America is a country in debt. Two of the main forms of debt have actually found favor because they have commonly been regarded as positive:
- Mortgages are the vehicle by which people can join the real estate market. History shows that values have always risen over time, even if in the short term there can be problems.
- Student loans that finance college education can be justified because they improve the career prospects of the graduate.
Increasingly these two ‘debts’ have been called into question and it is worth looking at the reasons and whether the recent views are at all justified.
Real estate has had its problems in recent years. Hindsight is a wonderful thing but the huge rises in value in the early years of the Century could not possibly continue. What no one knew was what would bring this inflation to a shuddering halt. Collateralized Debt Obligations (CDO) disguised potential toxic debt within packages that were graded because of the good credit content; they were snapped up with alacrity until the message hit home. People that had been granted mortgages, sometimes for more than the actual purchase price, and were never going to be able to make timely payments began to default and things came down like a pack of cards. Real estate value plummeted and those that had bought at the height of demand found their assets fall significantly.
It was a hard lesson for people to learn because the traditional view had always been that real estate was a great investment. It is but not to make a short term dollar. The timescale is medium to long term. It has got everyone thinking though to be fair the market continues to recover and interest rates remain low.
Although there are costs involved in switching mortgages it is worth investigating on a number of fronts:
- You may be able to take money out and invest in other financial products towards your retirement.
- You could clear other debts such as that on credit cards which charge a high rate on outstanding balances. The alternative to clearing such debt, and doing it quickly may be a nation 21 loan which is short term and certain to be offered at a much lower rate than the credit card companies charge.
- You can invest in real estate in other ways now that the market has improved. Owning a second property can provide rental income while there are funds which use professionals to invest their money in property portfolios.
So what are the conclusions on real estate? Mortgage rates are low and as long as you do not take the ‘get rich quick’ approach then mortgages make sense. After all you have to live somewhere and if you do not own your own home you will still have to find rent once you have moved out of the family home. You must shop around of course for real estate that is competitively priced and give the whole process plenty of thought because it is the biggest purchase you will ever make.
A recent study has identified that many people in their 20s regret taking out student loans because it has meant that they are starting out on their careers with debt when there are so many other calls on their pay check. A recent survey by Citizens Bank says that 36% would have decided against college if given the chance again with almost 60% regretting having so much student debt. The national figure is a staggering $1.3 trillion and that figure does not include the other debt that students and recent graduates are carrying.
Many seem unaware of what they actually owe and the average period this age have left before the student loans are fully settled is 11 years. Clearly some will still be paying off their student loans when they have started a family and should be making regular savings towards their retirement fund, even though that may be three decades away.
One factor that may change in the coming years is that the job market is improving. Those who thought that taking out a student loan as a means of a more profitable career may have found that has yet to happen. There are plenty of graduates who are over-qualified for the jobs they are doing because of the relative uncertainty of the job market until the recession faded. Wages have also been relatively static though there are reasons to think that will change.
Parents always want the best for their children and that means a good education. It costs money and families should discuss college. Debt at an early age can be daunting, especially if you want to start out on your own with an apartment and perhaps a car? It is important that parents do not overstretch themselves to help out because they may well have their own concerns about their retirement fund.
Student loans can be spread over a long period and the interest rate charged is fair and manageable. You must resist the feeling that you are overwhelmed with debt and take a positive stance. That means preparing a suitable budget and taking appropriate action where there are apparent problems. If you do that you should look to fulfil your potential and take out a loan that will help your further your plans to graduate.