Part One: The Student Debt Crisis and How We Got Here

Pursuing a degree in higher education is often romanticized. The mentality has remained that a job is guaranteed as long as you sacrifice anything and everything for a bachelor’s degree, and ideally, a master’s degree or two. Of course, there are valid arguments for this, and for the most part, it’s true. Over time, all the financial strife will be well worth the wait, as education is an investment into the future.

But what happens when the investment doesn’t pay off? It is not uncommon for students to have a period of unemployment post-graduation, which results in ignoring those looming student loans. In addition to this, we all know the job market is still on shaky ground, and not all of us will find something that actually pays us enough to survive.

According to Student Loan Hero, the total U.S. student loan debt is up to $1.2 trillion, with 40 million borrowers, and $29,000 being the average balance. Why have we allowed this to become our reality? Despite a generous financial aid package, even I fit into this statistic. To sleep at night, I let myself believe, “You’re in USC Annenberg, and you’ll be fine.”

Unfortunately, this is the mentality many students have. A respected degree from a prestigious university helps, but nothing is guaranteed. Student loan debt is often blamed on private universities, but cuts in state budgets have led to a rise in tuition at public universities as well. Additionally, private universities sometimes have more scholarships than public universities can afford to offer. It is difficult to argue that private establishments are not the worst offender, because of course they are. However, it is a case-by-case basis (for example, the UC’s had little to no scholarships available to me, therefore I would have a similar debt situation graduating from UCLA.)

At the end of the day, it is better to have a degree, but the federal government’s over eagerness to give out student loans has led to a serious problem. According to Business Insider, Bill Ackman is convinced the outstanding balance in student debt could trigger the next market crash. Ackman claims that the government has loaned out too much money, which is true. “Student-loan delinquencies, in red, have risen as late payments in other types of payments have dropped,” according to a study by the Federal Reserve Bank of New York. The student loan debt crisis is being compared to the housing market crash. Wall Street kept saying “the housing market is stable, there’s nothing to worry about.” Throwback to 2008 when our country faced the worst recession since the Great Depression. Ringing any bells? We all know history repeats itself, so why is it so hard to connect the dots, and realize predatory lending back then, isn’t so different from our current situation?

To clarify, it is a tad exaggerated to say the student loan debt crisis is a carbon copy of the housing market bubble. However, the issue is the casual attitude towards loans, credit cards, and OPM in general. Since the 1970’s, the convenience of credit cards and the mentality of “get it now, pay later” has transformed our economy. This transformation was crucial since consumers were encouraged to spend, which drove the demand up, which all in all boosted the economy. Today, without credit cards and the ability to borrow money, our economy would be at a stand still. Nonetheless, student loans are another story. Especially when student loan knowledge is lacking. According to a survey by intuition, two-thirds of millennials who received loans felt they did not have enough information about their loans. 45% of students are not receiving repayment counseling, 47% do not know the interest rates on their loans, and 75% have not been offered an income-driven repayment plan. In summary, college students do not know what the heck is going on. It is easy to point the finger at the students. Obviously, we don’t care about our financial future if the tiny, fine print isn’t read word for word right? Wrong! Student loans are perceived to be far more confusing than they actually are, the repayment process feels much more difficult than necessary. We all know young people are a bit naive, so why would the government or private lenders willingly keep us dazed and confused? It’s like they want us to default.

Additionally, no one is doing us any favors by never capping the amount of money we can borrow. There are measures taken to ensure that students don’t take advantage, but there are too many loopholes. Students are usually given a six-month grace period post graduation. What happens when graduate school is the next step? Paying back undergraduate loans are deferred, the interest goes up, and a few years later, you may be looking at paying off loans for 30 plus years. In some cases, the rest of your life.

