College prices have been on the rise for the better part of the last four decades. But what do students actually end up paying compared to the “sticker price”? In this podcast, the guys discuss the issues surrounding the price of college. They also discuss how bonds have been reacting to the recent rise in interest rates.
Show Notes
‘Bonds are Getting Crushed’ – Michael Batnick – The Irrelevant Investor
‘Why is College So Expensive?’ – Ben Carlson – A Wealth of Common Sense
What is the Real Price of College? – Transcript
DISCLAIMER: Tom Mullooly is an investment advisor representative with Mullooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Mullooly Asset Management. This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions. Clients of Mullooly Asset Management may maintain positions in securities discussed in this podcast.
Tom Mullooly: Welcome back to the podcast. This is episode number 344. Thank you for tuning in. I’m Tom Mullooly and joining me today are Tim Mullooly and Brendan Mullooly. Hey guys.
Brendan M: Hello.
Tim Mullooly: Hello.
Tom Mullooly: We all took note of Michael Batnick’s article about bonds and how bonds are getting crushed.
Tim Mullooly: Yeah, I feel like for the last year plus, a lot of the talk has been about how low interest rates are, but Michael wrote this about how actually for the last five or six months, rates have started to come back up. They’re still at historically low rates, but relative to where they were in the middle of the summer, they’re essentially relatively skyrocketing, you could say.
Brendan M: Yeah. So, he mentioned the 10-year went from 0.5% To around 1.3% as of this week. And that’s 160% increase in six months on the yield, which everybody knows is inversely correlated to the bonds prices and so I guess one would assume that over that period of time that bonds would have gotten absolutely destroyed, but it kind of depends on what sort of bonds you’re talking about.
Tom Mullooly: It does kind of depend. Brendan just cited the 10-year yield on the treasury. The 30-year treasury is now yielding a speck over 2%. It’s 2.08% today, but six months ago in August, 30-year treasury was 1.2%.
Brendan M: And that’s roughly a 75% increase in its own right. We haven’t really seen that commensurate spike on the shorter term end of the spectrum, mostly because of what the Fed is doing, but just to take a look over that same six-month period of time, I did some numbers, separate from what Michael ran in his post and over that same six-month period where we’ve seen these huge increases in yields in percentage terms, the aggregate bond index is down about three quarters of 1%. The three to seven-year treasury is down roughly the same. The seven to 10 year treasury is down about 3%. Long-term bonds are, I think what Michael is referencing in his post. Those are down about 10% during that period of time.
Tom Mullooly: Right.
Brendan M: But I think you got to remember that the longer term bonds, while they may be down 10% over the last six months, because of primarily what’s happening with yields, I think also you got to appreciate that there was a point in time last spring during March, during the peak of what was going on in the market where these things were up 20% while socks were down 20%, 30%. They do their job, it’s just a matter of whether or not you want to deal with how they perform when the market is going well or when yields are rising.
Tom Mullooly: Early in my career, I wish I could remember the name of the person at Lehman Brothers who shared this analogy with me, but he said, “The best way to explain what happens with bonds is to tell them a short-term bond or short-term bond fund will have the same volatility if you’re on the first or second floor of the Empire State Building. A 20 or 30-year bond will have the same kind of volatility if you’re on the observation deck of the Empire State Building. On a windy day, you are going to get blown around.” And that is exactly what happens with longer dated bonds. It doesn’t matter if it’s treasuries, corporate bonds, municipal bonds, the further you go out, the more volatile these things become and people say all the time, “Well, I felt bonds were safe.”
Brendan M: It depends on what kind.
Tim Mullooly: Right.
Tom Mullooly: Right.
Tim Mullooly: And what you’re owning them for. I feel like we talk about all the time like if you’re going to own super high yield, even like zero-coupon bonds, you might as well just own stocks because the prices are going to move around like we’re seeing here in this article. I also think it’s kind of funny, we did a video last week about how the media needs something to worry about all the time. And I feel like for months going back, it was not a good thing that interest rates were so low and it’s going to negatively affect the market. And then I saw something today that the Dow up and down 100 points because interest rates are going back up and people they have nerves about it, so.
Brendan M: Yeah, the media loves talking about yields. There’s something for everybody to hate, no matter what direction they’re going in.
