I should have been horrified by the story in yesterday’s Washington Post about rising college costs:
Even before the financial crisis intensified the upward pressure on college costs, the price of a degree was soaring. Since 1980, the average cost of tuition and room and board has grown by a staggering 121 percent while median household income has risen a mere 18 percent, according to federal data. But the credit boom earlier this decade provided some relief for families.
Wall Street financiers packaged student loans into securities and sold them off to investors, who could trade them just like stocks. That, in turn, provided more money for lending, helping to make student loans cheaper and more available. Even people with poor credit histories could easily get a loan.
But during the last academic year, private student loan volume fell by half as financial firms became wary of lending to students, who generally do not have long credit histories. Officials from Sallie Mae, the industry leader in student lending, said they expect another significant decline this year.
Nor have families been able to keep borrowing against the value of their homes, which seemed for years to appreciate with no end in sight. Second mortgages have been shrinking along with real estate values. Money made available by banks to homeowners through home-equity lines of credit has fallen by 25 percent, to $538 billion, since the end of 2007, according to federal data.
About a decade ago, financial planners began to tout the benefits of 529 plans, which invest families’ savings in the stock and bond markets with the aim of keeping pace with the growth in college expenses. Even before the crisis, these plans couldn’t keep up. Then, in 2008, the average 529 plan lost 20 percent of its value.
And no longer can students count on the credit cards once available so freely, often by salespeople who lined campus walkways, offering free T-shirts and coffee mugs with their plastic. Many students used the cards to pay for books, meals and more…
But being in the midst of my own daughter’s college application process, I realize that the high and rising cost of college is just going to force us to evaluate and compare the benefits of her different college options that much more carefully. In many ways, access to cheap credit causes people to behave as if the money is “free”–and often to make poor economic decisions because the standards for the benefits to be obtained from that household spending are correspondingly too low.
So I think having a tighter budget constraint may be a good thing.
This is well illustrated in this story about how real families have been forced to make adjustments to their family budgets during this recession:
As crazy as it sounds, losing a $70,000-a-year job has been good for Marty Morua’s finances. The former Wall Street stockbroker says the setback forced him to scrutinize his family budget and snip away at expenses. And soon, even with less income, their savings grew.
First, he and his wife decided to live on her salary so he could be home with their 5-year-old daughter after school. Without a nanny, they saved $12,000 a year. He dropped services he didn’t use on his cellphone — texting and video games — to pocket $250 a year. He took a defensive-driving course for a 10 percent discount on his auto insurance and dropped car-rental and roadside-assistance coverage, for an extra $150 a year.
For holiday gifts, he turned to thrift stores and gave home-baked cookies.
“When I was working, I didn’t look at the price tag,” he said. “In a strange way,” he added, losing the job “has been a blessing to teach me how to become aggressive and wise about saving and ways to save — areas I never would have thought about.”
The recession has caused a seismic shift in the consumer culture, converting die-hard spenders into savers. A growing number of people, either smarting from a job loss or spooked by the financial crises of others, are scrambling to get out of debt, establish emergency funds, and add to their retirement and savings accounts.
…And it’s why I think we really have to figure out how to make the budget constraints that the federal government faces “bind” more. Such as via a “fiscal commission” or “task force” or “advisory board” or whatever we might call it so that politicians might stop freaking out so much and start realizing it would actually a good thing to have more constraints placed on their policymaking.