Carl Mortished
Going to college is no longer just about getting an education. It's a financial investment, akin to taking out a mortgage but with a nasty sting in the tail. Unlike real estate, you can't sell the educational asset when you find that your ticket to fame and fortune has become an unaffordable nightmare.
The volume of student debt is climbing at such a rate that it is no longer a personal headache for a few, but a matter of national concern in many countries. In the United States, the outstanding liability is more than $1.3-trillion (U.S.), a 170-per-cent increase over the past decade. Canadian graduates owed more than $28-billion in 2012, according to the most recent figures from Statistics Canada. In the United Kingdom, the volume of student debt exceeded £86-billion ($141-billion Canadian) in 2016, rising by 17 per cent over 12 months because of a sharp increase in tuition fees.
The sheer volume of debt and the rate of increase is impressive, but the underlying worry is not about systemic risk to lenders – this is not yet sub-prime mortgage lending. What matters is the effect of high levels of indebtedness on a generation of college leavers: their spending patterns, their ability to borrow and the impact on the economy of a large cohort of young people struggling to repay loans even before they have bought their first home.
The average U.K. graduate is now joining the workforce with £44,000 ($72,000) of debt, up from £16,200 only five years ago. That compares with a loan burden of about $27,000 for a typical Canadian; last year, borrowers under the Canada Student Loan plan were given a respite when the income threshold at which graduates must begin repayments was raised to $25,000. In 2014, almost a third of graduates who owed money to Canada Student Loans were making reduced payments under the Repayment Assistance Plan.
Meanwhile, the U.K.'s Institute for Fiscal Studies reckons that 70 per cent of graduates leaving university in the past year will never finish paying off their loans, a burden that will effectively deny the greater part of a generation the opportunity of owning their own home.
Higher education was supposed to be about getting a head start, upward mobility, improving life chances. College was a middle-class rite of passage, a pleasant, sometimes bibulous interregnum that allowed a teenager to put off the tedious treadmill world of work while studying something useful, or at least moderately challenging. Parents hoped that the extended period of adolescence and financial cost would be repaid with the acquisition of tools (and contacts) that would enable their offspring to rise up a rung or two in the social and income ladder.
This is no longer necessarily true. The president of the New York Federal Reserve, William Dudley, is worried about the $1.3-trillion owed by America's graduates. Too many borrowers are getting into difficulty, serious delinquency (those borrowers who are 90 days in arrears) rates have risen to 11.3 per cent, well ahead of the 7-per-cent rate for the next most serious category, credit card debt. But what really concerns the New York Fed president is the social cost of the linkage between education and high levels of personal indebtedness.
The Fed's research reveals that those people with high levels of student debt are much less likely to own a home at any given age than those who completed their education with little or no student debt. The cost of higher education is outweighting the gain in future incomes, and exclusion from home ownership has long-term implications for society. Speaking last week, Mr Dudley explained that home ownership has historically been an important form of wealth accumulation. "For a large share of households, housing equity is the principal form of wealth … the way we finance post-secondary education could also have important implications for the distribution of wealth."
By shifting the burden of funding education from the public purse to the private pocket, we are building up indebtedness and personal solvency problems for the future. We may also be creating a generation that is risk-averse and debt-shy, a cohort of younger people starting their careers with little confidence in their own financial future.
Yet there is also an even larger political and social risk, which the Fed's president alludes to, and that is the shattered dream of social mobility. Over several decades, governments have seen higher education as a rising tide that lifts everyone. Canada has done well in that respect, with about half of the population now boasting some form of higher education diploma.
In any leveraged financial transaction, success depends on the rate of return exceeding the cost of debt. For college graduates, wondering how they will ever afford to buy their own home, the return on their bachelor's degree may be falling well below the cost of investment. That is a problem that could be with us for decades to come.
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