McArdle: Luxurious college apartments, built on debt

The lazy rivers. The dining-hall steakhouse. The hot tubs. The dazzling fitness centers. Journalists who cover higher education love these lists of amenities in student housing, and readers love to hate them.

Take the latest trend in college housing: luxury off-campus apartment buildings that rent only to students and that are considerably nicer than many professionals can afford. This is, on the face of it, somewhat mysterious. Students are not known for their fantastic credit. Nor for taking excellent care of their surroundings.

This naturally raises the question: Where are the students getting the money for this?

In some cases, from their parents. But in other cases, the students choosing these luxury options are financing that lifestyle with money lent, at below-market rates, by you the taxpayer. (Try not to think about the fact that some of this will be refinanced into the income-based-repayment programs that will result in considerable forgiveness of the principal.)

When people ask why college tuition is so high, defenders of the higher-education system point to things like “Baumol’s cost disease” (costs in industries without much productivity growth tend to rise, because they have to compete for labor with more productive industries) and declining state contributions to public colleges. No doubt these play a part. But this cannot explain the vast upgrades in college residential amenities that have taken place in the 20 years since I graduated from college.

Of course, our parents were paying for it, and they didn’t care whether we had a swimming pool. A certain Spartan element was supposed to be part of the ritual of college, just as it had been when they were in college. What changed? I suspect the answer is that rising tuition, and the increasing reliance on student loans, has placed more of the financial responsibility into the hands of students. And the students shop for colleges based on … well, about what you’d expect when you give tens of thousands of dollars to 18-year-olds and ask where they’d like to spend the next four years.

I’m the farthest thing from a credit nag. While freely available consumer credit does allow a subset of borrowers to get themselves into deep trouble, it has in general been a great boon to people, and the economy. But credit has a downside, as I explored when I went on the Dave Ramsey cash-only plan: By easing the pain of sacrificing to pay for something right now, credit can encourage us to spend more than we really should. Add that to college students, who waste money even when it’s in limited supply, and you have a recipe for a big budget problem — for either the students or the taxpayers.

It’s hard to believe that this is not at least part of the explanation for the vast oceans of money that are now sloshing through our college campuses, and off them, too. As Milton Friedman pointed out long ago, people spending other people’s money on themselves tend not to be motivated to look for the best value, but rather, the best hedonic experience — and this can be true even if the “other person” is your future self.

This is obviously not a big problem for the parents who can afford it. But groups of people are prone to consumption cascades — aka “keeping up with the Joneses.” If all your friends are going off to the school with the lazy river and the nosebleed tuition, it’s pretty hard to swallow your dreams and commute to the local branch of your state university. If all your friends on campus are living in the fancy building with the modern amenities, it’s really difficult to stay in the dorms by yourself. As most of us can remember from our own school years, the young are particularly vulnerable to this dynamic.

Living beyond one’s means is an even bigger problem when the credit is extended by the taxpayer. I don’t particularly blame any of the people stuck in this loop — the administrators trying to keep enrollment up, the politicians making loans more and more generous, the kids acting like, well, kids. But I don’t particularly think it should continue either.

It is one thing to say that we need a more affordable student-loan program so that people can get ahead. That should pay for things like tuition, books, food, basic housing. It should not be so generous that students’ lifestyle in college far exceeds what they’ll be able to afford after graduation.

This story was originally published March 11, 2016 at 12:09 AM with the headline "McArdle: Luxurious college apartments, built on debt."