BU Economist on College Ranking, Student Loans and “Shacking Up” with Mom | UB today

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“You can’t trust college rankings.”

“To pay, let alone borrow, a lot of money to attend an elite school is probably a huge waste of money.”

“Matching up, even with mom, is a very powerful way to safely raise your standard of living.”

If these words of Laurence Kotlikoff grab your attention, you might want to check out her new book, The Magic of Money: An Economist’s Secrets to More Money, Less Risk, and a Better Life (Small, Brown, 2022). Kotlikoff, William Fairfield Warren Professor and Professor of Economics at the College of Arts & Sciences, provides financial advice on college, buying a home, marriage and divorce, and retirement (don’t take security social security, which reduces your benefits and could cost you hundreds of thousands over your lifetime), seen through the lens of an economist.

Courtesy of Little, Brown and Co.

And from personal experience. His disdain for university rankings, he writes, followed the American News lack of interest in academics – notably BU’s economics department became one of the best in the country in the 1980s and 90s – while going gaga in its notes on the “splendid new gymnasium, dormitories five stars, a magnificent student center and a state-of-the-art hockey rink.

It also tells the true story of bringing a pseudonymous art history student to tears after learning she had $120,000 for college, but couldn’t turn her degree into a college offer. ‘use. “This episode still haunts me,” he wrote. “I apologized to Madeline profusely, during and after class. But the damage was done. This illustrates his broader point about risky college investing: 40% of students drop out, and “borrowing money with a 40% chance of getting nothing in return is extremely high stakes poker.” students”. He suggests shopping around for cheap schools, topped off with cheap online courses from elite colleges, or attending more prestigious places through grants and scholarships, not loans.

Oh, and fucking with mom? This advice changes an old adage: two can live cheaper than one.

Kotlikoff, named one of the world’s most influential economists by The Economist, has its own financial planning software company, the services of which are free for BU employees. He talked about his book with UB Today.

Q&A

With Laurence Kotlikoff

UB today: Why do you say that conventional financial planning advice is “dangerous to your financial health”?

Laurence Kotlikoff: They calculate based on what you currently save, which is surely wrong, [and whether] you spend a targeted amount they gave you, which is surely too high. The life cycle theory of savings, developed by [economist] Irving Fisher, has the same behavior as squirrels, that is to say that you want to avoid starvation at all costs. If you might starve to death, you’ll never follow [conventional planners’] course of action; you’d rather never be in the market. It has absolutely nothing to do with common sense, with economics. It has everything to do with [financial] product sales.

UB today: Conventional wisdom says stocks are a good long-term bet, but should be eliminated from your portfolio as you approach retirement. What do you think of this advice?

Laurence Kotlikoff: No one with a PhD in economics or finance would agree with that. It’s like driving the door. What is the probability of totaling your car in five minutes? Very slow. What is the probability over 20 years that you total your car? Important. It’s the same thing here. If you have money in the stock market, what is the probability of losing it all in an afternoon? Very slow. What is the probability of losing everything in 20 years? It is not necessarily very high, but it is high.

Photo of Kotlikoff, who wears a dark suit jacket, red tie and blue shirt.  He's an older man with short gray hair, who smiles slightly.
Photo by Bridget Jourgensen

UB today: If someone has made the mistake of borrowing for college and is inundated with student debt, what should they do?

You have to pay it. Otherwise, you are in the equivalent of a modern debtors’ prison. You don’t want to buy a fancy car; you want to buy a junker. You want your parents, if they’re investing in their retirement account, to consider taking money out of their IRA, [use it to] pay off the student loan, and you pay them off at a lower rate than the student loan interest rate.

Oberlin College, where I sent my sons, is extremely expensive. I was able, with my salary, to pay for my children; therefore, I have much less money than I would otherwise. They had a good upbringing, made lifelong friends, but I probably made a mistake not making them go to BU for free [via the faculty tuition remission], save some money and give it to them when they graduate. Yes [students] are not struggling with [debt] directly, they take care of it indirectly, insofar as the children will inherit less money if the parents have spent their fortune.

UB today: Why is paying off debt, including your mortgage if you can, the best investment?

If I can borrow at, say, 1% and lend at 20%, I make up the difference. It’s the opposite: if I can reduce my loans and repay a debt, where the loan is at a low rate and the repayment of the debt at a higher rate, it’s the same trade-off.

UB today: So should we rent rather than own our homes, as the majority do in some European countries?

There is a compromise there. If we have 18% credit card loans, we shouldn’t be putting money aside to pay for a house; we would have to pay off the cards and then save for a deposit and rent in the meantime. But one could also buy cheaper housing. We could move to neighborhoods where housing is cheaper.

UB today: Why do you suggest avoiding early retirement and waiting until age 70 to collect Social Security?

We can’t count on dying in time, based on our life expectancy, even though Wall Street tells us we can so we keep our money with them so they can keep charging fees. This is part of the scam they ran. What economics says is that you have to plan to live as long as possible, because you could be able. You can’t put yourself in a situation where you might starve to death or be in a terrible setting, like a Medicaid nursing home, if you can avoid it.

For low-income people, the risks of dying prematurely have increased. For people with high incomes, it is the reverse. You should plan to live to your maximum age, but given the likelihood that you won’t make it, what economics tells you to do is take a calculated bet, which you plan to live in up to age 100, but spend more before, say, age 70. , and gradually less afterwards. I’m going to cut my spending every year by half a percent, because chances are I won’t. It’s taking a gamble, but it never leaves me in a position where I’m starving.

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