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Friday, Mar 29, 2024

A Millennium of Debt

Any middle-aged adult who still has any ambition has got to feel some envy for the Millennials who are joining the digital startups seemingly popping up on every street corner from Santa Monica to Silicon Valley. How could you not? We all know our economy is literally being transformed under our noses. But it would be a mistake to equate our ongoing economic revolution with the idea that today’s young people are somehow more entrepreneurial and risk-taking than the generations that built the railroads, turned Detroit into the world’s car capital or created modern Wall Street. In fact, according to a recent Wall Street Journal analysis, they decidedly are not. The Journal, in a Jan. 2 article, analyzed recently released Federal Reserve data from 2013 and came up with this surprising fact: About 3.6 percent of households led by adults under 30 owned stakes in private companies. That compares to 6.1 percent in 2010 and 10.6 percent in 1989 – so, we are at a quarter-century low. How is this possible? After all, story after story in the business press, including our paper, celebrates young people who have put it all on the line to open businesses that might wildly succeed, but actually have a far better chance of ultimately collapsing. But who wouldn’t want to write about such individuals; not only are they inspiring but they are literally part of a revolution that has helped the United States, despite all its problems, maintain its economic supremacy. The Wall Street Journal article posits some reasons for the lower appetite for risk among younger Americans, and this is where the article goes off track. Among various reasons, it notes that youth have had particular difficulty accessing credit in the post-recession environment and regular jobs are hard to find, leading to lower youth net worth. But the article misses the giant white elephant in the room, if I may use that expression here. And that would be college debt. Just in case you think the college debt problem is overstated, let me share a study from the respected Pew Research Center in Washington D.C. published in October. It found that aggregate U.S. college debt in constant 2012 dollars has risen from $24 billion in 1990-91 to $110 billion in 2012-13, a period of time that roughly matches the decline in entrepreneurship among young people noted by the Wall Street Journal. And just in case you were wondering, even with the growth in population and student enrollment, debt is still way up. Accounting for enrollment growth, student debt on a per-capita basis during that period nearly tripled from $2,485 to $6,928. And don’t forget this is average, per-capita debt. This includes students whose parents can afford to pay full freight and others who hold down three jobs and pay as they go. Most of the young people I have run into in the past few years who have taken out student loans have debt that easily tops $10,000, $20,000 or more. So, I ask you, just how entrepreneurial would you be when facing a monthly debt nut that can be several hundred dollars? There are many reasons why students take out so much debt, from the relative decline in grant funding to soaring higher-education costs driven by inflated administrative salaries and gold-plated dormitories, gyms and other facilities. I’ve heard that at my alma mater Cornell – where an alumnus donated $100 million to rebuild the freshman dorms – the freshman dining hall has an unlimited sushi bar. I love sushi, but I’m hoping that’s a rural myth. (The college is in the boonies.) There also has been a contentious debate in Washington, D.C. on how to fix the problem since it seems pretty clear by now that one of the main drivers of higher-education inflation is the easy money given students. Whether in grant or loan form, the money feeds the monster of university overspending, as administrators build over-the-top facilities and offer luxury services aimed at drawing the most desirable students. Higher education costs are a subject too complicated to comprehensively address here, but what is worth noting is that the issue of student debt is no longer just a “student” or “parent” issue. It is an issue that, unless resolved, literally threatens the economic supremacy of the United States. I understand that student debt in China – our most serious economic competitor – is a fraction of a U.S. debt. And that is something to really think about when weighing whether to send your student to a particular college that, alas, may not have the latest climbing wall in the gym. Laurence Darmiento is editor of the Business Journal. He can be reached at [email protected].

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