Collapse of the College “Wealth Premium”?

Annie Lowrey

 

Is college worth it? As the cost of American higher education soars, inequality widens, and wages stagnate, millions of Millennials and Gen Zers have asked themselves that question. The answer, at least from economists, has remained a resounding yes. One study found that college graduates earn nearly twice as much as their peers without a college degree.

But what if those earnings are no longer translating into financial security and long-term prosperity? A new study by researchers at the Federal Reserve Bank of St. Louis suggests that might be the case. College still boosts graduates’ earnings, but it does little for their wealth.

The paper, by William R. Emmons, Ana H. Kent, and Lowell R. Ricketts, is an exercise in pulling apart averages. As a general point, college graduates earn more and are worth more than people without college degrees. And, as a general point, the college earnings and wealth premiums—meaning how much more a person with a college diploma makes and owns than an otherwise similar person—are large. But upon close examination, terrifying generational and demographic trends emerge.

The college earnings premium has proved durable and considerable overall. White people born in the middle of the century got more of an earnings boost for attending college than white people born in the 1980s—but the boost for both groups was big. (“People” is close-enough shorthand here; the authors use a more technical household comparison.) And black people born in the ’80s got a similar income bump to black people born in the ’40s and ’50s.

But the wealth premium has collapsed precipitously over the past 50 years. White graduates born in the ’30s were worth 247 percent more than their non-college-educated peers; white people born in the ’80s were worth just 42 percent more. Among black families, the wealth premium sat at more than 500 percent for those born in the ’30s and fell to zero—yes, zero—for those born in the ’70s and ’80s.

Notably, the study corrects for the fact that households tend to accumulate wealth as they age; the issue is not that members of the Greatest Generation and Boomers have had more time to let their homes appreciate and their money sit in the stock market. They were always on a different wealth trajectory than their kids and grandkids.

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The authors cite a few reasons this might be the case. The first has to do with asset prices. Older generations were able to buy houses and stocks when prices were low, then saw the value of those assets rise. Recent generations have faced high housing prices and have found themselves unable to buy their way into the stock market. Therefore, they have not been able to take advantage of the recent run-up in asset values. “The three oldest cohorts we studied generally have experienced fortuitous asset price fluctuations,” the authors write.

The second potential factor involves Wall Street’s financial engineering. Younger folks have come of age during an era of consumer debt, with banks more than happy to load customers up with credit cards, car loans, and so on. Those debts then get subtracted from the value of families’ assets when determining their net worth, helping to explain the Millennials’ crummy wealth accumulation. “The leveraging of college-graduate balance sheets over time is entirely consistent with the progressive weakening of their overall financial positions that we identified—even while the college and postgraduate income premiums remained intact,” the authors write.

Finally—most obvious, and perhaps most important—is the cost of college and graduate school itself. The price of consumer goods has increased by a factor of four since the late 1970s. College costs have increased by a factor of 14, the study notes. More and more students have taken out heavy debt burdens to be able to go to school, burdens that then eat away at their earnings, month after month, for years on end. That has forced millions of Millennials to delay life milestones, including getting married, having children, and owning a home, for years, if not for decades, if not forever.

Even if going to college is still important for young people’s earnings and employment, it is less of a clear economic boon than it was 30 years ago. In it way, the paper makes a powerful argument for making college a public good, low-cost or even free for everyone. The spiraling cost of higher education is choking Millennial families, and more young people would be able to go to college—and get the full financial benefit of getting a degree—if they were able to do it for the same price as their parents paid.

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Student loan assistance may become as popular as 401(k) plans?

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Mixing a bit of personal finance and education today. This is something that was talked about a few years ago, but is now making news. Student loan debt in the USA now sits at a staggering 1.5 trillion (and growing) dollars. This debt has outpaced credit card debt, and other consumer debt to become the largest debt held by Americans outside of their mortgages.

What do you think? Is this attacking the symptom over the disease? Is this something that might catch on? Comments welcome!

see the full article here

https://www.cnbc.com/2018/08/20/student-loan-assistance-becomes-a-mainstream-workplace-benefit.html

Student loan assistance may become as popular as 401(k) plans

  • Around 70 percent of college graduates are in debt today. The average person leaves school $30,000 in arrears, and many owe more than $100,000.
  • Hundreds of companies are now offering student loan assistance to their workers.
  • “It’s as meaningful to recent graduates as 401(k)s,” said Meera Oliva, chief marketing officer at Gradifi, a Boston-based firm that designs student loan repayment programs for companies.

RyanJLane | Getty Images

Jessica Crowley used to dwell on an unpleasant thought. When her children began college, she’d still be repaying her own student loans.

But a few months ago, the company where she works announced a new benefit: student loan assistance.

Now, New York Air Brake, which makes train control systems, pays Crowley $166 a month toward her student loan balance, which means she’ll be debt-free sooner than she thought.

“It’s going to shorten my loan life by a couple of years,” Crowley, 30, said. “It’s going to be a big difference.”

Jessica Crowley, who receives student loan assistance from her employer New York Air Brake.

Source: Jessica Crowley
Jessica Crowley, who receives student loan assistance from her employer New York Air Brake.