Take Liz Kelley, an extreme example of how allowing students to borrow to their heart’s desire is risky business. In the New York Times article “Student Debt in America: Lend With a Smile, Collect With a Fist,” Ms. Kelley admits that she “made her own choices.” Ms. Kelley has $410,000 in debt due to a number of circumstances. Long story short, Ms. Kelley had financial factors such as her autoimmune disease, childcare, divorce, foreclosure, and much more that kept delaying her from completing her education. By the time she finished undergraduate school and eventually graduate school, the interest rates destroyed her ability to pay all this back anytime soon. This story goes to show the “deep contradictions in the federal governments approach to student loans.” There are so many students that are still handed out loans, despite a shaky history of repaying loans in the past. When it is time to pay back the loans, forgiveness is hard to come buy. This is setting students up for failure, and most importantly, the decline of our economy.

The argument is made that those with the most debt have the highest degree, and therefore have the means to pay back loans. In many instances, this holds true. However, according to William Elliot, director of the School of Social Welfare at the University of Kansas, ” ‘even people with only $5,000 to 10,000 [in loan] are still going delinquent.’ ” The Federal Reserve study reveals that the 90-day student delinquency rate has raised to 11.3%. The White House Study attributes this to drop outs or people with lower degrees (who therefore have low wage jobs,) but that doesn’t mean delinquency only applies to a certain group of people. The fact of the matter is delinquency is rising, and the amount of student debt people under the age of 35 must pay back is decreasing economic growth due to lack of willingness to spend.

Part Two: How Student Loan Debt is (Potentially) Crippling the Economy

Millennials are the future of the economy, and yet most are reluctant to be ” ‘big spenders’ .” According to the Los Angeles Times, millennial’s are cautious as ” ‘children of the Great Recession.’ ” However, there is much more complexity to this issue than millennials simply being too frugal (in comparison to past generations.) Student debt is a major deterrent from investing in the future. The graph below (left) shows how people aged 35 and under have much higher student debt rates than past generations. Therefore, buying a house, marriage, child rearing, even buying a car is all postponed. Many students resort to living with their parents, not because millennials are too “coddled” (I promise you no one willingly lives with their parents post grad,) but because ” ‘student loan debt, more than any other kind, contributes to people having less favorable views on their own financial well-being.‘ ”

 

The lack of confidence in spending has lead to the slowing of our GDP and overall economic growth. As young people put off buying homes, the housing market slows down. Those who need to sell their homes are unable to, because the young, hip couples are crammed in their minuscule, overpriced apartment. According to a survey conducted by the National Association of Realtors and American Student Assistance, “seventy-one percent of those surveyed said their student loan debt is delaying them from buying a home. More than half said they expect that delay to last longer than five years. ” Additionally, one third of current homeowners revealed that they cannot afford to sell their home and buy another one because of student debt. Something else to keep in mind is that not being able to pay back student debt negatively effects your credit score, and your credit score effects every crucial financial decision in life, such as buying a home. This is probably another reason why the housing market has struggled recently.

(Note: As of May 2016, there was indeed a boost in the housing market. However, this survey was taken in June 2016 and indicates that the housing market is still not as strong as it should be. Everything else in the economy? Sluggish in comparison.)

Waiting to have children till later in life is not the end of the world, but if this continues for too long, our economic future could adversely affected by not having enough young people in the next generation (take Japan or Germany as great examples.) Not saving for retirement could also cause problems down the road. All in all, everything is being affected by student debt, more than economists and the elitist Wall Street “geniuses” would like to admit

Wall Street believes that student debt is a ” ‘fiscal headache rather than a financial risk,’ “ since many loans are backed up by the federal government. Most are convinced that due to this, there is a low chance of another financial crisis if defaults become rampant. However, if the government ends up needing to bailout student loan debt, the $1.2 trillion necessary to do so will halt economic growth, and raise taxes.

The hesitance to refer to the student loan debt issue as “crisis” is the wrong action to take. Why wait for things to get worse when there are ways to fix the problem now? Senator Elizabeth Warren and Attorney General Kamala Harris have made the effort to find solutions, but no one has taken them seriously. Decreasing government loans is not the right move either, as the demand for student loans would stay the same, and private lenders would swoop in and take further advantage of students. Some might say blaming student loan debt for the slow economic growth is pushing it, but why discredit the statistics that are right in front of us? Why ignore the millennials, who are arguably the most important group of people for the future of the economy? It is only a matter of time before this problem thoroughly unravels, and all we will be able to do is say, “I told you so.”

