The trend has changed, and that changes the rules

Two years ago, a good friend of mine (who spends far more time monitoring the investment markets than I do) argued with me about my daughter and her choices.

His view was that she should go straight on to graduate school from undergraduate studies, even if she needed to take out a student loan to do so. Her view (and mine) was that paying cash was the smart way to get an education, and therefore her plan to take a year off between her BA and MA to restock the bank account made the most sense.

Well, in 2011, that “just borrow” — as my friend said, “money’s never been cheaper” (i.e. interest rates never lower) — was correct, but the end of the low interest rate period was in sight. In 2013, we’re already up and continuing to climb.

In other words, debt gets more expensive from here on in.

We’ve lived through a thirty year period where debt (by and large) got cheaper every year. It didn’t just get cheaper because you went from being a poor recent graduate to a mid-career heavyweight. It got cheaper because, year over year, interest rates fell. That let old debt get renegotiated into cheaper payments periodically (such as, when a mortgage renewed, or when credit cards got rolled into a line of credit, or when you switched lenders and they gave you a deal).

The next few decades, on the other hand, will have a different secular trend. In it, the cost of money will go up, year after year. Being debt free will bring security that no amount of “buy it now, pay for it later” can do. (My friend’s pressing to “take a loan and carry on” was based on getting the credentials as quickly as possible, to jump into the job market while there were openings.)

Think about that, if you’re advising your children. Everything you think you know about money is wrong, unless what you’re advising them is to treat debt very cautiously indeed.

Rising interest rates don’t mean they’ll just go steadily up, of course, just as falling ones didn’t just go steadily down. As with any market, there’ll be reversals. But the long-term trend line will be clear.

(The people who do technical analysis, drawing all those charts and marking them with lines to show the long-term trends, can show you how 1980-2010 was a period of steadily falling rates, and steadily rising bond prices [as yields fell]. They can also show you how the core government bonds all broke out of their thirty-year-long trend lines in 2013, showing that the new direction is now well established. People buying US government debt — say, the 10 year treasury bond — have raised their interest rate ask by a full percentage point this year, despite the Federal Reserve holding the “official” rate constant. They want 3 per cent to loan capital for ten years, while the Fed says interest rates are at 0.25 per cent. I don’t think central bankers are in charge any more, if they ever were…)

So, if you’re planning to go to higher education, you might want to pay cash, or do without. The alternative is to become one of those people who, failing to get the big job payday at the end of their degrees, continue to take one or two courses each year to keep taking out new loans because “as long as they’re in school, they don’t have to repay the loans they have”. That’s a growing part of the young population in the United States, by the way (in the USA, you can’t bankrupt your student debt).

The same is true for those working, of course. We all know that “first you go to school, then you go to work, then you retire” has been a cliché but not reality for years. Going back periodically to pick up a continuing education credential, a community college certificate, an industry certification, or another degree from a university is the norm (if it wasn’t, multiple faculties wouldn’t offer “executive” degree programs that run on weekends, and the average age of the students at online universities like Athabaska, Royal Roads, etc. wouldn’t be forty).

Again, “pay cash” rather than take on debt. There are few guarantees with education these days. Such debt as you do take on — and let’s face it, there aren’t many of us buying our housing for cash — had better be focused, and kept as small as possible. Borrowing will, as rates climb higher and higher, become less and less frequent.

For all that student debt might not make sense, education still does. But notice what happens when you start paying cash.

You start taking programs that suit you, and your needs, rather than trying to match up a set of financial commitments to future income.

A philosophy degree focusing on issues in bioethics, philosophy of law, etc. might serve you just as well as going to law school might, especially if you remember that 90 per cent of people practising law in the United States are earning less than $50,000 per year after the expenses of their practice. A degree in applied mathematics coupled with courses in political economy and history might serve just as well as an MBA. What’s more, these “lesser” degree programs might serve in more places than an LLB or MBA might, and at a lot less cost.

Stretching the mind, in other words, will pay off, just not necessarily enough to cover a honking big pile of student debt. Fully paid for education, on the other hand, can generate positive returns on investment immediately.

Due diligence as applied to our personal lives begins with knowing what the world you’re in is really like.

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