This Month’s Newsletter

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.