 

 

 

 

 

 

 

 

 

 

Residential investment currently accounts for about 5% of the United States gross domestic product. Considering the US GDP stands at just under 18 trillion dollars, housing is clearly a significant portion of American spending. As a major driver of economic growth, housing indicates the wealth of the people, but since the 2008 recession, it has taken a dip, and it is important to examine why. At 35%, the largest generational group of buyers consists of millennials between the ages of 18 and 34, but since the 1980s, the probability of this age group owning a home has gone from almost 17% to just under 14%. The question now is whether this is a permanent change or if it is just a fluke due to the economic crisis.

In the early 2000s, credit was very cheap, and this led to banks loaning money to people who probably should not have been given that responsibility. They took this money and bought up homes because they were known as a stable, surefire investment. Eventually, these people struggled to pay back their loans, and the bubble burst, causing banks to suddenly tighten up and be wary of loaning money. This does not bode well for average young adults because they do not have a long financial history to back up their ability to pay off loans. Right now, young adults are also being hit with a plethora of other problems, such as student debt and a flailing job market. The average college graduate in 2015 has to pay back over $35,000, which is more than double the amount borrowers had to pay back only 20 years ago even when adjusted for inflation. What is worse is that 44% of college graduates in their 20s are stuck in low-wage, dead-end jobs. With such shallow income-growth trajectories, millennials are more focused on paying current bills and making rent every month than saving for their future home.

 

This goes against the fundamental “American Dream,” which is a traditional idea consisting of three entities: job, family, and home. The hope is that with hard work and determination, one can acquire a high-paying job and eventually purchase a home for his or her family. As a result, young Americans have set life goals around hitting milestones to put them on this path, but as illustrated above, this “dream” is increasingly becoming out of reach.

The share of young homeowners has fallen steadily for the last thirty years, which means many millennials have taken up a new, or perhaps old, residence: living with their parents. For the first time in 130 years, the most common living arrangement among millennials is sharing a home with their parents, and over one-third of this generation is choosing to do so. Much of this can be blamed on the recession. Young adults do not have the money for a down payment or the continuous stream of bills stemming from mortgage and upkeep. Additionally, the housing market is not making this any easier with its increasing market prices and decreasing number of available affordable homes. Young people say they will move out the day they can afford it, but that day is looking depressingly out of reach.

For some, this situation is old news. Those who grew up in poor neighborhoods have always been less likely to be motivated to leave their hometown. These young adults probably will not go too far for college, and they are stuck doing low-wage jobs that, even in the long run, will not provide enough income for them to save and eventually spend on their own house. Those in this group are more likely to live with their parents and may be providing for the family just to make ends meet. Their situation is dire, and they are bound to a place that cannot allow them to grow and prosper.

On the other hand, take a look at those who have the greatest chance of being able to afford their own home. These include high-achievers who tend to come from rich backgrounds, move away for college, and settle in popular cities with a concentration of jobs like San Francisco or New York. Compared to the first group, this group has drastically more resources and therefore more freedom to set their own priorities. However, they are still not buying homes, but this could actually signal a cultural shift and a delaying of the whole process. There are many rational reasons why a young person of decent money would want to wait to splurge on a home, and it is possible this is due to a change in mindset.

For one, the rent in the cities mentioned above has reached astronomical, and for many, unaffordable levels. In both New York and San Francisco, the average square footage of a one-bedroom apartment is 750 square feet. This is a comfortable size for at most two people. The median rent per month for this apartment is $2,200 in New York and an outrageous $3,600 in San Francisco. This means that per year, those who choose to live in these cities are committing between $26,400 and $43,200 to solely rent. For many, moving to these cities is not so much a choice as it is the best way to find a career in their desired industry. New York is a financial district, and San Francisco is the land of the start-ups. There are definitely more job opportunities, but as a location gains popularity, it also gets more expensive. This leaves little room for young adults to save a large enough sum for their own property.

