Student loans would be an investment if like other investments, it could be removed from someone's 'portfolio'. IMO the fact that student loans are not dischargable means they are not an investment.
Not sure what we should call student loans, but 'investment' seems like the wrong word.
You take out a car loan because you expect to extract more value from the car than its price plus interest. You take out a student loan for the same reason.
If student loans were buying a some percentage of your monetary worth or income then I could see investment angle but that's basically owning a person which I couldn't support.
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.
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.
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.
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.)
I'm countering this assertion that you need to subtract all the money that the owner did not have to pay in rent because this is going to be equal to the amount that the owner did not earn in rent by renting out their house.
People who buy a house for living (rather than rental) do not often make a rational economic investment decision which is kind of my point.
Sorry, I did not make it clear that I was assuming a comparison between renting and owning in the same neighbourhood. People (Americans in particular) generally rent apartments and buy houses, as you rightly pointed out. Within the same neighbourhood, a house is going to cost more to rent than an apartment.
In a first approximation, if rent is much less than owning + expenses, the property owner will have to sell or go bankrupt, which will reduce property values. If rent is much greater, then property owners have an incentive to increase the rental market, lowering rents and raising property values. At a theoretical level, owning carries more uncertainty than renting.
Of course, weird circumstances can upset things: a decrease in acceptable uncertainty can cause rents to go up faster than the market can otherwise adjust, for example.
My past experience says that renting costs more than owning, but bit by much.
But I don't know what you think an inordinate down payment is.
The value of an investment has nothing to do with how much use you get out of it. You're conflating investments with assets.
The value of an investment is how much you can sell it for and how much money it bring you (dividends, etc). The value of an asset is how much value you're currently getting out of it.
The fact that you'll have to pay money for rent is immaterial. You can count that as paying rent to yourself by owning a house.
The equation is simply costs should be less than outlay. If rent <= property taxes + interest on down payment + property taxes + amortized closing costs + opportunity cost for not being able to easily move + repair costs - tax benefits, you win. Otherwise, you're losing.
A house can be both.
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.
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.
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.
Yes leverage is just a tool. The point is, a mortgage creates leverage and it's silly to ignore that when thinking about return.
> 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.
This is speculation by you. Again: note how many resumes keep college on them.
> 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.
This is self-contradictory unless you think that salaries for people with degrees grow more slowly than for people without degrees.
Actually, you're paying somebody who also might be paying interest on a loan. What happens to money after you pay it is immaterial. You're not paying interest on a rent debt you've accumulated.
> The point is, a mortgage creates leverage and it's silly to ignore that when thinking about return.
You're spinning it in terms of pure rewards. When you leverage your money on an investment which can have value go both up and down, you're just magnifying your exposure. Of course, if you can find an investment that's guaranteed to go up, of course you should leverage yourself to the hilt. If that's the case, go buy up some tulip bulb.
> This is speculation by you. Again: note how many resumes keep college on them.
And also by you - if we did an A/B test based on years of experience vs college, we can see whether that matters or not. Everything else is speculation.
> you think that salaries for people with degrees grow more slowly than for people without degrees.
Of course they do. If you start off earning 30k as a high school dropout doing the same job as somebody earning 60k who has a degree, your wage will rise more quickly if you perform at the same level.
It's worth pointing out that the post I'm replying to stated that housing prices generally track inflation, which is upward. My point is simply that leverage permits a return higher than inflation under those circumstances. I wouldn't claim that housing prices are some sort of "sure thing," and I don't think I did.
> And also by you
Yes, but the difference is I know I'm speculating.
Unless you've got some actual data to bring, I'm not interested in a guessing contest.
Well, my point is that if you leverage yourself in an investment that just tracks inflation, you're running in place. Leverage doesn't do anything in real terms here. The number value in your bank account might go up, but your real purchasing power doesn't.
That was my point, that in this situation leverage doesn't help you, and that fundamentally if you're trying to use leverage in this situation, you're hoping that housing prices rise faster than inflation does.
If the interest rate on the mortgage is equal to inflation, then you will realize the same gains on the house as if you put the downpayment in an interest bearing account at that same interest rate. This is before accounting for transaction costs, property taxes, upkeep, etc. If the mortgage rate is lower than inflation then you will have a larger gain and if the mortgage rate is higher than inflation then you will lose money.
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The increase in earnings will be largest when you have 0 years of work experience and smallest when you have 40 years of work experience. In this sense, the value of the degree diminishes over time as the value of your work experience increases.
Alternatively, you can do a discounted cash flow analysis on this increase in lifetime earnings to get the present value of the degree - you could do this while still in school, at graduation or partway through your career. Arguably, if you do this analysis partway through your career, you should include the increases in earnings already realized in which case the value of the degree will likely remain static or drop slightly over time. Regardless, the value of the degree will not go up over time.
The value of the actual education itself to a career is usually lower than the value of a random (as in random access) sample of 4 years of work experience. However, the value of the education & degree to getting the first, second, and perhaps even third job is non-negligible.
Mortgage interest doesn't go on the balance sheet because it is an expense, not a liability. Other property expenses include property tax, insurance, upkeep and maintenance, repairs, etc.
These expenses do not magically disappear just because a property is a rental. If you are paying rent, you are paying all these expenses, unless your landlord is purposefully losing money on you.
I'm not here to claim that buying a home with a mortgage is the best investment for everyone. That depends on the particulars of each situation. I'm just challenging the notion that buying a home is not an investment.
People buy homes because they expect to get a return, and most do. Same with education. If your analyses comes to the conclusion that that is not possible, then you need to check against the data actually coming out of the economy.
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.
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.
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.