Student loan assistance, which started as a niche offering by a handful of companies, is finding its way into the mainstream menu of workplace benefits.

“This is certainly emerging as a new and very important benefit,” said David Pratt, a professor at Albany Law School who studies employee benefits.

This year, Fidelity began to offer businesses a way to contribute to their workers’ education debt. Since then, more than two dozen companies have signed up, and it expects that number to double by January.

“This is certainly emerging as a new and very important benefit.”-David Pratt, professor, Albany Law School

“This is going to grow rapidly over time,” said Asha Srikantiah, vice president of workplace emerging products at Fidelity. “We’re seeing so many more people who have debt and who are overwhelmed by that.”

Indeed, 7 in 10 college graduates have student loan debt. The average person leaves school $30,000 in arrears, while nearly 20 percent owe more than $100,000. Americans are now more burdened by education loans than they are by credit card or auto debt.

Companies offering assistance grows

Helping employees with their education debt is a great way to attract new talent, said John Samaan, senior vice president and head of human resources at Millennium Trust Company.

The financial services firm began offering its employees student loan assistance a few months ago. Now, 20 percent of the company’s 300 employees are already enrolled, Samaan said.

“We got a lot more inquiries from potential candidates,” Samaan said. “People want to join us to be able to participate in this program.”

Options Clearing Corp., a large clearinghouse for equity derivatives, also started providing its employees student loan contributions this year. More than 70 employees signed up within the first month, said Erin Smith, first vice president of total rewards at the company.

She said student loan assistance is the number one benefit being talked about at job and recruiting fairs.

“Most companies provide a pretty standard benefit menu, like medicine, dental and vision, so when you introduce a program that differentiates you, that really matters,” Smith said.

“It’s as meaningful to recent graduates as 401(k)s.”-Meera Oliva, chief marketing officer at Gradifi

More than 350 companies are administering education debt benefits to their employees through Gradifi, a Boston-based firm that designs student loan repayment programs for companies.

“It’s as meaningful to recent graduates as 401(k)s,” said Meera Oliva, chief marketing officer at Gradifi.

It’s not enough, critics say

To be sure, there’s some skepticism about how much the private sector can remedy a $1.5 trillion — and growing — outstanding student loan debt balance.

“The problem is we’re treating the symptom of a disease — and the disease is that education is more expensive in this country than anywhere else in the world,” said Pratt, the Albany Law School professor.

Student debt could hold back economic growth, Fed chief says

Student debt could hold back economic growth, Fed chief says  

The country needs a more universal solution, like bringing down the cost of tuition, said Kate Bronfenbrenner, director of labor education research at Cornell University.

“It doesn’t work if it’s provided via employers, because it’s always going to be a small amount that offer it,” Bronfenbrenner said. “And they’re going to provide this, but then take away that.”

Indeed, the number of companies supplying the benefit remains relatively small — around 4 percent, according to the Society for Human Resource Management.

And one of the factors likely contributing to the nation’s swelling student loan debt is that the number of employers helping their workers with their original education costs is shrinking.

Company contributions to undergraduate education expenses dropped to 53 percent in 2017, from 61 percent in 2013, accordingto the Society for Human Resource Management.

During that period, graduate school assistance at work also fell, to 50 percent from about 60 percent.

“The problem is we’re treating the symptom of a disease — and the disease is that education is more expensive in this country than anywhere else in the world.”-David Pratt, Albany Law School professor

Still, the benefit can make a big difference for the employees who do receive it.

For example, if someone has a student loan balance of $26,500 on a 10-year repayment term with a 4 percent interest rate, a $100 a month contribution from his or her employer would free them from their debt three years earlier.

It can also help employees better take advantage of other workplace benefits.

Ed Farrington, head of retirement strategies at Natixis Investment Managers, said the company realized after annual surveys of 401(k) plan participants that student loan debt was hindering millennials’ ability to save for retirement.

“We thought, what can we do to try eliminate one of those barriers?” Farrington said. “And we said we want to start helping people who are carrying student loan debt.”

Maggie McCuen, who works at Natixis and uses the student loan assistance program.

Source: Maggie McCuen
Maggie McCuen, who works at Natixis and uses the student loan assistance program.

It seems to be working for Maggie McCuen, 26, public relations manager at Natixis, who’s been receiving the assistance at work for around two years now.

“The money that I would have been spending on the student loan I’ve been reallocating to my 401(k),” McCuen said. “I think I’ve put away at least four times as much.”

Abbott, an Illinois-based health care company, recently announcedthat it will contribute to employees’ 401(k) plans if they’re putting at least 2 percent of their salary toward their education debt.

Will loan assistance become as big as 401(k)s?

There’s still an unfortunate tax hurdle that will likely stall the growth of a student loan assistance benefit, experts say.

Companies recieve no particular tax incentive for such contributions while employees must report their payments as income to the IRS.

However, a number of recent bills seek to make this assistance tax-free, up to a certain amount. Companies including Starbucks and Verizon have expressed support for such a measure.

“Congress needs to take the next step and make this benefit tax free,” said Mark Kantrowitz, publisher of SavingforCollege.com and a student loan expert. “Most people don’t remember that 401(k) plans started in exactly the same way about 35 to 40 years ago.”

What is to be done?

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