Disney: The Monopoly of All Monopolies

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In July of 1955, the magic of Disneyland began with the first theme park opening in Anaheim, California. Sixty-one years later, Disney parks and resorts dominate the tourism industry inside and out of America. Every movie and TV show is the perfect opportunity to bring children’s favorite characters to life right in the park. Disney theme parks would not be nearly as lucrative without cashing out on gift shop souvenirs, as screaming children beg their parents to buy them a plush, pet-sized Olaf. The opening of Disneyworld in Orlando, Florida and its booming success has lead to Disney theme parks crossing borders to Paris, Tokyo, Hong Kong, and Shanghai (and that isn’t even including all the resorts.)

Not only does Disney dominate in tourism (Disney runs the world,) their presence in all things entertainment such as media and cable networking is undeniable.  However, with the subscription and viewing issues at ESPN, the historically stable company is facing unforeseen challenges.

It is no secret that America’s patience with cable is slowly dwindling, but no one knows this better than ESPN. Nielsen Cable confirmed the alarming loss of subscribers for November 2016 was 621,000, and a drop in revenue of over $52 million. Don’t try to do the math for 2016 as a whole. Long story short, its pretty painful.

The question is will ESPN put Disney at long-term risk? Although shareholders aren’t exactly fleeing anytime soon, we have to consider how the future of cable will affect the company as a whole. Disney may be too big to fail in many people’s eyes, as the popularity of Disney’s parks, resorts, and studio entertainment will not wane anytime soon. Despite this, looking at the impact Disney parks and resorts have on the economy is important to understand how much could be lost if Disney earnings continue to slow down (the thrilling exploration of quarterly earning reports will take place to further understand this.)

Disney’s effect on the urban economy in Anaheim and Orlando

The Disneyland Resort in Anaheim has undoubtedly changed the economy of the surrounding city (Disneyland Resort includes Disneyland and Disney California Adventure, Downtown Disney, and three hotels.) In fact, Disneyland is one of the reasons for Southern California’s economic success. An economic impact study was conducted by Arduin, Laffer & Moore Econometrics (ALME) which revealed that $5.7 billion is generated annually for Southern California’s economy. Additionally, the Disneyland Resort contributes $370 million in state and local taxes. The employment statistics are equally impressive The study was based on fiscal 2013 data, so these numbers may be higher today. Employment is also positively impacted with 28,000 employed and 25,000 jobs created indirectly due to the company. Disneyland Resort’s employment rate has grown at 34% which is faster than California’s 6.7% rate (from 2009-2013.) As you can see, Disneyland dominates Anaheim, one-third of Orange County’s tourism profits being linked to them.

The opening of Disney World Resorts shaped the future of Central Florida. Before Disney, the area was far from a popular destination. As of 2015, there are an estimated 67.8 million visitors to all theme parks combined (which includes Magic Kingdom, EPCOT, Hollywood Studios, Animal Kingdom, Typhoon Lagoon, and Blizzard Beach.) Compared to Disneyland and California Adventures combined 27.7 million visitors, that is a huge difference. It shouldn’t be too surprising then that Disney dominates this urban economy as well. According to a study conducted by Fishkind and Associates, Disney World is responsible for generating an estimated $18.2 billion annually and 1 in 50 jobs in the state are linked to the company. The 161,000 jobs linked to Disney World along with $900 million spent paying Florida vendors is equally noteworthy if not more. This study was based on fiscal 2009 data, so its impact since then has surely increased.

If it is not already apparent, Disney has a huge impact on local economies.  Disney pumps money into these areas by attracting so many visitors who end up spending money outside of the parks themselves. Job growth and tax revenue are equally as important if not more to keep the system growing. This economic growth positively impacts the U.S. and makes us more appealing to international travelers. In fact, the multitude of park and resort locations have not dissuaded international Disney fanatics from coming to the states, as it gives the incentive for true fans to accept the challenge of visiting all parks and resorts. According to a fellow anonymous Trojan who works as a performer at Disneyland Anaheim, “true Disney fans will stop at nothing to come to the parks. Some annual pass holders come every day! And a lot of the time I get to meet so many international kids it’s crazy.”

The fact is cities like Anaheim and Orlando were created by Disney, for Disney. If Disney begins to falter then so do these cities as they are all almost too reliant on each other at this point in time. To show this, it is now time to play the numbers game.

