams who will charge you a lot less than a quarter of a million dollars.

Were these people ever fat?


Monday, June 21, 2021

"Don't just retire. Retire well." What does that mean to millions of Americans drowning in student-loan debt?

 Almost every day, I see a television ad for an investment firm that targets retirees. "Don't just retire," the tv spokesperson says. "Retire well."

Of course, everyone wants to retire well. For most of us, that means retiring with our debts paid and enough income to cover our bills and travel occasionally.

But many Americans aren't going to retire well because they are shackled to crushing student-loan debt. People who took out student loans late in life are especially burdened, along with parents who signed up for Parent PLUS loans to finance their children's college education.

But young people also see their retirement years threatened by oppressive student-loan obligations. According to a CNBC news story, two-thirds of older millennials (ages 33 to 40) are still paying on their student loans, and more than half say their loans "weren't worth it." 

College borrowers in mid-life are reporting that student loans have forced them to put off buying a house, marrying, having children, and saving for retirement.

And the cost of higher education is going up, not down. I had hoped that the COVID pandemic would force colleges to trim their costs, become more efficient, and perhaps lower their tuition rates.

But that didn't happen. Instead, although student enrollments dropped during the pandemic, the federal government sent colleges massive amounts of money that allowed them to continue operating inefficiently.  Indeed, federal COVID money probably shored up some struggling colleges that otherwise would have closed.

And while tuition rates continue to rise, the quality of a college degree goes down at many universities. Hundreds of schools have dropped standardized test scores as an admission requirement--opting for "holistic" admission standards.

The colleges say they have taken this step to attract more minority students and students from low-income families. But in reality, the schools need warm bodies to fill their classrooms--whether those warm bodies are college-ready or not. Inevitably, holistic admission policies will lead to lower teaching standards and grade inflation. 

In short, going to college has become a risky proposition--much like gambling at a Las Vegas casino. Some people will be winners; they will play the slots and hit the jackpot. For these folks, their student loans will give them an education that improves the quality of their lives and allows them "to retire well."

But for millions of Americans, going to college is more like most people's experience when they feed the slots. If they borrow too much to get a college education, they are going to be losers.

You gamble with your future when you take out student loasns

Saturday, June 19, 2021

Student-loan payment relief during COVID crisis ends soon: Will student debtors start making payments again?

 About 40 million student borrowers got some relief last year when the Department of Education allowed student debtors to temporarily skip their loan payments due to the COVID crisis.

Even better, DOE did not charge interest on student loans during the forbearance period. 

But DOE's relief program ends on September 30, and the feds expect all borrowers to resume their loan payments in October. Will borrowers begin writing those monthly checks?

Maybe not. Navient reported in April of last year that 40 percent of federal student-loan borrowers requesting COVID repayment relief held loans that previously had been delinquent or in forbearance.  In other words, millions of student debtors were not making payments on their loans even before the COVID crisis.

Student loans are kind of like overdue library books. They are easy to forget about.

The Department of Education's website lists a host of options for borrowers as the COVID-forbearance plan winds down. If you are a distressed student debtor, you should take a look at that site.

But here's my advice. If you are financially unable to repay your student loans under DOE's standard 10-year repayment program, sign up for the most generous income-based repayment plan  (IBRP) you can find. IBRPs are a terrible option because your loan payments will not be large enough to cover accruing interest. Thus, your loan balance will keep growing in the years to come, even if you make regular monthly payments.  

But your monthly loan payments will be lower under an IBRP and allow you to tread water until some sort of comprehensive relief program is put in place.

As I have said a thousand times, Congress needs to revise the Bankruptcy Code to allow overburdened college borrowers to discharge their student loans in a bankruptcy court. But that may never happen.

Some politicians are calling for wholesale student-loan relief. Just wipe out $1.7 trillion in student debt, they say. But that may never happen either. 

The student-loan catastrophe is enormous and getting bigger with each passing day. If you haven't taken out federal student loans yet, choose a college program that will lead to a job and do everything you can to avoid taking on onerous levels of student debt.  

If you already have a mountain of student-loan debt, get into an IBRP and wait for Congress to clean up the mess. But don't hold your breath.

And one more piece of advice. Don't ask your parents to take out a Parent PLUS loan, and don't take out loans from a private lender.