Education Debt - A Drag on the U.S. Economy

Graduation day came and went this past May for the class of 2009, ushering them into the "real world," a place to take their recent education, spread their wings and fly.  For many, these graduates face the challenge of chasing their goals with the shackles of student loan debt on their feet.

Student Debt on the Rise

With rising education costs becoming more commonplace in today's environment, more students are finding themselves with a higher amount of loan debt to cover the costs.  In 2002, CNN reported that 64% of students graduated with student debt with the average debt totaling $16,928, double the 1992 amount. 

This May, student debt for bachelor degree recipients at 4-year public institutions was $17,700, up 4% over the last 5-years, with student debt for graduates at private institutions rising 5% to $22,375 per graduate.

A Drag on the Economy

Even before the current economic downturn began, recent graduates were entering the work force with more debt than ever.  And yet, these graduates had not even had a chance to think about buying their first home and for some even their first automobile.  The U.S. economy is greatly dependent upon consumer spending, much of which is fueled by 20-somethings as they purchase their first homes, furnishings, lawn equipment and autos.  The purchasing power of recent graduates have been significantly reduced by their student debt levels as they have entered the work force.  While it is difficult to measure the direct impact resulting from the student debt drag on the U.S. economy, we expect this drag to continue for the foreseeable future.  The continued escalation in the unemployment rate will serve to amplify this economic challenge and until the colleges and universities in America take a more pro-active role in managing student debt levels for their graduates, the U.S. may have a higher hill to climb to remain competitive in the global economy.

Colleges and universities are known for flexing their fundraising muscles, reflected in the massive size of many university endowments.  Endowment funds are raised with the intention of furthering the universities goals of providing meaningful and effective higher education while keeping the cost of higher education affordable for students. The recent economic downturn and in particular the downturn in the financial markets have taken a toll on university endowments.  The recent trend of managing the investments held in education endowments with a higher risk strategy, some similar to hedge funds, has exacerbated this decrease.  Even Harvard University, the bell weather of university endowments, experienced an overwhelming 22% decline in assets the first four months of their 2009 fiscal year.

Institutions are beginning to recognize their responsibility to do something about rising student costs.

While student debt continues to escalate at break neck speeds, some institutions are finally beginning to consider the seriousness of the negative long-term economic and demographic results that emulate from the burden of these escalating student loan balances.  Some of America's most well endowed universities have begun to collect tuition on a declining scale based upon family income and ability to pay.  Yale for example, trimmed the cost of tuition for families in the $120,000 - $180,000 bracket nearly in half and cut tuition entirely for families making under $60,000 dollars a year.  Other universities have adopted similar financial aid policies.  This is a powerful and bold move forward for colleges and universities as they begin to take a more active role in reducing the burden of student debt that comes from relying on paying for an education with student loans. 

In today's world, a college education is essential for youth and for America.  But the one-two punch of the rising cost of a diploma coupled with the impact of high unemployment is a drag on the U.S. economy.

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