Disney as a whole

As Disney expands, it is unrealistic to expect every quarter to be a slam dunk. Additionally, increase or decrease in attendance, revenue, and profit has a lot to do with the season in tourism. Disney’s best profit time of the year is during the most wonderful time of the year: Christmas. Other factors come into play such as unforeseen events. For example, the Charlie Hebdo attacks in 2014 along with the terrorist attacks in 2015 during Bastille Day and in November decreased attendance at Disneyland Paris. No one wants to put their entire family at risk after a tragic event like that. Therefore, there was a 10% drop in guests and 7% drop in revenue this past year.

The fourth quarter for Disney as a whole was a shock compared to past years, and even compared to the third quarter. The third quarter generally had a trend of increased revenue and income, with a 6% increase in revenue for parks and resorts and 8% increase in profit. On the other hand, the fourth quarter resulted in a decrease across the board.

Fourth Quarter and Full Year Earnings for Fiscal Year 2016 https://ditm-twdc-us.storage.googleapis.com/q4-fy16-earnings.pdf

As shown above, revenues were down 3% from $13.5 million to $13.1 million, and operating income was down 10%, from $3.5 million to $3.1 million.

Looking at revenues for parks and resorts, there was only a 1% increase from $4,361 billion to $4,386 billion. Operating income was down 5% from $738 million to $699 million. The report attributes lower operating income to lower turnout at Disneyland Paris and Hong Kong, but this is offset by the opening of Shanghai. Long story short, Disney always has an answer for concerning numbers.

The true reason for decreased revenue and income is largely connected with cable networks. Media networks revenue was down by 3% from $5,826 billion to $5,658 billion, and operating income down by 8% from $1,819 billion to $1,672 billion. Revenue for Cable Networks decreased by 7%, and operating income at Cable Networks decreased by $207 million to $1.4 billion (from $1.6 billion.) This is linked to both ESPN and Disney Channels.

ESPN is bleeding money

Decreased revenue is primarily due to ESPN, as the loss of subscribers in November alone was 621,000. According to Market Realist and Nielsen Cable projections, from 2013 to 2015, 7 million subscribers have been lost. 

The issue is the expense of ESPN. At roughly $7 a month, you end up paying around $80 a year. However, owning as many sports rights as ESPN has is truly that expensive. But customers don’t really care about that they just want their sports!According to Disney, this quarter resulted in lower income from ESPN specifically due to “lower advertising and affiliate revenue and higher programming and production costs” Ironically, during their third quarter press conference, it was the complete opposite wording with

According to Disney, this quarter resulted in lower income from ESPN specifically due to “lower advertising and affiliate revenue and higher programming and production costs” Ironically, during their third quarter press conference, it was the complete opposite wording with “higher advertising and affiliate revenue” to explain the “nice operating income growth” of 1%. I see what you did there Disney, but no one is fooled (but seriously what is that plug-in statement code for/what does it really mean?)

During their press conference back in August, Disney said they are optimistic that subscriptions would slowly trickle back in. To combat loss of subscribers, they are pairing up with BAMTech to allow future streaming. The licensing rights of BAMTech include MLB and NHL which will bring more viewers. Bob Iger claims the goal is to provide a complimentary service to what ESPN already has, by creating streaming access for the sports that are not currently on the channels. This includes college sports, basketball, tennis and so on. Although no cable subscription is necessary to watch this new ESPN streaming service, the catch is the channels already available on ESPN will not be viewable through this service.

To me, this idea may work for in the short term to bring people in, but it will further frustrate customers and be counterproductive to not be able to fully stream all ESPN channels. However, Iger also feels that more subscribers can be brought in through Direct TV’s Sling TV, which is only $20 a month and includes all the ESPN channels a sports fan needs. Perhaps this will work, but this would require more incentives to join Direct TV and every region in America has a different cable monopoly (for example Comcast is your only viable option in Marin County in Northern Calfornia.)

How ESPN aka the former cash cow of Disney may affect theme parks

You may be wondering how all of this connects. Logically, every component of business matters but how much impact could the decline of ESPN have on theme parks and resorts? Before streaming programs changed the game, ESPN was the be all and end all of Disney profits. The money has been pouring in ever since being acquired through ABC back in 1995. According to the annual report of 2014, ESPN brought in $6.8 billion in operating profit or 46% of the company’s total. Cable networks overall contributed to 34% of Disney’s revenue. Wells Fargo Securities analyst Marci Ryvicker estimated back in November 2015 that $700 million in fee revenue and $200 million in earnings would be lost due to the loss of subscribers (3 million at the time.)

