How Student-Loan Debt, or Not Having It, Shapes Lives
To better understand the impact of student debt on borrowers, consider the trajectories of those who never took out loans
To better understand the impact of student debt on borrowers, consider the trajectories of those who never took out loans
Without student loans, millions of Americans couldn’t afford the degrees that might smooth the road to prosperity. Yet, having student loans can also make it tougher to get far along that journey.
People who leave school without loans can have an easier time buying a home, saving for retirement or starting a business, compared with those who have student debt. One aim of President Biden’s student-debt relief plan, currently stalled by legal challenges, is to help borrowers shed debt and progress toward those goals, though critics argue the program is unfair to those who sacrificed to pay for college or pay down their debt.
Research from the Federal Reserve found that, between 2005 and 2014, there was a link between rising student debt and the reduced share of young adults who own a home. Carrying student debt is also associated with being less likely to start a small business, according to research from the Philadelphia Fed, and with being more likely to delay having children, according to researchers at Ohio State University.
Furthermore, college graduates with student debt have built up an average of about $9,000 in retirement assets by age 30—half as much as those without student debt, according to a 2018 study from the Center for Retirement Research at Boston College.
“Student debt is a new stratification system,” says Charlie Eaton, an associate professor of sociology at the University of California, Merced who studies economic disparities in higher education. “It confers a set of advantages at the end of college for people who are debt-free over people with student debt.”
Being debt-free isn’t itself a guarantee of prosperity, and even with student loans, Prof. Eaton says, “you’re probably mostly better off going to college, though that’s not true for everyone.”
It isn’t surprising that those without student debt often hit financial milestones sooner than borrowers do. Notably, these graduates say they also feel more freedom to take personal and professional risks or to pursue passions and alternate paths.
Skyler McKinley, a 30-year-old in Denver, says he wouldn’t have been able to accept his first job working for $34,000 a year if he had graduated with debt. That job, deputy director of a state agency in charge of Colorado’s then-novel regulations on recreational-marijuana sales, was instrumental in launching his career, he says.
“I graduated with so much more freedom because there were no bills that came due,” says Mr. McKinley, who now works in communications at a national consumer group. He funded his education at American University through survivors’ benefits from his late father’s job as a state judge and a merit scholarship.
Mr. McKinley says that being debt-free put him in a better position, financially and psychologically, to take out loans to buy a condo in Denver for about $300,000 in 2018 and a bar for a similar amount last year.
Owning a bar was a long-held dream, though the Oak Creek Tavern only breaks even, Mr. McKinley says. “I wouldn’t have taken that risk if I was also servicing and paying debt,” he says.
The majority of recent four-year college graduates took on at least some student debt. For the class of 2021, 46% of bachelor’s degree recipients had none, according to the College Board, a nonprofit. Among Americans with a bachelor’s degree, 64% of those who didn’t take on student debt report their financial status as “living comfortably,” while 36% of those who currently hold debt say the same, according to a Fed survey.
The median monthly student-loan bill is between $200 and $299, according to data from the Fed, and many borrowers pay significantly more. In 2021, 12% of debt holders were behind on their payments, according to Fed data, and the rate was higher for Black and Hispanic borrowers, who Prof. Eaton notes face disadvantages in the labor market and tend to come from less family wealth.
Some critics of Mr. Biden’s plan argue that student-debt relief unfairly favours some well-paid college graduates over Americans without a college degree, who might be more financially insecure. Republican Sen. Mitch McConnell has called the plan “a slap in the face to every family who sacrificed to save for college, every graduate who paid their debt, and every American who chose a certain career path or volunteered to serve in our Armed Forces in order to avoid taking on debt.”
Whether or not a college student takes on debt comes down to family finances, academic achievement and, sometimes, chance. Those whose parents can afford to pay full tuition might also benefit into adulthood from having a financial safety net and family connections.
Rachel Romer, co-founder and chief executive of Guild Education, has seen firsthand the difference it makes to not have student loans. In what she calls an “A/B test on affordable education,” one side of her family—21 of her siblings and cousins, plus Ms. Romer—had their college tuition paid with money from a family business started by her grandfather, while the other side—20 cousins—didn’t have shared wealth to draw on.
This family history served as an inspiration for her to start Guild, a platform for employers to provide education benefits to workers that can be accessed debt-free. Ms. Romer, 34, says that having a family that could afford to put her through Stanford University gave her the financial freedom to attend business school and start her company at age 26.
Emerging from college without debt can also give some graduates the space to map out alternative paths after college.