Tim Mullooly: Last week, there was inflation expectations. And now this week it’s interest rates rising again, I think.
Brendan M: I saw a good tweet from Joe Weisenthal at Bloomberg. And he said that when yields are down, the narrative is that markets are pricing in slow growth deflation and the Fed failing to normalize in terms of getting rates back to where they “should be” as if anybody knows what that number is. I don’t believe they do. And then when yields are going up, markets are pricing in inflation, deficit fears and the Fed losing control of interest rates as a whole. And so everybody’s unhappy unless rates are doing nothing, which they never are. They’re always moving in one direction or the other.
Tim Mullooly: Exactly. Yeah.
Tom Mullooly: There is a lot of hand-wringing going on about bonds and bond yields. It seems more than ever what’s going on right now, because people don’t… The bond market isn’t behaving the way the Fed… In the media, the way the Fed is portraying it to be, the bond market kind of has a mind of its own and will do whatever it says. So the Fed has said that they’re leaving rates, now they control the short end of the market. The Fed said that they’re pretty much on hold. Now, we’re in the first quarter of 2021. They’re talking about not doing anything until late 22, maybe 23, nothing set in stone right now, but people want to place their bets on which way rates are going to go.
Brendan M: The thing that gets me is what I was a little tongue in cheek about moments ago is how people have very strong views about what they think interest rates should be, or what inflation really is as if like these numbers that the Fed uses to determine this sort of thing are made up or wrong or something. And you can think whatever the heck you want about any kind of investment and what it should be worth, but that really means next to nothing in my opinion. I’m not sure why people want to pound the table so hard on this when it’s not clear to me like how they’re getting to the numbers that they are.
We also saw a period of time where rates were this low coming out of the financial crisis and we did get to a period of time where the Fed started to see what they wanted to see in terms of economic data and started hiking rates for a period of time. We got up to almost 2% on short-term rates at a period in 2018-
Tom Mullooly: Yeah, end of 17.
Brendan M: … and we paused. And end of 2018 I think we paused when the market freaked out. And then we had 2019 where they weren’t really doing much. And then we headed into obviously last year and they had to start cutting and pretty fast, but point being that owning bonds over, let’s say that whole period of time, just in aggregate bond, index fund, let’s say from 2010 through 2018 was perfectly fine. It hedged the stock side of your portfolio. You made money. You probably made more money than many people would have told you in 2010. They would have told you, you were nuts for buying bonds at the yields they were at because rates can only go up and the rates did go up, but maybe a final point that Michael made in his post where we started off was that for bond investors, there is some pain in the short-term associated with owning bonds as yields rise.
Brendan M: However, if you’re going to be a net owner of bonds for any longer period of time, you need higher rates for your expected returns to be higher because we know that the expected return on a bond portfolio is probably going to look pretty similar to the starting yield. And so if you own a bond fund that’s constantly reinvesting as rates rise, you’re getting a raise in terms of the interest you’re going to collect as long as you continue to own that. And so, not necessarily a big negative for people who own bonds to see rates going up.
Tom Mullooly: Can you just explain again, the concept that you just shared about how what your expected return might be from bonds based on when you get started with them?
Brendan M: Yeah. Assuming they’re higher quality bonds, treasuries or investment grade corporates, even. You’re looking at roughly what the starting yield is going to be your return over the duration of whatever the fund is. But if rates rise over that period of time, let’s say you own a portfolio of bonds that on the average yields one and a quarter percent right now, but rates rise over the next year, two or three, and it’s still buying target. Let’s say it’s a portfolio that wants to own a average maturity of 10 years or something like that, yields on those bonds go up over that period of time. It’s going to keep buying those bonds to make sure that you still own the same portfolio that you signed up for, but maybe they’re yielding one and a half or one and three quarters, or even 2% at some point in the future. So, your return incrementally becomes greater over that period of time, just because you’re buying bonds with a higher promise to you, not so bad.
Tom Mullooly: It really isn’t so bad. I think that’s a good way to explain it to folks when they start to invest in some of these fixed income products that we’re not necessarily buying it because it’s got an attractive yield, we will talk to clients about what their expected returns should be and the reason why we own bonds in a portfolio. Tim, I have a question for you.
Tim Mullooly: Mm-hmm.
