Student Loans: An Education in Finance, Like It or Not

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July 31, 2015

There’s no disputing the financial returns of a college education.


Over the course of their careers, graduates with a four-year degree earn over $1 million more than those with only a high school diploma — a gap that has widened over the past 25 years, according to a 2014 “Current Issues in Economics and Finance” report by the Federal Reserve Bank of New York. Yet with those benefits come escalating tuition costs, which more students and their families are meeting by taking out loans. Total student loan debt in the United States has surpassed debt from credit cards, auto loans or home-equity lines of credit.

New Strategies for Families

A manageable amount of debt can help college graduates learn the importance of budgeting. “If you are a family of means that can pay for a college education, that’s the greatest gift you can give a child,” says Bob Webster, National Director of Wealth Planning for The Private Client Reserve.

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July 31, 2015

“But also, if you have them assume some responsibility for that cost, you teach them the importance of handling a small amount of debt.” Parents might ask students to cover some college expenses through a small loan, for example, or take a part-time job to contribute toward tuition.


For parents and grandparents who want to help with tuition payments, consider a 529 plan; its earnings will not be taxed when the money is used for qualified education expenses. Webster suggests that grandparents retain ownership of the investment, so that a college will not include it when calculating the grandchild’s eligibility for financial aid. Keep in mind, 529 earnings not used for qualified education expenses may be subject to tax and penalties.


Another popular strategy is having a grandparent directly pay the school for tuition rather than give the money to the student, because students then do not have to pay gift taxes on the money sent to the college.

In the past, more families might have considered a home-equity loan, but “the incentives for how to fund college have changed,” says Rob Haworth, Senior Investment Strategist for The Private Client Reserve. A decade ago, he says, home-equity loans were cheap, while student loans were relatively expensive. Now, home-equity loans have become more difficult to obtain, while student loans are more affordable — another reason for their skyrocketing growth.


A Drag on Home Purchases

Rising student loan debt poses an obstacle for college graduates wanting to purchase their first homes. For many years, first-time buyers were about 40 percent of the housing market, according to the National Association of Realtors. Today, that figure is about 33 percent.

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July 31, 2015

In addition, “the mortgage credit standards really tightened up during and after the recession, so it was a lot harder for recently graduated students to qualify,” says Ed Cowling, Director of Specialty Assets for U.S. Bank’s Wealth Management Group. That means stock prices of homebuilders have suffered, while investments in apartment companies have surged, he explains.


Student Debt by the Numbers


As college graduates have more success in finding jobs, they too are becoming part of this increased formation rate. 

Homebuilders are now sharpening their focus on lower-priced houses to attract first-time buyers, a move that might improve prospects for those companies.


More broadly, investors might consider whether relatively slow U.S. economic growth could be linked to more people taking on debt, such as student loans, that can’t be easily discharged, Haworth says. “In our portfolio allocation, we’re thinking about how we can get appropriate exposure to faster-growing regions or economies,” he says, “but also maintain enough cash flow from the fixed-income side of our portfolio to help supply income growth.”


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