Since Frank Teng graduated in 2013, one guiding question when he is faced with a big decision has been, “What would make for a better story?” Mr. Teng, a 31-year-old user-experience designer in Houston, received a full scholarship from Yale University after being connected with the school by QuestBridge, a nonprofit that matches colleges and low-income applicants.
With no loans, he was more comfortable putting money toward a mid-college gap year backpacking in Southeast Asia, therapy in his late 20s and a monthlong wilderness-survival training earlier this year. If he had amassed debt, he says his pursuit of a good story would have been less of a priority than paying off all his loans.
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
Equities are often seen as expensive after promising start to 2023
A new trading year kicked off just weeks ago. Already it bears little resemblance to the carnage of 2022.
After languishing throughout last year, growth stocks have zoomed higher. Tesla Inc. and Nvidia Corp., for example, have jumped more than 30%. The outlook for bonds is brightening after a historic rout. Even bitcoin has rallied, despite ongoing effects from the collapse of the crypto exchange FTX.
The rebound has been driven by renewed optimism about the global economic outlook. Investors have embraced signs that inflation has peaked in the U.S. and abroad. Many are hoping that next week the Federal Reserve will slow its pace of interest-rate increases yet again. China’s lifting of Covid-19 restrictions pleasantly surprised many traders who have welcomed the move as a sign that more growth is ahead.
Still, risks loom large. Many investors aren’t convinced that the rebound is sustainable. Some are worried about stretched stock valuations, or whether corporate earnings will face more pain down the road. Others are fretting that markets aren’t fully pricing in the possibility of a recession, or what might happen if the Fed continues to fight inflation longer than currently anticipated.
We asked five investors to share how they are positioning for that uncertainty and where they think markets could be headed next. Here is what they said:
Cliff Asness, founder of AQR Capital Management, acknowledges that he wasn’t expecting the run in speculative stocks and digital currencies that has swept markets to kick off 2023.
Bitcoin prices have jumped around 40%. Some of the stocks that are the most heavily bet against on Wall Street are sitting on double-digit gains. Carvana Co. has soared nearly 64%, while MicroStrategy Inc. has surged more than 80%. Cathie Wood‘s ARK Innovation ETF has gained about 29%.
If the past few years have taught Mr. Asness anything, it is to be prepared for such run-ups to last much longer than expected. His lesson from the euphoria regarding risky trades in 2020 and 2021? Don’t count out the chance that the frenzy will return again, he said.
“It could be that there are still these crazy animal spirits out there,” Mr. Asness said.
Still, he said that hasn’t changed his conviction that cheaper stocks in the market, known as value stocks, are bound to keep soaring past their peers. There might be short spurts of outperformance for more-expensive slices of the market, as seen in January. But over the long term, he is sticking to his bet that value stocks will beat growth stocks. He is expecting a volatile, but profitable, stretch for the trade.
“I love the value trade,” Mr. Asness said. “We sing about it to our clients.”
For Richard Benson, co-chief investment officer of Millennium Global Investments Ltd., no single trade was more important last year than the blistering rise of the U.S. dollar.
Once a relatively placid area of markets following the 2008 financial crisis, currencies have found renewed focus from Wall Street and Main Street. Last year the dollar’s unrelenting rise dented multinational companies’ profits, exacerbated inflation for countries that import American goods and repeatedly surprised some traders who believed the greenback couldn’t keep rallying so fast.
The factors that spurred the dollar’s rise are now contributing to its fall. Ebbing inflation and expectations of slower interest-rate increases from the Fed have sent the dollar down 1.7% this year, as measured by the WSJ Dollar Index.
Mr. Benson is betting more pain for the dollar is ahead and sees the greenback weakening between 3% and 5% over the next three to six months.
“When the biggest central bank in the world is on the move, look at everything through their lens and don’t get distracted,” said Mr. Benson of the London-based currency fund manager, regarding the Fed.
This year Mr. Benson expects the dollar’s fall to ripple similarly far and wide across global economies and markets.
“I don’t see many people complaining about a weaker dollar” over the next few months, he said. “If the dollar is falling, that economic setup should also mean that tech stocks should do quite well.”
Mr. Benson said he expects the dollar’s fall to brighten the outlook for some emerging- market assets, and he is betting on China’s offshore yuan as the country’s economy reopens. He sees the euro strengthening versus the dollar if the eurozone’s economy continues to fare better than expected.
Even after the S&P 500 fell 15% from its record high reached in January 2022, U.S. stocks still look expensive, said Rupal Bhansali, chief investment officer of Ariel Investments, who oversees $6.7 billion in assets.
