The hallowed sounds of “Pomp and Circumstance” wafting over the loudspeakers …
The celebratory tossing of caps in the air …
The tears from proud parents and grandparents, some of whom are watching a family member graduate from college for the first time ever.
This time of year creates a lot of happy memories for graduates and family members alike. I can still remember happily collecting my dual degrees from Boston University – and transitioning into adult life beyond.
But these days, more and more students are facing a darker reality. They’re graduating with more than college degrees. They’re walking away with enormous DEBT burdens!
- The Class of 2012 graduated with an AVERAGE financial hangover of $29,400, according to the Project on Student Debt.
- In more expensive parts of the country like the Northeast, four-year degree students owed even more – almost $34,000.
- We’re not just talking about a handful of students, either. More than 7 in 10 graduates had at least some debt when they got their degrees.
- The growth in debt is far outpacing the growth in income, too, rising at a rate of about 6 percent per year over the past half-decade.
- All told, student loan debt now totals around $1.1 TRILLION. That’s almost quadruple the level of a decade earlier. It’s now the single biggest category of consumer debt outside of home mortgages.
There are plenty of reasons. College costs have been growing at a faster rate than inflation for years. Many Americans chose school over the workforce when the economy cratered. The value of a college degree has gone up substantially, in terms of making people more employable.
But many believe these enormous debt burdens are increasingly holding the U.S. economy back.
For one thing, a huge debt burden saps the ability of new graduates to take jobs they might otherwise want to. If you have too much debt and hundreds of dollars per month in payments to make, you’re more likely to take on a less intellectually fulfilling job. You may also be less willing to sign up for a lower-paying job in a field like teaching or non-profit work, where you can make a difference to the community and world around you.
|They’re celebrating now, but many college grads are walking away with the dark reality of enormous debt burdens.|
For another thing, it makes it much harder to borrow money for other purposes. As the New York Times noted, student debt stifles entrepreneurship by making people less likely to borrow to fund the next, great brilliant idea or small local business.
And what about housing? You and I both know when you go to get a mortgage, one of the biggest things the bank looks at is your current debt load and ability to service it. If you have tens of thousands of dollars in student loans to pay back, and you have to pay a few hundred dollars a month on those loans, you’re going to have a much tougher time qualifying for a home loan – especially these days when standards are tighter.
The Federal Reserve Bank of New York looked at this phenomenon and concluded that debt burdens were likely a significant headwind for home purchases among the 25-30-year-old set. It said:
“The failure of young consumers, and particularly the comparatively skilled young consumers of our student loan group, to re-enter the housing market remains a puzzle. Many factors could be contributing to this phenomenon, including growing student debt balances, limited access to credit, lowered expectations for future earnings, and perhaps even a cultural shift by which young people — whether they went to college or not — are deferring home purchases.”
It’s tough to say what the solution is. The Project on Student Debt report I cited earlier has some ideas. But suffice it to say that if we as a country encourage or allow student loan debt to expand at such accelerated rates, the economy will suffer immensely. And this graduation season could prove to be a lot more stressful for the Class of 2014 than it ever was back in my day … or yours!
“Many believe the enormous student debt burdens are increasingly holding the U.S. economy back.”
What are your thoughts? Are your kids or grandkids coming out of college buried in debt? Is it the fault of our government, our institutions of higher education, or something else? Do you see a way out of this budding crisis – and what does it mean for your investing approach, if anything? Let me know at the blog!
|OUR READERS SPEAK|
Meanwhile, amid the latest Ukrainian election – and the clashes in the Donetsk region of that country – Reader Knut weighed in over the motivations of Russia to annex Crimea and cozy up to China financially. He said:
“Since Russia tried many times to get a free trading zone agreement with Europe, and the U.S.A. and G.B. always vetoed the move (for many selfish reasons), Russia simply looks at the alternative, the biggest market in the world. Sadly the foreign policy pursued by the U.S.A. and Britain has now brought us to the point that the capitalistic/free market world is coming to an end.”
As for how we should react to China’s antagonism, Reader Mike S. suggested taking a fairly straightforward step: “The sooner we stop doing business with the Chinese the better … What has started as a grass roots movement to not buy ‘Made in China’ will eventually be recognized by our leadership. Heck, even Walmart has noticed the trend!”
And what about all those companies trying to maximize their profits and minimize their taxes at Uncle Sam’s expense? Reader Jim Y. had some thoughts there:
“Businesses are only doing the rational thing mandated by their corporate constitution: Run a profitable company within the laws of the U.S. The govt. should do the same and follow its Constitution. There is no mandate to spend beyond its means. Neither is there a mandate to dominate the economy. Therefore, govt. must cut its spending and let the economy grow with thriving businesses.”
Good points all around, I think. But what about you and your thoughts? Weigh in at the blog when you have a chance.
|OTHER DEVELOPMENTS OF THE DAY|
“Food Fight!” JBS SA of Brazil’s Pilgrim’s Pride unit (PPC, Weiss Rating: A-) just launched an unsolicited bid to buy Hillshire Brands (HSH, Weiss Rating: C+) for $5.6 billion . The move is an attempt to scuttle Hillshire’s proposed takeover of Pinnacle Foods (PF, Weiss Rating: B-), and broaden its meat products business line.
We got a bunch of economic data today, and the overall message was fairly positive: We’re growing, though not at a gangbuster pace. A key consumer confidence index rose to 83 in May from 81.7 a month earlier, while home prices grew at a slightly faster-than-expected pace in March. Orders for long-lasting durable goods rose 0.8% last month, versus forecasts for a decline of 1.3%.
Now THIS is the kind of scavenger hunt I could get used to! An anonymous millionaire is leaving envelopes full of cash around the San Francisco area and encouraging people to find them via social media. No word yet on whether this person winters in Palm Beach County, Florida – but I certainly wouldn’t complain if he or she did!
Reminder: If you have any thoughts to share on these market events, all you have to do is hop on over to the blog and leave your comments.
Until next time,