All of this is problematic because if there are less corporate funds, then there are fewer funds to open new attractions within existing theme parks, along with taking the possibility away of expanding further (but does anyone really need another Disney theme park, I think not.)

Additionally, if the stock price begins to drop significantly, investors pulling out is never a pretty sight. You can even say ESPN is potentially holding back Disney’s stock price from growing as the headlines of “millions of subscribers lost” doesn’t help anyone.

Overall, what we’ve learned here (and probably already knew) is everything within Disney is deeply intertwined. The theme parks and resorts simply cannot succeed without the funds to maintain upkeep and periodically upgrade them. I believe that the current business model for ESPN will not be successful or beneficial past 2020. Streaming is taking over as it is, and although families will continue to buy cable packages for a long time, nothing is permanent in this technological world. It may be time for Disney to sell ESPN to Comcast or AT&T and let someone else face the backlash. In fact, if subscribers do increase as Iger predicts, it would not be a hard sell to another cable company to take on the project. Since Disney theme parks and resorts are such an important part of the domestic economy (if I had discussed the world market as well this would be overwhelming) sacrificing the most traditional and magical component of Disney is not worth it. Disney’s history all ties back into the mini economies of Anaheim and Orlando (and the rest of Florida) and therefore prolonging their well-being is not negotiable.

Disney Parks and Resorts Research

https://smartasset.com/credit-cards/the-economics-of-disney-world

https://ditm-twdc-us.storage.googleapis.com/q3_fy16_earnings_transcript.pdf

http://www.usatoday.com/story/money/2016/08/09/disneys-q3-income-up-5-theme-parks-film-studio-gains/88483996/

https://blog.shermanstravel.com/2014/8-major-differences-between-walt-disney-world-and-disneyland/

http://www.ocregister.com/articles/study-665882-resort-disneyland.html

https://publicaffairs.disneyland.com/disneyland-resort-generates-5-7-billion-for-southern-california-economy-2/

http://www.broadcastingcable.com/news/currency/disney-ceo-bullish-espns-future/161076

http://www.broadcastingcable.com/news/currency/disney-earnings-suffer-espn-declines/161072

https://finance.yahoo.com/quote/dis?ltr=1

http://marketrealist.com/2016/03/disney-believes-espn-will-start-gaining-subscribers/

http://www.heritage.org/research/reports/2011/07/what-is-poverty

https://en.wikipedia.org/wiki/List_of_assets_owned_by_Disney#Walt_Disney_Parks_and_Resorts

https://www.bloomberg.com/news/articles/2015-11-27/espn-viewer-losses-add-to-angst-for-disney-s-big-profit-engine

Disney Quarterly Reports

https://thewaltdisneycompany.com/disneys-q3-fy16-earnings-results-webcast/

https://ditm-twdc-us.storage.googleapis.com/q1-fy16-earnings.pdf

https://ditm-twdc-us.storage.googleapis.com/q2_fy16_earnings.pdf

https://ditm-twdc-us.storage.googleapis.com/q3-fy16-earnings.pdf

https://ditm-twdc-us.storage.googleapis.com/q4-fy16-earnings.pdf

The Appeal of Spirit Airlines

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For some Americans, low airfare carriers such as Spirit Airlines is the difference between reuniting with loved ones for the holidays and sacrificing family to save a few bucks. The inevitable scramble for airline tickets is upon us, which forces us to evaluate our options. The appeal of Spirit Airlines is obvious: how can you say no to a cheap flight when life in America becomes increasingly unaffordable? However, the unfortunate reality is Spirit Airlines completely takes advantage of their promise to provide low airfare costs.

According to Andrew Schmertz from the Huffington Post, Spirit has some of the worst customer service reviews out there. Small, uncomfortable seating along with a barrage of baggage fees. Free carry on? No such thing. Any bag over 40lbs will cost you $30, up to $100 for larger bags. Free drinks or peanuts are nonexistent, and delays are commonplace. Nonetheless, the worst offense of all is the treatment of their workers. Back in 2015, there were reports of a multitude of delayed flights due to “bad weather” reports that did not even exist. The theory was that pilot and crew strikes were the real reason for the delays, but this was never confirmed. This is not surprising as the employee reviews are far from flattering. Low wages and poor management are common complaints, as Spirit has the worst customer service known to mankind.