Of course, the market doesn’t appear as frothy as it did for much of 2020 and 2021, but she said she expects a steeper correction in prices ahead.
The broad stock-market gauge recently traded at 17.9 times its projected earnings over the next 12 months, according to FactSet. That is below the high of around 24 hit in late 2020, but above the historical average over the past 20 years of 15.7, FactSet data show.
“The old habit was buy the dip,” Ms. Bhansali said. “The new habit should be sell the rip.”
One reason Ms. Bhansali said the selloff might not be over yet? The market is still underestimating the Fed.
Investors repeatedly mispriced how fast the Fed would move in 2022, wrongly expecting the central bank to ease up on its rate increases. They were caught off guard by Fed Chair Jerome Powell‘s aggressive messages on interest rates. It stoked steep selloffs in the stock market, leading to the most turbulent year since the 2008 financial crisis. Now investors are making the same mistake again, Ms. Bhansali said.
Current stock valuations don’t reflect the big shift coming in central-bank policy, which she thinks will have to be more aggressive than many expect. Though broader measures of inflation have been falling, some slices, such as services inflation, have proved stickier. Ms. Bhansali is positioning for such areas as healthcare, which she thinks would be more insulated from a recession than the rest of the market, to outperform.
“The Fed is determined to win the war since they lost the battle,” Ms. Bhansali said.
Gone are the days when tumbling bond yields left investors with few alternatives to stocks. Finally, bonds are back, according to Niall O’Sullivan of Neuberger Berman, an investment manager overseeing about $427 billion in client assets at the end of 2022.
After a turbulent year for the fixed-income market in 2022, bonds have kicked off the new year on a more promising note. The Bloomberg U.S. Aggregate Bond Index—composed largely of U.S. Treasurys, highly rated corporate bonds and mortgage-backed securities—climbed 3% so far this year on a total return basis through Thursday’s close. That is the index’s best start to a year since it began in 1989, according to Dow Jones Market Data.
Mr. O’Sullivan, the chief investment officer of multi asset strategies for Europe, the Middle East and Africa at Neuberger Berman, said the single biggest conversation he is currently having with clients is how to increase fixed-income exposure.
“Strategically, the facts have changed. When you look at fixed income as an asset class…they’re now all providing yield, and possibly even more importantly, actual cash coupons of a meaningful size,” he said. “That is a very different world to the one we’ve been in for quite a long time.”
Mr. O’Sullivan said it is important to reconsider how much of an advantage stocks now hold over bonds, given what he believes are looming risks for the stock market. He predicts that inflation will be harder to wrangle than investors currently anticipate and that the Fed will hold its peak interest rate steady for longer than is currently expected. Even more worrying, he said, it will be harder for companies to continue passing on price increases to consumers, which means earnings could see bigger hits in the future.
“That is why we are wary on the equity side,” he said.
Among the products that Mr. O’Sullivan said he favours in the fixed-income space are higher-quality and shorter-term bonds. Still, he added, it is important for investors to find portfolio diversity outside bonds this year. For that, he said he views commodities as attractive, specifically metals such as copper, which could continue to benefit from China’s reopening.
Ramona Persaud, a portfolio manager at Fidelity Investments, said she can still identify bargains in a pricey market by looking in less-sanguine places. Find the fear, and find the value, she said.
“When fear really rises, you can buy some very well-run businesses,” she said.
Take Taiwan’s semiconductor companies. Concern over global trade and tensions with China have weighed on the shares of chip makers based on the island. But those fears have led many investors to overlook the competitive advantages those companies hold over rivals, she said.
“That is a good setup,” said Ms. Persaud, who considers herself a conservative value investor and manages more than $20 billion across several U.S. and Canadian funds.
The S&P 500 is trading above fair value, she said, which means “there just isn’t widespread opportunity,” and investors might be underestimating some of the risks that lie in waiting.
“That tells me the market is optimistic,” said Ms. Persaud. “That would be OK if the risks were not exogenous.”
Those challenges, whether rising interest rates and Fed policy or Russia’s war in Ukraine and concern over energy-security concerns in Europe, are complicated, and in many cases, interrelated.
It isn’t all bad news, she said. China ended its zero-Covid restrictions. A milder winter in Europe has blunted the effects of the war in Ukraine on energy prices and helped the continent sidestep recession, and inflation is slowing.
“These are reasons the market is so happy,” she said.
Predicted increases in value signals strength in local property market.