Here in Montreal, students have been striking for 13 weeks and protesting in huge numbers about a government tuition hike. The protest is laughable to the rest of the continent because fees will be raised to just $3600/year.
The protest has divided the city but it’s given me ample opportunity to hear about the cost and value of education. My mind keeps coming back to this chart from the Carpe Diem blog.The hallmark of a bubble is that it’s based on conventional wisdom; “house prices will never fall”
The conventional wisdom of higher education is that people with degrees will earn significantly more money over a lifetime. I’m not sure that’s true:
- Studies may have proven this but those studies looked at people in their 50s and 60s compared to their cohorts. At the time, a university degree meant something and a far lower percentage of workers had one compared to today.
- These studies don’t adjust for work ethic and intelligence. Some people who don’t go to university just don’t like working or they’re stupid so naturally they will make less money.
- Anecdotally, I don’t think it’s true. Workers in the skilled trades or low-level government jobs are much better-off than the average grad.
Paying off a $30,000 debt over five years costs about $540 a month. In the US, work is scare, rent is still high and student debt averages $25K for undergraduates.
With low interest rates, carrying that debt is manageable but even with Obama keeping rates low for another year, those rates a certain to go higher.
Many people have written about the bubble not the new question is not, if there is a bubble but how does it burst?
Already, automakers are seeing lower demand from young people and first-time home buyers aren’t coming back. That’s my base-case: consumer spending will be a constant disappointment as more money goes to loan servicing. It will be a headwind for growth for generations.
The outlying scenario is that Americans head to the streets for the right to default on their loans. And with 300,000 people in the streets in Montreal, maybe that day isn’t as far off as most people believe.
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