Orlando's Outlook: Education the key to millennial financial success

07-21-2017

Bottom line “If you give a man a fish,” the oft-quoted saying goes, “then he eats for one night. But if you teach a man how to fish, then he eats for a lifetime.” Many young people realize that educational and economic successes are inexorably linked, the first milestones to adulthood and the main priority before marriage, buying a house or car, and starting a family. But as education becomes critically important for Americans, tuition costs have risen at a much faster pace than wages and inflation, making it more difficult for students to repay student-loan debt, which has more than quadrupled over the past 13 years, impeding their ability to make any other discretionary purchases.

Employment data tells the story Looking at the most recent June 2017 employment report, the official unemployment rate (U-3) for the broad economy was at 4.4%, just off May’s 16-year low of 4.3%. But there’s a significant skew associated with different educational levels. People 25 and older with a bachelor’s degree or higher have an unemployment rate of only 2.4%. Alternatively, the rate for those with less than a high school diploma is 6.4%.

Not a bubble but a hurdle The Federal Reserve reports that student-loan debt has soared to nearly $1.44 trillion in the first quarter of 2017, up by almost $100 million in the past year. It is now the second-highest consumer-debt category: $620 billion more than total U.S. credit card debt, higher than auto loans, and only trailing mortgage debt. The class of 2016 graduated with an average of $37,000 in student-loan debt, a 6% increase from the previous year and a doubling of debt from $18,500 in 2004. All of this potentially threatens consumer spending and economic growth.

College costs soaring According to the Bureau of Labor Statistics, the Consumer Price Index for college tuition fees increased 63%, while college housing and textbooks surged 51% and 88%, respectively, from January 2006 to July 2016. That compares with an overall rise in consumer prices of 21% during this period. The tepid wage growth awaiting graduates as they take jobs is insufficient to support the cost of college and the servicing of their student-loan debt.

More family dinners Tuition and student-loan debt that grows faster than inflation and wages have a deleterious impact on economic growth. More young people today live with their parents, resulting in a decline in homeownership for those aged 28-30 between 2003 and 2011. The Fed reports that higher student debt can explain 35% of the decline in homeownership in this age group. Had tuition stayed at 2001 levels, these young Americans could have purchased an estimated 360,000 additional homes. Not only is home ownership an important route to building personal wealth, but also it has an economic multiplier effect, requiring additional discretionary spending on furniture, repairs and home appliances.

No car, no problem The Wall Street Journal reports that the average age for new-vehicle buyers has increased by almost seven years from 2000 to 2015, indicating a 30% decrease in vehicle purchasing in part because of these differences between generations. New ride-sharing technologies explain some of this economic trend. But because of the financial pressure, these younger generations look to economize on the high costs of owning, insuring, repairing and parking a car.

Love can wait In 1976, about 69% of women were mothers by the age of 25-29. Fast forward to 2016, and that describes women aged 30-34. Marriage has changed even more drastically. In 1976, 85% of women and 75% of men were married by the time they were 29. Today, those metrics apply to people in their 40s.

Choose wisely In 1970, only 1% of taxi-drivers were college graduates, but that soared to 15% in 2010, as we emerged from the Great Recession. To be sure, unemployment and underemployment (U-6) have fallen sharply since then. But one of the biggest problems that companies are facing right now is finding graduates with the right skills to fill their open positions. We wrote earlier this year about the 500,000 open technology positions in the U.S. right now that exist because of this skills mismatch. Given the high cost of college, choosing a marketable major is a critical decision, as students strive for a “college wage premium” and an appropriate return on their academic investment. In a recent survey of 90,000 students, Strada Education Network, a nonprofit dedicated to helping students launch their career, reported that 36% would choose a different major, 28% would choose a different institution and 12% would decide on a different degree. The biggest difference in the survey was between those who earned a bachelor’s degree in liberal arts and those who studied STEM subjects (science, technology, engineering and math).

