To avoid default, try technical college

To understand whether to borrow for a college education, students should listen to investors in bonds backed by student loans, suggests the Wall Street Journal. It’s a $242 billion market.

Hedge fund manager Daniel Ades of Kawa Capital Management won’t invest in bonds backed by loans made to 2010 and 2011 graduates, “because we can’t quantify the risk,” he told the Journal.

Investors like Mr. Ades have a unique view on the future for America’s job-seekers. Their investments depend on accurately predicting young people’s ability to repay their loans, which means they obsess about everything from employment rates by profession to the long-term earning potential of young graduates.

Historically, investors have assumed 25% to 30% of student loans bundled into their bonds will default. But today they are baking in between 30% and 40% default rates among the current crop of graduates, said Chris Haid, a director in asset backed trading at Barclays Capital. Even those assumptions are a best guess and defaults could ultimately go higher if unemployment rises, Mr. Haid said.

Not surprisingly, failure to graduate sharply raises the likelihood of default. So does the failure to finish on time.

Investors in bonds backed by student loans hate to see perpetual academics in their portfolio, chronically changing majors or stopping and starting school, adding years of tuition to their debt load.

“When you see a guy in a loan made in 2005 that is still in school, you throw that away,” said investor Rubin Bahar, of Eagle Asset Management.

In the current economy, the return on investment can be better for two years at a technical or community college than a four-year degree and three years of law school. A technical degree from a public two-year college delivers relatively  high wages for a low cost, according to Mr. Ades. The median annual community college tuition is $2,963 a year the College Board estimates.

“We’re in a skills based economy and what we need is more computer programmers, more [nurses],” he said. “It’s less glamorous but it’s what we need.”

A technical college degree is worth as much as a bachelor’s degree, concludes Thumbtack, which surveyed business people — contractors, photographers, performers and others — who advertise their services on the site. The hourly rate for technical college graduates is $55 an hour. Bachelor’s graduates also average $55 an hour. (“Technical college” includes for-profit career colleges and technical degrees earned at community colleges.)

Electricians, plumbers, auto mechanics and HVAC techs trained at community colleges and technical colleges make good money and can’t be outsourced, notes Glenn Reynolds in Popular Mechanics.