Millennials also have this newfound desire for flexibility, and homeownership does not allow that. Many graduates have the mindset that they will take a job for at maximum a few years and then move onto something else. In fact, it is completely normal for millennials to switch jobs an average of four times in their first decade out of college, and more often than not, this career change also results in a location change. This demands the ability to be mobile, and renting means that once the contract is up, renters can move out without having to worry about finding someone else to take their place. Selling a house requires a whole other set of considerations, such as possible remodeling and hiring an agent in order to get the best price. From this point of view, renting property simply provides conveniences that buying does not.

Consider a newly married couple where the wife works at a large insurance company and the husband is a doctor. This couple has moved three times during their time together: once from college to medical school, again for medical school to residency, and one more time for the husband’s first real job. Throughout the years, the couple has accumulated a healthy sum in comparison to others in their age group, but because of their tendency to hop from place to place, they do not see the point in buying a house. Selling after just a few years does not provide much profit, even in high-income areas, and moving without selling the house does not make much sense. Years ago, it was uncommon for people to move across the country multiple times, so there was not much risk involved when buying a house. For young people nowadays, this is rather commonplace, so they have a totally different mindset than their parents did. Norms are changing, and that means cultural decision-making is changing as well.

On top of this, there is currently a shortage of starter homes, so young people have a very limited set of options. Housing starts went way down after 2008, and it is slow going on its journey back to pre-crisis levels. Instead, new construction is now being focused on the luxury side, so homes that used to be entry-level are now priced above what young adults can pay. Because of increasing expectations, the new supply is being adjusted to fit the demand. Getting fancier also means getting more expensive, which only prices out the people who actually want to purchase their first home. This is clearly a vicious cycle.

Money is a driving factor in most decisions. It hides behind other reasoning and provides concrete limits, but maybe it should not be the first thing people blame for the decline in homeownership. Perhaps it is simply a change in the mindset and priorities of millennials that has veered tradition off course.

Product sharing is an idea that can only exist in modern age companies because of not only technology but also the cultural shift mentioned above. One example is Zipcar. It boasts over 700,000 members, which makes it the largest car-sharing company in the world. Members are able to borrow these cars from various locations, and Zipcar covers gas and insurance. These conveniences are highly appealing to many people because this eliminates two large worries associated with owning a car. There is also no need to search and pay for long-term parking, which can reach exorbitant levels in big cities. If people do not want to worry about parking at all, they can turn to Uber or Lyft and simply pay for the ride itself. This “sharing” business model has been repeated across industries, including Airbnb for housing, Rent the Runway for clothing, and Spinlister for sports equipment. The list goes on. Sharing companies are now commonplace, and they are born out of a newfound prioritization of convenience and flexibility.

Regardless of the cause, the decline of homeownership has very real implications, and it is telling about the health of the economy. High levels of homeownership signal a certain confidence among buyers. They believe they can make good on payments, and this means they are earning a comfortable wage. Typically, a family’s largest purchase is their home, and home purchasing decisions are telling of the nation’s economic development. Families exhibit their buying power through what home they choose to purchase, but if they no longer have the desire to buy a home, this affects other industries as well. For example, urban planners who map out entire neighborhoods of homes suddenly have less demand, and construction workers have fewer jobs as a result. There are also real estate agents and others who have fewer sales to make, and the list goes on. Changes in the housing market no doubt affect the greater economy, which is why the decline in homeownership is so alarming.

At least at this stage in their lives, millennials simply place less of an emphasis on actually owning items than past generations have, and this translates to a decrease in young adult homeownership. However, this does not mean that young adults do not hope to one day own their own homes. Among millennials, 65.3% still associate homeownership with the American dream, and more than half of all millennials expect to buy a home within the next five years(USAToday). Their plans may be delayed, but there is definitely still a checkbox next to homeownership that they hope to tick off within their near future. The American dream lives on; the millennials just need more time to get there.

