How Student Loans Influence the Talent Economy
Student loan debt is a crippling expense for major portions of the workforce. How does the burden influence talent’s behavior in the economy?
The city of Memphis, Tennessee, will soon help its employees pay off their student loan debt.
Starting July 1, 2017, the Student Loan Reduction Program will provide $50 per month to employees, who can put this cash toward their loan repayment. According to a press release, Memphis is the first major U.S. city to offer this benefit to city workers.
Memphis’ effort on this issue might be something other employers, including those in the private sector, should consider.
Student loan debt now amounts to $1.44 trillion among 44.2 million borrowers, who face an average payment of $351 per month, according to various Federal Reserve sources.
“The cost of higher education has grown far more rapidly than median family income, leaving students with little choice but to take out loans which, upon graduating into a labor market with limited job opportunities, they may find difficult to repay,” according to “The Class of 2016,” an April 2016 study from Economic Policy Institute. More people are going to college than in the past, which has increased the number of borrowers. The same report showed that there was a 92 percent increase in number of borrowers and a 74 percent increase in average balance of student loans between 2004 and 2014.
Interest rates on student loans are rising as well. In July 2017, interest rates for direct subsidized and unsubsidized loans for undergraduates will rise from 3.76 to 4.45 percent, according to The Washington Post. These increases in debt may feel crushing to many who owe tens of thousands after they graduate, but it’s not for naught.
The benefit of student loans as an entitlement is that anyone who’s a U.S. citizen can potentially access higher education, said Daniel Pianko, co-founder and managing director of University Ventures, an education investment fund based in New York City. “College is still the best pathway to middle-class and upper-middle-class lifestyle,” he said.
How do loans impact decisions?
Lifetime earnings for college graduates far exceed those who only have a high school diploma, with earnings gaps of $1.13 million for men and $792,000 for women, according to “Education and Lifetime Earnings in the United States,” a report published in Demography in August 2015. The earnings potential is worth the cost of college, with men seeing a value six times the cost of education and women earning four and a half times the cost.
These workers are also more likely to be employed, according to the report, which found that 89 percent of 20- to 24-year-olds with a college degree were employed in 2015, compared to 76 percent of the same age group with only some college education. Employment rates become dramatically different when comparing to those without any college education.
This is a great benefit for those who attend college, but it’s the human impact of this debt that is worrisome. “If you have this level of debt, it definitely changes how you operate,” Pianko said.
The problem with student loans, he said, is that they require a minimum payment each month. If unable to pay this, a borrower’s credit score will decrease, impacting their future ability to borrow money, rent an apartment or, in some cases, get a job. This payment, he said, means borrowers can’t take entrepreneurial risks as easily as in the past. If their businesses fail, they lose the money they invested, and they can default on student loans, a burden which fell on 7 million people in 2014, according to “An Economist’s Perspective on Student Loans in the United States,” a paper from Brookings Institution. “It’s taking out a whole generation of entrepreneurs,” Pianko said.
Debt could also impact how much college borrowers complete. According to the National Center for Education Statistics, only 60 percent of full-time, first-time students at four-year schools completed their degrees in 2008. This even accounts for those who were enrolled for six years. “Absolutely the price has an impact,” said Elise Gould, senior economist at Economic Policy Institute, who also co-wrote “The Class of 2016.”
These loans also impact career choices. “Those with higher educational debt are more likely to accept jobs for higher initial wages yet slower wage growth over time,” Gould said. This puts borrowers at an economic disadvantage compared to their debtless peers. Furthermore, stagnant wage growth doesn’t help. “Part of the difficulty in paying back loans is not decent enough wage growth,” Gould said.
A combination of these factors means that college is more attainable for those in middle- and higher-income families. “You’re not necessarily getting the people that are the best and the brightest in terms of who’s going to get the most out of that education,” Gould said.
This trend isn’t just affecting young people. Older workers are also accruing debt and delaying retirement to help their children attain college degrees. According to the Consumer Financial Protection Bureau, those aged 60 years and older are taking on student loan debt in droves. In fact, the number in this group with student loans quadrupled from 2005 to 2015; 68 percent of these borrowers reported the loans were for a child or grandchild.
This practice means a greater cost for those later in life, as they face a 7 percent interest rate on student loans, compared to 4.45 percent for a loan taken out by the students themselves. Those with student loans have about $10,000 less in their 401(k) retirement accounts than their peers without loans, the study found when examining those ages 50 to 59 in 2013.
What can business leaders do to help?
Executives could offer loan repayment as a benefit to help their workers and retain talent, University Ventures’ Pianko said. “Employees frequently place more value on those dollars than on other dollars, which may not be economically rational, but then again, when you’re hundreds of thousands of dollars in debt, you may or may not be acting economically rational to begin with,” he said.
Changing requirements for posted jobs can also help, Pianko said. Employers often expect students to come to the organization with the required skills already honed, but many technical skills could be taught internally. If this changes, workers and students could benefit from more alternative pathways than traditional, four-year degrees.
“Employers have a real role to play here, working closely with academic institutions, students and government to create these faster and cheaper pathways that would be the real fundamental solution to the student loan crisis,” Pianko said. To do so, business leaders should create competencies in job descriptions that institutions and students can then prepare for. Also, business leaders can fund programs that encourage alternative pathways to employment.
Financial literacy is another benefit to offer those with loans to pay down. “A lot of employers overlook the student loan aspect when it comes to this education,” said Kris Alban, executive vice president at iGrad, a financial literacy resource based in Cardiff-by-the-Sea, California. Employees often don’t understand alternatives to going about loan repayment, such as refinancing and federal benefits; they simply take on a second job or move to another company in hopes of paying down the loan more quickly.
“We believe that providing more education on the student loan topic can help with employee retention just in that fact alone, letting them know not to be so stressed about their student loans. There are so many options if they just versed themselves with them,” Alban said.
Lauren Dixon is an associate editor at Talent Economy. To comment, email email@example.com.