The Looming College Debt Crisis
I recently discussed with an entrepreneur his plans for putting his four kids through college. They all have solid grades and look to be on track to attend prestigious, well-respected schools. After saving $400,000 in a 529 plan (not an insignificant amount of money), he estimates he will still need another $600,000 to fund school costs.
These kids are fortunate to have parents who have the ability (and willingness) to help their children with their education. But what happens to the rest of the world when they try to fund education expenses? In many cases, student debt is the only alternative to pay for college.
The problem with student debt is it can become a significant burden even when a student graduates and begins a work career. Imagine having $300,000 in debt and working at a job paying you $70,000 dollars a year. How might that impact one’s standard of living? Imagine the specter of default if the burden is just too extreme.
The student debt crisis is just that; a crisis. Huge debt impacts future spending as debt servicing costs soak up any discretionary income from the borrower. This will have a long-term negative effect on the overall economy as there are simply less resources for consumption. For many students, even a $10,000 debt can feel virtually insurmountable and can impact one’s life for years to come. I accumulated $10,000 of student loan debt and it took me many years to pay off. I know what it’s like to be saddled with student loans!
Of course, one solution is not to attend college, but more and more that’s becoming an alternative that lacks appeal. As the US economy transitions into an economy requiring greater skill sets, education is key. More particularly, competitors to the United States (China for example) continue to push higher education as a way to overtake the United States in terms of economic prosperity. Education is becoming mandatory not just preferred.
There are several solutions currently proposed to address this issue. All of the solutions have consequences. I suppose one’s perspective on these proposals are guided by one’s economic and political beliefs. For that reason, this is a contentious subject. I bring this issue up to highlight why we believe economic growth will encounter challenges going forward, even with recent corporate tax cuts. If future consumers have less disposable income because of high debt loads, this will have an economic impact.
Portfolio strategies should reflect one’s perspective on the future and our view is that economic growth will face headwinds. At Destination Wealth Management, we continue to analyze macro trends that we believe will impact portfolio strategies. Importantly, we will continue to position portfolios accordingly based on what we think lightly outcomes will be. It is our view that high student debt loads will only be a negative for future economic growth.
If you’ve any questions about this information, do not hesitate to let us know. We are always here to help!