Investing in the Future

Last week was a busy one, which is why I was unable to post to this blog. But, from a Wellness prospective, let me share with you some of my insights from the ASA Symposium held this past Monday and Tuesday, June 19th and 20th.

I love reading articles by and listening to presentations by Dr. Sandy Baum. If you dont know her, she is a professor of Economics at Skidmore College as well as a Senior Policy analyst for the College Board. She really "gets" financial aid and need analysis. She spoke about "How Much Debt is Too Much Debt", and gave me a perspective that I want to try and develop over the coming months.

To paraphrase Dr. Baum, we in the student loan industry should try to convey the concept of debt to students as "investments" in their future. Since students do not traditionally have much money to invest in their future, the financial aid programs provide the needed resources at rates which will usually be lower than the eventual return in terms of future income. Students need to consider their long term income (return on investment) in making consumption decisions. It is a traditional model that people borrow in youth and repay in their middle years when their incomes are higher. This is the same model as buying a home.

We have traditionally told students that they should not borrow more than they will be able to repay as 8% of their future income. But with the potential of a higher income than average, the student should be able to shoulder a greater percentage of future income as the current investment in their education. The actual amount should be a factor of the median expected income for a particular occupation or potential salary.

Of course, this concept is a little too complex to be absorbed by a traditional 18 year old, but there is something here, and I think it could be simplified as a message to entering students. I like the concept of "investment" rather than "debt". And, from this we derive the very important message "Don't invest foolishly".

I also heard two professors from Miami University in Ohio who discussed research they are conducting (sponsored by ASA.) It involves relationships between the level of student debt, and the students' ability or willingness to give to their college as Alumni. Their very preliminary findings indicate that there is a negative correlation: Students with high debt are less likely to gift as Alums. They expect the study to be completed in October. If you are interested in a copy, send me an e-mail and I will make sure you get on the mailing list.

Best, Duane

Posted by Duane Quinn on June 28, 2006 at 05:02 PM EST

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