What The Fed Won't Tell You About Student Debt
Two weeks ago, the San Fran Fed released "research" on the topic of whether "it is still worth going to college." What it "found" was that "Earning a four-year college degree remains a worthwhile investment for the average student.... The average college graduate paying annual tuition of about $20,000 can recoup the costs of schooling by age 40. After that, the difference between earnings continues such that the average college graduate earns over $800,000 more than the average high school graduate by retirement age... We show that the value of a college degree remains high, and the average college graduate can recover the costs of attending in less than 20 years. Once the investment is paid for, it continues to pay dividends through the rest of the worker’s life, leaving college graduates with substantially higher lifetime earnings than their peers with a high school degree."
What was left unsaid, of course, is that the SF Fed merely was tasked with goalseeking a study that seeks to perpetuate America's most exponential chart. The one showing federal student loans, which as we showed recently just hit an aggregate total of over $1.1 trillion, increasing 12%, or $125 billion, from this time last year.
As we have shown in the past (here and here), since US consumers have largely given up on the two conventional forms of leverage - credit cards and mortgages - no (taxpayer-funded) expense will be spared to promote the myth that (federal-debt funded) higher education is the way to go.
Alas, the San Fran Fed ignored something important. This is how we concluded our article: "Perhaps for the San Fran Fed to be taken seriously one of these years, it will actually do an analysis that covers all sides of a given problem, instead of just the one it was goalseeked to "conclude" before any "research" was even attempted."
Namely the impact of debt.
And since the Fed can't be bothered with an objective analysis covering both sides the most important debt issue for America, we go to Pew which recently concluded an analysis on the impact of student debt and found that "Student debt burdens are weighing on the economic fortunes of younger Americans, as households headed by young adults owing student debt lag far behind their peers in terms of wealth accumulation."
At the big picture level, there is nothing surprising here, but the extent to which student debt burdens cripple wealth formation and accumulation was indeed stunning and explains why the Fed had to explicitly omit the impact of debt on one's long-term well-being, because the result is nothing short of shocking.
About four-in-ten U.S. households (37%) headed by an adult younger than 40 currently have some student debt—the highest share on record, with the median outstanding student debt load standing at about $13,ooo.
An analysis of the most recent Survey of Consumer Finances finds that households headed by a young, college-educated adult without any student debt obligations have about seven times the typical net worth ($64,700) of households headed by a young, college-educated adult with student debt ($8,700). And the wealth gap is also large for households headed by young adults without a bachelor’s degree: Those with no student debt have accumulated roughly nine times as much wealth as debtor households ($10,900 vs. $1,200). This is true despite the fact that debtors and non-debtors have nearly identical household incomes in each group.
Another not surprising tangent: those who borrow to pay for college, are most likely to borrow for everything else too.
Among the young and college educated, the typical total indebtedness (including mortgage debt, vehicle debt and credit cards, as well as student debt) of student debtor households ($137,010) is almost twice the overall debt load of similar households with no student debt ($73,250). Among less-educated households, the total debt load of student debtors ($28,300) is more than ten times that of similar households not owing student debt ($2,500).
Either that, or households which do not have to borrow to pay for college, most likely don't have to pay for other expenses. In other words, Pew uncovered the profound tautology that if you are rich, you remain rich, which all those others in the lower and middle classes who aspire to reach the upper class thanks to easy and cheap debt, only bury themselves even more in their aspirational approach to purchase class status with debt.
As American Interest observes about the Pew research, "the report revealed an alarming trend: While the total debt burden of households without student debt has declined since 2007, the total debt burden of households with student debt has increased. This holds true for all student debtors, whether they completed college or not.
There’s no way to figure out what is behind this huge disparity in wealth accumulation. As the study notes, it’s understandable that young people who went into debt to pay for college also lacked the money to pay for cars and other expenses, and thus borrowed more. The data may also reveal a widening gap between two types of people who go to college: those wealthy enough to afford most if not all of tuition, and those who have to borrow (and keep borrowing) to keep up with the spiraling costs.
Student debt is obviously an enormous burden on a household, and one that seems to set off a domino effect of borrowing. If we want to make sure that college students aren’t feeling the pain of student loans well into middle age (as a recent Gallop poll says they do), we’d better try to make college more affordable. After looking at these figures, can you doubt the severity of the problem?
By now we doubt anyone doubts the severity of the problem. What may be confusing, however, is the problem itself which after Pew's far better research can be concluded as follows:
- The San Francisco Fed is absolutely right in that college education is extremely valuable if one is rich enough to be able to afford it without resorting to debt. For those who need student loans to pay for college, the debt cost most likely vastly outweights the benefits from increasingly diminishing cash flows for college graduates, and it is certainly unclear if as the San Fran Fed concludes, the costs are more than paid off within 20 years. This is a profound falacy since there has been no cohort whose college debt IRR can be tested in a 20 year window, since the exponential rise in student debt only took over after the Lehman collapse (for one of the main reasons why college became so expensive following Lehman, read here).
- The San Francisco Fed is absolutely wrong in not distinguishing how one funds their college education. Because the bottom line is that college educated households which took on student debt have a net worth of $8,700, which is less than the $10,900 net worth of not college educated households who don't have student debt!
In any case, the conclusion is clear: if one is rich enough to be able to afford college tuition, room and board without requiring debt, college is a no brainer. For everyone else the payoff of a college education, especially in an economy where college grads are certainly not assured quality paying jobs, is far less clear and in fact as Pew finds, one is better off not borrowing to go to college.
Of course, the direct implication here is also very clear, if very sad: the rich who can afford college, will end up becoming even richer thanks to the better-paying jobs their degree affords them, while everyone else will either drown under the weight of student loans, or simply be relegated to far less-paying jobs during their career. And while the Fed can be confused about this conclusion, not even the Fed is confused that it itself is the reason for this record and increasing disparity between rich and poor.
So the next time you curse someone for making college so expensive you need hundreds of thousands in debt to pay for it, or are cursing the fate that made you into a 40+ year old debt slave, aim those curses where they belong: Alan Greenspan, Ben Bernanke and now, obviously, Janet Yellen. Because for all the "confusion" about America's record wealth divide that French socialists have to reprise the role of Karl Marx in the process selling blockbuster books to a new generation of pre-communists, the fundamental reason for the greatest class divide in history is a very simple three letter word: the Fed.
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