Is coding the new language requirement? A generation or more ago, it was typical for schools to require the study of a foreign language, such as Spanish, French or Latin. A decade or so ago, more progressive schools added Chinese to the curriculum, mirroring China’s ascension as the world’s second-largest economy. In 2002, a joint study by the Fed and Harvard showed only a small 2% difference in wages between those who spoke foreign languages and those who don’t. So today, schools are realizing the technology language of computer coding is much more useful for students to learn than a language they might never need to use. Not only do growth companies such as Apple and Microsoft require coders, but also blue-collar industries as we move into a more automated world.

Many routes to success As students and their families evaluate the sticker shock of college costs, whose total bills can approach $70,000 per year now at top private schools, they have come to realize there’s more than one way to skin a cat. It’s important to start saving for college early, using tax-advantages programs like the 529. One creative alternative includes getting an associate degree for two years of study or a certificate of specialized training, which can put someone on a middle-class earnings path. According to the Colorado Department of Higher Education in a 2014 study, the median earnings of someone a decade after they earned an associate of applied science degree would be about the same as someone with a bachelor’s degree.

Community college classes are generally priced at low or even no cost. Students can then transfer to their lower-cost in-state university to complete their degree at a fraction of the expense, and perhaps continue to live at home, work part-time and commute to classes. Sure, we’d all love to be academic “HYPSters”: students at Harvard, Yale, Princeton and Stanford. But few of us have the financial resources to attend these uber-elite private universities. Graduate degrees can be completed part-time at night while working full time during the day, perhaps for a company that has a tuition-assistance program. It’s hard work, to be sure, but it’s a cost-effective, character-building academic experience.

Apprenticeships are a viable alternative Georgetown Center predicted that by 2020, 65% of jobs in the U.S. will require a postsecondary education. But for the other 35% of jobs, academic alternatives exist to make a good living. College is not a perfect fit for everyone, and apprenticeships can be the right decision for many to craft a marketable career without crushing student debt. The U.S. economy desperately needs carpenters, electricians, plumbers and automotive technicians. President Trump addressed the national “skills mismatch” by signing an executive order increasing the government funding on apprenticeship programs to $200 million. The Apprenticeship and Jobs Training Act of 2017 would create a tax credit for employers to offer training programs and apprenticeships.

In 2016, a study by the Associated Equipment Distributors, a large trade association, showed that 50% of the 800 equipment, distributors, manufacturers and industry-service companies reported difficulty in finding qualified technicians, and 60% said this skills gap made it difficult to meet customer demand.

Unhealthy loan cycle The Federal Direct Loan program issues 90% of all loans made across the country. While it helps students attend college, it also allows colleges to raise their prices. Some 68% of college seniors who graduated from public and private nonprofit colleges in 2015 had loan debt, not including for-profit colleges, where debt levels are even more problematic. One in 10 students is behind on their student-loan repayments, making it the highest delinquency rate among all borrowers.

Federal Loans the best option The Department of Education offers four different federal student loan programs, which make up 80% of the federal loans for college students and carry a lower interest rate and favorable repayment options. Federal loans do not require students to pay interest on the loans while at school, and private loans require a higher credit rating or a co-signer. While the interest rate on federal loans is fixed, private loans, which have a much more streamlined application process, have a variable interest rate. Federal loans can offer flexible repayment options, consolidation and forgiveness programs, while private loans do not offer any of these benefits.

Lower interest rates New federal loans for the upcoming school year will increase from 3.76% to 4.45%. By comparison, the average variable rate on private student loans is 7.81% and the average fixed rate is 9.66%. One potential solution to help manage the $1.44 trillion in student-loan debt would be for the federal government to step in and use its power to issue Treasuries to refinance this higher-rate debt for students.

Political hot potato Student loans have also entered the populist world of politics. In last year’s presidential election, many candidates pandered to the fears and concerns of these debt-ridden students, by offering to make college free and to waive their student loans. But there’s no free lunch, and the economic costs to such proposals are higher tax rates, slower economic growth and soaring federal debt levels.

Research assistance provided by Federated summer intern Victoria Sanzo