Tom Mullooly: Why is college so expensive?
Tim Mullooly: Well, let me point you to the article that Ben Carlson wrote with that title. And he kind of looked at what’s been going on for the last four decades with college prices. He started out by pointing out since 2000, the cost of college has risen at two and a half times more than inflation, but going back to the eighties and nineties, it was up even more than that in terms of inflation, so.
Brendan M: That was kind of surprising to me. I don’t know if it’s just because I’ve only been around since the nineties, but I guess it seems like it’s a more recent phenomenon all the hand-wringing over college costs, but this seems like this was set in motion long ago. And if anything, it was-
Tim Mullooly: It was worse.
Brendan M: … growing. Yeah. It was getting more and more expensive at a faster rate for the two decades of the eighties and the nineties than it was for the beginning of the 2000s and then the tens.
Tim Mullooly: Maybe it just took people longer to realize the consequences of those prices going up and as the student loan amount grew, the dollar amount people were like, “Oh, this is a problem.”
It took a while for them to realize the impact it was having.
Tom Mullooly: Right. So, I can tell you when I went to college many moons ago, a year of college where I went was $3,500 a year. That same institution now charges $40,000 a year. And this is roughly 40 years later. I think what a lot of people overlook is, think back, if you’re over the age of 50, think back to what your starting salary was at your first job out of college. I can tell you, my first job out of college was with EF Hutton in coincidentally their financial planning department, where I made a whopping annual salary of $14,000. I can do a whole podcast on that, but there’s no way you could hire anybody today for those kind of amounts of money. And so things move along. I think what’s getting everybody’s attention now is you’re getting people graduating from college and they’ve got $100,000 in student loan debt. They may go into a job that pays $100,000 but it is still an eye-popping number to see numbers that large.
Tim Mullooly: Yeah. And I think Ben was… He referenced a book. One of the points that he was making is that the sticker prices for colleges have been going up steadily, but a lot of the average student tends to pay significantly less than that.
Brendan M: Yeah, what he said, he said the average first-year full-time student at school gets a 53% discount off the sticker price. And so if you adjust for that sort of average, and obviously an average means some people get more and some people get less than that, the price has not really risen at quite the… They’re obviously still higher, the price of college. However, not quite as high as people might think. And I kind of look at this as interesting comparison over the same period of time, there’s been a lot of analysis done on wage growth and how we haven’t seen it really growing at a clip many would like or some people think would be fair over the last several decades. But when you factor in things like employer healthcare and retirement benefits, things like that, the entire package, the take home pay for certain workers, maybe hasn’t grown, but the cost of employing those people has grown exponentially, especially due to healthcare.
And so, this is kind of similar in the sense where we’ve seen college costs rise, but like maybe it’s like a phantom rise almost because it seems like at least a good portion of people who are attending are not paying anything close to that sticker price.
Tom Mullooly: Yeah. And this is what Ben’s referring to in his post is a book written by Ron Lieber who’s written for The New York Times. We’ll link to it in the show notes.
Tim Mullooly: They were also talking about how colleges seems to… He gave a couple of examples, how college has just raised their prices, because they assume that people associate higher prices with higher quality. And that ended up being true for a few of the schools that they were talking about.
Tom Mullooly: Yeah.
Tim Mullooly: To compete with some of the reputations that Ivy League schools get, they just raised their prices to make people think that it was more.
Brendan M: Exclusive.
Tim Mullooly: … exclusive or better. You’re paying more for a better education, whether or not that was actually true. When it comes to public schools as well, they talked about how recessions and state funding kind of played into the rise in the price for state schools after 2001 and 2008. They said 80% of the state school price increases were due to the state’s cutting funding. So if you want to fix that problem, Ben was saying that either taxes need to go up so that the states can fund these schools or the tuition continues to rise there. So, which one do you want?
Brendan M: That’ll depend. People will choose whether or not they want to bear that cost depending on what their outlook is for… Like, are they going to send somebody to school in the next five or 10 years then they probably want it to be baked into everybody else’s tasks because that mean less out of their pocket.
Tim Mullooly: Right.
Brendan M: However, if you’re not going to, then you probably don’t want that to happen because you don’t want to bear the cost for something you’re not reaping any benefit from. And so I think that that’s a tough one. I think those are the solutions, but I don’t necessarily know that support’s going to be there for either of them.
