It’s nearly graduation season, and that means it’s as good a time as any to weigh in on why you should care about rising college costs, even if paying for tuition and paying back student loans won’t ever be on your to-do list.
Over the past 10 years, college tuition levels (and accompanying student debt levels) have risen sharply, while employment opportunities have diminished, and starting salaries have stagnated. During this period, not only have tuition cost increases far outpaced headline inflation, they’ve also outpaced the pricing power of some of the most coveted jobs requiring a college education (think doctors, lawyers and bankers).
This unmitigated long-term acceleration in the cost of a university education doesn’t just have implications for college students and their families, it also matters for the broader economy. In fact, here are four interrelated, and perhaps under appreciated, reasons that astronomical college costs and student debt are a major headwind to the U.S. recovery.
4 reasons college costs & student debt are a major headwind to U.S. recovery
1 Contributing to unemployment and declining labor market participation
Due to the heavy financial burden college costs place on parents, many parents struggling to pay for their children’s education are left with less savings and more debt when they hit retirement age than they might otherwise have had. As a result, they’re forced to stay in the workforce longer, crowding out younger workers and making it harder for the younger generation to find jobs. In other words, the rising cost of college is one reason for the demographic-related headwinds facing the labor market today.
2 Stymieing savings
By some estimates, more than half of college students now borrow annually to cover the costs of education, and more than half of student loan borrowers still have outstanding debt balances into their 30s. This early-life debt means that the younger generation has less money to save–significant student debt lowers the average savings rate for young workers–and will likely have to work longer to cover future children’s college costs.
3 Suppressing home buying
Today, the first-time home buyer demographic is synonymous with student loan borrowers, posing a major headwind to recoveries in the lackluster housing market and in real estate-related employment. Thanks to high-interest student loan debt payments, along with disappointing employment opportunities and stagnant incomes, many young adults don’t have the savings required to make a down payment. Indeed, the proliferation of student loans in the early 2000s coincides with a decline in home ownership rates of 25 to 34 year olds, and the trend appears to be continuing. According to one recent report, rising student debt burdens reduced U.S. home sales by about 8% in 2014.
4 Worsening the class divide
Those for whom college, even with loans, is simply too expensive to attend are left with a bleak employment future. A college degree improves early employability, leads to lower unemployment rates throughout one’s career and raises one’s current and potential earnings power. So, it’s more difficult for those without a college degree to get a job, and the jobs they do get tend to pay less. The result: further bifurcation of socioeconomic classes.
In short, the growing expense of college, and the associated growing student loan burden, are playing a role in stunting the normal saving, investment, and consumption habits that ultimately serve as the guiding force of economic growth in the U.S. If this headwind isn’t addressed soon, it potentially may lower U.S. economic activity for years to come.
So what can be done? I believe there’s a need for creative and thoughtful fiscal policies that seek to relieve at least some of the student loan debt burden. Merely forgiving, or extending the term, of the debt are solutions that are fraught with inefficiencies and imbalances. There are other incentive programs and initiatives worth considering, however, that would seek to reduce the student loan debt burden while simultaneously boosting the number of first-time home buyers, creating jobs for those in need and building a better savings future for young people, all while drawing on minimal tax-payer dollars.
Sources: BlackRock research, including analysis of information from the U.S. Department of Education, the National Center for Education Statistics, FRBNY; John Burns Real Estate Consulting and the U.S. Census Bureau.
Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Fundamental Fixed Income, is Co-head of Americas Fixed Income, and is a regular contributor to The Blog. You can find more of his posts here.
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