Will the Student Loan Bubble and the Housing Bubble Merge Into One Huge Super Bubble?

Luxury student housing in Texas. (WSJ)
Luxury student housing in Texas. (WSJ)

Tuition, clothes, cars, spring break. College students will blow money on anything, as long as they don’t have to pay for it (thanks Mom and Dad!). Or, at least, as long as they don’t have to pay for it right now (loans! credit card debt!).

You know what else they’ll pay for? Housing. You know how much they’ll pay for it? A lot.

At least, that’s what real estate developers are discovering (to their delight), according to The Wall Street Journal. As long as you can put up with the occasional rager and someone vomiting into the pool every now and again, student housing pays handsomely. And because students are paying with other people’s money—either their parents’ or their future selves’—student housing has proved cheerfully impervious to market downturns. 

When the housing crash roiled the rest of the country, parents continued to pony up in order to make an increasingly expensive college dream a reality. And lenders are happy to continue to dole out ever-larger student loans—which are essentially a sure bet given that borrowers can never declare bankruptcy and escape. As the Journal notes: “During the real-estate crash, as prices of single-family homes declined and apartment landlords reduced rent, many student-housing landlords continued to raise rent, thanks to the generosity of parents and student-loan programs.”

Which all can be reduced to one indisputable fact: student housing, in light of the tentative recovery of the U.S. housing market, has become an exceptionally attractive investment. Among the many projects being developed by private developers right now, Lennar Corp is building by the University of Texas at Austin, Brandywine Realty Trust is building a 33-story student housing tower in Philadelphia and Landmark Properties, which already has some 5,000 beds, is building another 2,500.

Housing developers, having witnessed firsthand one massive debt-fueled collapse, apparently want a good view of the next one.

Not that the housing isn’t needed—universities and colleges across the countries are grappling with a shortage of student housing and aging dormitories that require significant upgrades. The Journal estimates that colleges are short 1.5 million to 2.15 million beds. Nor are the current dorms particularly cheap—many freshman and their parents are surprised to learn that sharing a dorm room with another person and a bathroom in the hall costs nearly as much as a studio apartment in the same market.

It’s just unfortunate that developers, as developers are wont to do, are intent on adding luxury amenities to collect the highest rents possible. While the rest of the country is discussing ways to the reduce the cost of a college education, developers are brainstorming how to drive it up. For example, Toll Brothers is building off-campus dorms by two as-yet unidentified East Coast universities that will feature individual bathrooms for every resident, movie-screening rooms and gyms.

Other deluxe dorm developments are slated to include tanning beds, resort-style pools and ice-skating rinks. Individualized bedrooms and bathrooms are standard, rather than a rarity. And while many students will no doubt be glad not to be sexiled by their roommates or late for class because of a bathroom hog, such niceties don’t come cheap. Students may be getting more for their money, but they’re also being asked to pay a lot more money. The Journal reports that many of these new dorms will approach $1,000 a bed, which is ridiculously high in housing markets outside of New York and San Francisco.

“Not the dorm living I experienced,” Toll Brothers CEO Douglas Yearley Jr. told Bloomberg in December. And he, apparently, went on to do very well for himself. So why do future generations need to fork over all their future earnings to live like tycoons-in-training? Luxury housing for college students means many young people spending more money than they can afford to, and to a large degree without fully realizing the ramifications of what they’re doing.

Additionally, more colleges relying on private developers to construct and manage housing, rather than doing it themselves, means that there will be less options for students who prefer more spartan accommodations (not to mention that fact that lower-income students risk being roped into upscale housing by the desire to live with wealthier friends).

The student loan bubble may not be a bubble. It certainly lacks some of the tell-tale signs—unless you count graduate school, one can’t leverage college debt to fall deeper into debt. The rising cost of education also seems likely to continue to rise steadily, rather than rising quickly and falling all at once, as bubbles tend to do. Moreover, a college diploma does retain some essential value despite the difficulty that many recent graduates are having finding jobs—it is a financial investment, but not only a financial investment. Yet even if student loan debt isn’t a bubble waiting to burst, that doesn’t meant that it isn’t a crippling and increasingly widespread problem that’s on the verge of becoming a massive social and financial disaster.

“As today’s parents know as they drop their kids off at college, these are not the most inexpensive places you can find, like some of us may have experienced in our college days,” Toll Brothers CFO Martin Connor told The Journal. “They are high quality, in great locations and generate significant rent.”

Translation: luxury housing is completely unnecessary for a college student, but it allows us to make a lot of money.

College involves many things that have nothing to do with education, and certainly, living the high life may seem far from the most self-destructive of them. But unlike the other excesses associated with higher education—drinking, sex, self-indulgent conversations, which are largely inevitable, often regrettable, parts of transitioning from childhood to adulthood, amassing a huge amount of consumer debt is not. It isn’t an essential part of the college experience, nor is it a way to experiment with new ideas and identities. It’s just a drag.

One of the few reasons that so many students have agreed to take on huge educational debt in the first place is opportunity—education is supposed to offer chances and possibilities that a person probably couldn’t or wouldn’t otherwise have. And while resort-style pools and individual bathrooms shouldn’t hurt anyone’s chances of getting an education, paying for them for years into the future may well cost many graduates all kinds of valuable opportunities: the opportunity to travel, to take a lower paying but more fulfilling job, to leave one career and start another. The kinds of opportunities that excessive debt can stifle or snuff out altogether, the opportunities that are the reason so many of us go to college in the first place.


Will the Student Loan Bubble and the Housing Bubble Merge Into One Huge Super Bubble?