Tom Mullooly: I think some of the other points bear mentioning. The fact that a lot of students do wind up getting grants and some type of financial aid, there’s very, very few people that actually pay the sticker price when their family member goes to college. Not that you can go in and haggle like you would for a car, but there is some room for maneuvering.
Brendan M: Well, so maybe like walk us through when you send somebody to school, when do you find out in your experience, at least. When do you get from the sticker price to the actual price? Because I feel like if more people were aware that there were discounts forthcoming or that they just had to like jump through a few hoops to get to the real number.
Yeah, people might treat the process a little bit differently because you’re not doing apples to apples until you have the real price from all these places.
Tom Mullooly: So let’s take this from a calendar approach. So you’re a senior in high school, hopefully by the time your senior year in high school has begun. You’ve already done a few college visits, but you have at least an idea of what you might want to study and where you might want to attend. And you’ve got a small list of where you want to go. In many cases, your application is going to be due sometime in October. Some schools will give you the early decision option and they’ll tell you right away. “Yeah, you’re accepted and you’re going to be in.” But at some point over the next couple of months, you’re then going to be accepted. You still don’t know what the cost is going to be. And that’s a-
Brendan M: That’s a problem.
Tom Mullooly: It is a problem because, as a parent, you want your son or daughter to go to the school of their choice. On the other hand, you still haven’t been told how much this is all going to-
Brendan M: You would like to do apples to apples before you give them the okay and make a final choice. So when do you actually get those numbers?
Tom Mullooly: So typically in May, you will get a letter and it’ll be the package.
Brendan M: You have to commit to the school first? Or can you still be on the fence?
Tom Mullooly: You can still be on the fence. Normally you will have to send in some kind of deposit to hold your space in the class, but it isn’t until May. And for some applicants, this might be five or six months later after they’ve gotten into the school of their choice, they’ve already celebrated the fact that they’re going to XYZ university. Then in May, right before you graduate from high school, your parents will get the letter in the mail or you’ll get the letter in the mail and it’ll say, “All right, the cost of the school is this. We factored in, you’re going to get a Pell Grant, a Stafford Loan, deferred, and non-preferred types of loans. The end result is going to be this much. This is what it’s going to cost you.” And then you have to really figure out, “Okay, how are we going to pay for school?”
And that’s when we get into a couple of different options, but the long and short of it is you can… If you’re in a position, you can write a check and pay the tuition, or you can contact the school and usually set up some kind of interest-free payment plan over 10 months where you pay the tuition. If you’re not in that kind of position, you can apply for student loans or parent loans. Parent loans need to really be examined a lot closer. I think a lot of people just don’t understand how they work. Parent loans are not like you’re applying for a mortgage or a car loan. They basically say, “If you agree to this payment agreement, we’re not going to run an income check on you, we just want to make sure that you don’t have a bankruptcy in your past and you are committed to pay the whole amount.”
So basically you can sign a parent loan, a PLUS loan for the entire amount, whether you can afford it or not, the school will give you the loan. I will tell you that pulling aside the financial aid director at the school where your student wants to go is probably the best thing you could do. If there’s a way that you could virtually buy them a cup of coffee. I learned so much talking to the financial aid director at your college when you guys attended school there. It took the lampshade off of my head. I thought I knew a lot about this.
Tim Mullooly: I think that the sticker price, if people don’t end up actually paying that, you do end up paying for it eventually though. But that spills into the whole conversation about student loans. Part of it is colleges can continue to increase these prices, knowing that people don’t actually end up paying it because they know that the loans are available for people, but you’re still on the hook to pay for majority of those loans.
Brendan M: I don’t know. It seems like for… I get your point, Tim, because like it… I don’t know. I guess it basically comes down to supply and demand because if they’re raising these prices and the market continues to bear them, then-
Tom Mullooly: A lot.
Brendan M: … they’re going to.
Tom Mullooly: Yeah.
Brendan M: That’s how that’s going to work. And for all the hand-wringing over whether or not college is worth it for everybody, which I think is a discussion with a ton of nuance, it depends-
Tom Mullooly: It’s very personal.
