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Yet Another Burden On The US Economy                                                            Join our Monthly Newsletter              April 2019                                                                                              

Mark R. Hoffman

CEO, Principal

 

In 1984, I graduated high school and enrolled as a freshman at UNC Chapel Hill.  College was expensive, but you really can’t put a price tag on education.  Right?  Looking back on it now, both of the statements are false.  Relatively speaking, college was not expensive at the time.  I grew up in Charlotte, so annual tuition at UNC cost me (actually my loving parents) a total of $480.  Even if I was “saddled” with out-of-state tuition, it would have cost $3,100/year.  And you really can – and should – put a price tag on education.  And boy has that price tag gone up!

The College Board publishes an annual survey of college costs.

In 1984, average annual tuition and fees for 4-year private and public colleges were $5,090 and $1,150 respectively.  By 2019, those numbers were $35,830 and $10,230.  That’s an increase of 604% and 790% over 35 years.  That’s 2-3x the pace of inflation.  That’s twice the rate of US health care cost increases over the same period.  Throw another $12k/year on top of that for room and board and the total cost is astounding.

But a college education gets you a higher paying job, right?  Well, yes.  But average starting salaries in 1988 (when I graduated) for those that earned a bachelor’s degree was $25,000.  In 2018, it was $50,000.  That’s not quite keeping up!

So, how is anyone paying for this?  Student debt.  And a mountain of it.  The current figures are staggering.  There is now $1.57 trillion in outstanding student debt.  Student loans have now passed credit cards as the second largest component of household debt in the US.  42.9 million Americans hold student debt with an average outstanding balance of $33.3k, average monthly payments of $393 and average time to repay them of 21.1 years. 

This is a huge problem.  If you hold the loans, there aren’t many options:  A) slowly pay it off (average time = 21.1 years), B) extend by refinancing the debt (average time > 21 years), C) take a job somewhere in public service whereby the debt can be forgiven in 10-15 years, or D) declare bankruptcy.  Oh wait, option D doesn’t work.  Even if you declare bankruptcy, student loan debt does not go away.

It’s also a huge problem for the US GDP.  As student debt has grown, spending by those in debt is down, defaults are up (in June 2018, 7 million borrowers were in default on $135 billion), credit ratings are lower, home buying is delayed, and more and more graduates are still living with their parents.  (This last one is especially troubling for me as I have two in college right now and one more to go.)  


While most people are aware of and acknowledge student debt as a serious issue, there are no easy solutions.  Sound familiar?  Federal debt and deficit spending problems?  Unfunded pension plans?  Tenuous Social Security liquidity?  States and municipalities on the verge of bankruptcy?  At some point, all of this will unravel.  What can you do?  If you have children or grandchildren that will be going to school, open and fund their 529 plans.  For the rest of your portfolio?  Invest and diversify wisely.  When all of these bills come due, you will be glad that you did. 


 

Mark is a co-founder of Lanier Asset Management and serves as its Chief Executive Officer. Prior to founding Lanier, he was a partner at The Boston Consulting Group. Mark is an honors graduate of The University of North Carolina at Chapel Hill with a BA in Economics, and holds an MBA from The Harvard Business School.



March 2019: Capitalism vs. Socialism: The Debate is Alive and Well

February 2019: What Are the Most Important Factors for Investing in a 401k Plan?

January 2019: A Look Back and a Look Ahead

December 2018: The Inverted Yield Curve - In Layman's Terms

November 2018: A False Sense of Security

October 2018: Reflections From Over Four Decades

September 2018: A Decade of Assisted Recovery

August 2018: The Entitlements Train Wreck - Possible Solutions?

July 2018: Is Wage Growth In This Country Improving Over Time?

June 2018: The Impact of Corporate Tax Reform

May 2018: Kentucky Derby Talks - Bulls vs. Bears

April 2018: How Much Longer Can Interest Rates Stay So Low?

March 2018: Policies For Economic Growth

February 2018: Volatility

January 2018: So What's In Store For 2018?

December 2017: Tax Cuts and Jobs Act: Good or Bad for Me? It Depends.

November 2017: Whack-A-Mole - D.C. Style

October 2017: Should You Consider a Robo-Advisor?

September 2017: Alternative Investments - What and Why?

August 2017: The QT Quandary

July 2017: Quality of Life Influencers (Cont'd)

June 2017: Quality of Life Influencers

May 2017: Repatriation Myths and Realities

April 2017: Time to Invest in International Equities?  Let's Take a Look...

March 2017: Valuation - A History Lesson

February 2017: The Prince of Darkness

January 2017: Mountains of Debt - Does it Matter Anymore?

December 2016: Trumponomics: Reagonomics' Twin?

November 2016: Found Money

October 2016: Marrying Theory and Practice

September 2016: Do You Have a Sharpe Portfolio?

August 2016: Be Careful of High Dividend Stock Strategies

July 2016: "Die Younger" is Not a Strategy

June 2016: Blame Tina

May 2016: Would You Rather:  Tax Cut or Tax Increase?

April 2016: Father Time Demands Your Attention

March 2016: What Has the Last Year Taught Us?

February 2016: Winners and Losers of the Oil Battle

January 2016: Diversification Improves Returns and Lowers Risk

December 2015: Synergy and the Art of Building High Performance Portfolios

November 2015: Take Control...or the Government Will For You

October 2015: A Note from Our Dean of Business

September 2015: Double Espresso at Midnight

August 2015: An Allocation to Hedge Funds - Essential!

July 2015: Another Greek Tragedy?

June 2015: What Does Financial Planning Mean To You?

May 2015: The Active vs. Passive Battle

April 2015: Out on an Island – Preparing for the Fed Rate Hikes

March 2015: To Fee or Not to Fee?

February 2015: European Central Bank Tries QE – Will it Work?

January 2015: 2014 Recap