MacroMonitor Market Trends Newsletter August 2014

The MacroMonitor Market Trends Newsletter from Consumer Financial Decisions (CFD) highlights topical news and trends of interest to you and your colleagues.

Education-Loan Debt Is Delaying the American Dream

Unlike Europe, which channels young people into university and technical tracks at a young age, the United States has promoted an egalitarian system of universal education to give all young adults a chance to realize the American Dream. Evidence that education links directly to income (pay) appears to be conclusive. For example, a 2013 analysis of Economic Policy Institute data reports that individuals with a four-year college degree earn 1.8 times what individuals with no college degree earn; people with some college, but no degree, earn 1.1 times the pay of individuals with no college. However, despite billions of tax dollars spent on K12 education, "only 26% of high school graduates who take the ACT college admissions test are ready for college in all subject matters," according to the National Bureau of Economic Research (in the New York Times on 21 May 2014). One result is that many higher-learning institutions find a need for remedial programs for entering freshmen. Despite the increase in the number of freshmen, the number of four-year-college graduates is not increasing commensurately. In addition, the growing consensus among employers is that "too many graduates lack vital skills required for today's jobs" (Economist Intelligence Unit report 2014).

Unfortunately for most young people, at the same time that evidence shows the lifetime value of a college degree, the evidence also shows that the cost of that four-year-college degree has skyrocketed by 500% since 1985 (Time Magazine, 9 September 2013). Many middle- and low-income students turn to student loans to fund their education. As of 2012–13, 11% of US households carry a staggering $476 billion in self-reported student-loan debt. Many students start, but do not complete their degree; consequently, prospects for a better job (higher income) do not materialize, but students—and sometimes families—have assumed debt they cannot repay.

Education Loans

Many students and some parents face long-term financial challenges as a result of assuming student-loan debt—a double whammy on the economy. Students, even those who graduate successfully, will delay marriage, family formation, and home and even vehicle ownership in order to meet debt payments (some of these students are Boomerang Kids—see the July 2014 MacroMonitor Trends Newsletter). And many households saddled with student loans are Preretired households; loan payments may trump retirement savings and investments.

Some companies—such as Starbucks, which offers a Tuition Program partnership with Arizona State University—are offering some tuition relief. However, financial-services providers are uniquely positioned to provide information and advice about saving and the potential pitfalls of any financial obligation. For example, consider an ongoing outreach program in the communities in which you do business: Partner with grammar schools to train youngsters about money matters—information that many parents cannot, or do not, teach. This type of education may be the most important students will ever receive.

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