“I miss the price of my hair service in Beijing,” said Yuyuhou Li, a graduate student from the University of Southern California studying Strategic Public Relations, after her recent pricy experience in Korean Town. The total cost of having her hair dyed was “about $280 including tips.” In other words, having her hair dyed once in Los Angeles equals to three hair dyeing appointments at a similar salon in Beijing.

No wonder it seems that living in America is quite expensive, at least in most Chinese people’s eyes. It is well acknowledged that China is rising at an impressive pace. From ranking second in the world in nominal GDP to pulling itself from poverty at least in its southern coast, to the “Made-in-China” label being used worldwide, to the grand hosting of the Beijing Olympic Games. Even the great Uncle Sam started to fear the rising eastern star, going so far as to come up with the China Threat Theory.

Considering all of this, can we safely draw a conclusion that living in China is more appealing than living in the States, especially for a young and upcoming generation? The following aspects might give you some insight.

Living Cost & Purchasing Power Parity (PPP)

Pick up an apple from a Walmart in Shenzhen, one of the most developed coastal cities in China and read the price tag carefully. Those lovely red apples are sold at ¥4.98 （=$0.75）per 500g. Now let’s move the scene to a Walmart in Los Angeles, where a large price tag reading $2.47/lb ($2.24 per 500g) sits on top of those made-in-America apples.

It is not uncommon to see an almost triple price differential between consumer products made in the most developed cities in China and those produced in America. A box of 12 cage-free eggs are sold at ¥12.9（=$1.93）in the Shenzhen Walmart, while eggs in the LA Walmart are more than double that price. Not only groceries, but also basic necessities such as toilet paper and laundry detergent suffer from the huge price gap. For example, Tide detergents of the same size in both China and the US do not break the spell of the three-times price difference.

Both Shenzhen and Los Angeles are coastal cities with a high volume of port trade and technology-intensive industries. However, according to Numbeo’s comparison, people would need around ¥35,143.95 ($5,266.80) in Los Angeles to maintain the same standard of life that they can have with ¥21,000.00 ($3123.60) in Shenzhen (assuming you rent in both cities). As the chart below shows, Shenzhen’s living cost is higher than Beijing’s, but still falls way behind Los Angeles’.

 

(Source: Numbeo)

In terms of the price gap among different countries, Purchasing Power Parity (PPP) plays a vital role in evaluating the living cost in the respective country.

PPP is arguably more useful than nominal GDP when assessing a nation’s domestic market because PPP takes into account the relative cost of local goods, services and inflation rates of the country, rather than using international market exchange rates which may distort the real differences in per capita income.

According to the International Business Times, China’s economy surpassed the U.S. in purchasing power for the first time in 2014 and continued to rank in first place in 2015.

With the same amount of money, you can enjoy more goods and services in China than in the United States. For example, Yuyuhou Li can buy the same detergent and enjoy similar hair dyeing services in both Shenzhen and Los Angeles; but in China, where labor and rent are lower, dyeing her hair and purchasing basic daily necessities cost much less than she pays in the U.S.

This round, China wins America by a huge margin.

Per Capita Personal Income

“If I am making money in dollars, living in the United States won’t be that expensive,” said Yutian, Li, a graduate student studying in USC with a major in computer science. There’s no doubt that computer science is one of the most profitable jobs in the United States. But earning dollars and spending yuan is very tempting in the fact that the exchange rate between yuan and dollar is more than 6:1.

“You earn a lot less money in China, but you can save more,” said Robert Little, who used to teach English at the University of International Business and Economics in Beijing. “America is much more expensive to live in because cost of living is much higher,” he added.

The National Bureau of Statistics of China reveals that per capita personal income in Shenzhen was 73492 yuan (=11010.45USD) in 2014. Also, the latest data revealed by the Shenzhen survey group of the National Statistics Bureau shows that the average disposable income of Shenzhen residents was 30524 yuan (=6,868 USD) in 2015. The latest data shows that per capita income in Los Angeles County is 42,042 USD, almost 4 times higher than in Shenzhen.