Brendan M: … a lot, whether it was specifically worth it for you or not. I think on average, the results still bear out that it’s probably a pretty good decision for most, meaning that on average, their earnings over a career will be higher than if they did not go to school. Until that detaches, and there isn’t any more correlation between school and earnings over a career, I don’t know.
Tom Mullooly: Right.
Brendan M: So people would have to like stop wanting to go, which would mean there would be no benefit monetarily or socially or at all for them attending and I’m just… Well, I don’t think that’s going to be the case.
Tom Mullooly: When we started talking about this yesterday. And one of the points that I raised was that when I talked to my own father about this, he said that he wasn’t… First of all, he couldn’t afford college. And secondly, he said that he wasn’t mature enough to be a serious student. And he went into the Navy, served his time in World War II and came out and went to law school on the GI Bill. And he said he was ready for it. And gosh, what an opportunity that turned out to be. So he was a little more mature and a little more ready for what to expect, probably a little more streetwise in terms of what to expect. I look back and say, “You know what? I went to college when I was 18, 19, 20.” And I wish I could go back to college now because I would take it a lot more seriously than I did way back then.
Tim Mullooly: Yeah. I feel like he was in the minority of being able to be that self-aware to realize that he wasn’t mature enough for it.
Brendan M: I also think culturally over, let’s say this eighties, nineties through today time period, college has become much more of like a culturally ingrained period of time and thing that people do as a part of the growing up process than maybe it was prior to that.
Tom Mullooly: Sure.
Brendan M: And I think that’s only… You see the price of college compounding over those years, I also think that the cultural aspect of college has compounded over those years to the point where it’s just an expectation for a lot of people. And I know that that’s not the case for everybody, but it certainly felt that way to somebody who was in that position not that long ago.
Tim Mullooly: I also think it’s tough to figure out a solution to this, to the tuition issue, because at the same time these prices have been going up, but these colleges and universities have also… They have costs to operate under and they’re used to operating under… Getting a certain amount of money from their students every year. So it’s not just like, “Oh, well colleges should just charge less.” It’s like, “Well, then they can’t keep the lights on. They can’t pay their teachers. They can’t fund everything that the school needs to fund.” So then, those universities or those schools would close and then there would be less schools to go to. So then the schools that were still open could charge more because there was less schools out there. So like-
I don’t think it’s… Yeah, the simple answer of well, colleges should just charge less money. Like it doesn’t work like that.
Tom Mullooly: I’m sorry to laugh, but that’s exactly… You’re right.
Tim Mullooly: Yeah.
Tom Mullooly: It doesn’t work that way.
Tim Mullooly: It doesn’t work that way. There’s so many, like you said about even just deciding to go to college, there’s so much nuance and other variables that go into it. It’s not just a one solution solves everything kind of problem.
Tom Mullooly: Before we close, I just want to go back to breaking down some of the math. And we talked a little bit before we turned on the mic, first of all, the average price for a private college is now $24,000 a year. The average price for an in-state public university is now a little over $15,000. And Brendan, as you mentioned, a few moments ago, it’s going to be higher in some parts of the country and less in other parts of the country. But Tim, you had an experience where you were choosing between going to an in-state school and going to a private school in Pennsylvania. And one of the things that I learned in conversations with the football coach at the school was that at an in-state school, you’re not going to have all the grants and scholarships and ways that they can cut the cost of going to a school. And when we actually sat down, you and I, and did the math, we found out that the out-of-pocket expense between an in-state school and a private school, there was very little difference.
Brendan M: Yeah. At least for us in New Jersey.
Tom Mullooly: Yes.
Brendan M: I think maybe in other parts of the country maybe it will be different. Basically what you’re saying is you’re banking on the in-state or the public school, just starting from a lower number, because there are going to be fewer things to tick off of the list there in terms of making it cheaper, but private schools maybe have a little more leeway and you know what they’re discounting in terms of need and merit-based grants, things like that, right?
Tom Mullooly: Yep. We’re only scratching the surface when it comes to talking about college costs. And we’d go through these discussions a lot with clients who have students who are getting closer to making college decisions. It’s a big decision now and not an easy one either.
Tim Mullooly: All right. Well, that’s going to wrap up this episode of the Mullooly Asset Management podcast. Thanks for listening and we’ll see you on the next episode.
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