If we divide the items sold at the Walmart in both cities by the per capita personal, Interestingly, the percentages are so similar.

	Los Angeles	Shenzhen
Apple	0.006%	0.007%
Egg	0.01%	0.018%
Toilet paper	0.03%	0.03%
Tide detergent	0.02%	0.03%
Hair dyeing	0.67%	0.82%

But what causes Los Angeles’ cost of living to run ahead of Shenzhen’s? Although the overheated property market in China has driven the prices up and up, rent prices in Shenzhen are 50.93% lower than in Los Angeles. “My living cost per month is about $3,000,” said Jake Davidson, a senior from Los Angeles studying accounting at USC.  According to Jake, he has to pay $1600, almost half of his living cost, for his rent. In that case, people living in major cities in the United States such as Los Angeles and New York actually suffer more renting pressure.

However, Shenzhen’s hair dyeing services are at a higher percentage than Los Angeles’, which meets a current trend of more expensive service industry in China’s big cities. 

Opportunity Matters   

“I prefer to work in the United States,” said Caixin Yang, a sophomore who comes from Chongqing City and now studies economics in America. For her, the United States has more advanced and mature financial systems and markets. “China is under transformation and everything is in a mess,” she said.

The same answer goes with Yuyuhou Li who thinks highly of a  well-established public relations career path in America. “Although the living cost is really high here especially in LA, working in the United States represents a more stable life,” she added.

In spite of skyrocketing living cost especially the rent in the United States, Chinese students are rushing to pursue education in the United States, in the hopes of receiving better a education and a better life in the future. The most recent figures, from the 2014-15 academic year, show that 304,040 international students in the US hailed from China – far more than from any other country.

An estimated number of 2.64 million Chinese have moved overseas to study since 1978, but only 272,900 students returned to China in 2012, according to the Ministry of Education. A 2014 report by Oak Ridge Institute shows that 85 percent of the 4,121 Chinese students who received doctorates in science and engineering from American universities in 2006 were still in the U.S. five years later. The stay rate had been 98 percent a decade earlier, which actually marks an improvement. This situation results in a massive loss of talent for China.

What entices Chinese students who receive education in the United States to choose to earn a life in a foreign country even though China has become the second largest economy? Free work culture, decent income and better welfare treatment could be the answer.

“High living cost is not something I value if I choose to stay in the United States or in China,” said Yiling Jiang, 23, studying communication management at USC. He values personal development, opportunities, lifestyle, family, and friends when judging which country is more appealing. Not only Yiling, but all of the interviewees agreed that the U.S. living cost is high but not a huge problem. It is the bureaucratic working ethics, complicated relationship (guanxi) and unfair career treatment that decrease the charm of coming back to China.

In addition, as smog worsens, China’s most well-educated have begun fleeing the country. Caixin Yang also mentioned her concern in her interview about the long-lasting severe pollution in some Chinese metropolitan cities such as Beijing, the Capital of China.

Faced with the army of ambitious Chinese up-and-coming professionals, are Americans worried? Yes, they are. Despite current slowing growth rate, plummeting stock markets and a variety of economic challenges that China is facing, Americans are still concerned about economic threats posed by China. The loss of jobs is one of the top three problems that are rated as a very serious problem by approximately sixty percent of the American public, according to a survey in 2015. The other two concerns are the amount of U.S. debt held by Beijing and cyberattacks from China.

At the same time, still, a number of Chinese students who pursue degrees in America prefer to go back to China. “China has a lot more potential in development and I am willing to contribute myself in this course,” said Yutian Li.

Yutian admitted that current American life is more attractive in terms of advanced education and systematic career training, but in the future, living in China will be more appealing to him as China’s is speeding up in making itself better.

In light of a rising China, which country is more appealing? There is no definite answer. Living costs are not scary. Opportunity matters most.