Despite all this, Spirit Airlines still remains a go to low airfare carrier. At the end of the day, Schmertz believes “economy over convenience” is the driving force of Spirit’s success.

The real question is, are they making as much money as they could be? With all those extra charges, is their net income any better? According to Yahoo Finance, the share price is at a stable $53.11. Compared to other airlines like Southwest with a market cap of $29.5 billion, their market cap is quite small at $3.68 billion. Spirit’s quarterly report revealed their net income was $61.9 million in the first quarter of this year, $73.1 million in the second quarter, and $81.4 million by the third quarter. Overall, they seem to be doing pretty well. Their expenses are not as high as other airlines as they do not fly to as many locations. It seems that Spirit Airlines, which puts pressure on other airlines to lower airfares. However, this will lead to lower profits overall for airlines like Southwest or United as they spend more on their flights than Spirit does. Time will tell how long Spirit will remain a competitor in the airline industry, but for now, terrible customer service and endless fees are worth it to hard working Americans.

The Fate of the U.S Trade Embargo on Cuba

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Since 1960, our trade relationship with Cuba has been severely limited. The effort to isolate Cuba by preventing trade and travel has backfired and has not lead to the implementation of Democracy or improved human rights violations. The Cold War mentality that Cuba must be forced to change its communist ways has been unsuccessful. Therefore, if the embargo is not helping anyone, the U.S. should fully lift this trade blockade on a country that has more than paid the price.

In 2013, Cuba urged the U.S. to end the embargo during a U.N. General Assembly. According to Cuban Foreign Minister Bruno Rodriguez, the economic damages due to the embargo amounts to $1.126 trillion. This includes decreases in tourism, costs of exports into the U.S., and loss of exports from the U.S. Instead of punishing the corrupt regime which existed during the 1960’s, the people of Cuba as a whole suffered.

Since President Obama’s election in 2009, he has actively discussed the goal to have better relations with Cuba. In 2009, the Council on Foreign Relations reports that the Obama Administration reversed limitations on travel and telecommunications. However, it has taken the administration not one but two terms to finally make moves towards lifting the embargo entirely, mostly due to conflicts within Congress.

In October 2016, the strict limits on Cuban cigars and rum were lifted.  The previous $100 limit on alcohol and tobacco no longer stands, along with open collaboration to research and sell pharmaceutical products in the U.S. These are all great steps forward, but the U.S (aka congress) still remains hesitant to lift the embargo.

Another dramatic change this October was the U.S. abstaining from the U.N. vote to lift the Cuba embargo. After 50 years of strict sanctions, the U.S is slowly moving towards full engagement with Cuba. Hopefully, this could go into full effect by the end of 2016.

Although the embargo negatively affected Cuba the most, there is evidence of positive trade impacts we have missed out on if the reversing of the embargo occurs. According to a study by the George Washington University, “Economic and Strategic Impacts of U.S Sanctions in Cuba,” the estimated trade impacts in agricultural exports could be anywhere from $400 million to $1 billion annually. In medical exports, $20 million to $600 million annually. If all restrictions are lifted, we could earn $1.6 billion in aggregate exports and create up to 20,000 jobs. The U.S is number one in agriculture production, and yet we are no longer the main supplier of meat, dairy, and grains to Cuba. This means that not only have we isolated Cuba, we have isolated ourselves due to the embargo.

Overall, allowing more Cuban imports and open trade with Cuba could bring many benefits to our economy. We must proceed with caution, for the concerns regarding human right violation in Cuba is valid. However, we might as well not be the country that worsens their economic situation and fight to help them. If we feel the need to overly involve ourselves in every other country (the countries that don’t even want our help,) what is stopping us from moving forward with Cuba?

The Student Debt Crisis: How Your Degree is Causing Economic Unease

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The Problem

Pursuing a degree in higher education is often romanticized. Education is revered as the investment of a lifetime, and a staple of the American dream. However, the price tag associated with this dream has either left millions in anxiety-inducing debt or deterred people from pursuing a degree at all.

In 2016, The White House released a study that evaluated the benefits and challenges of student debt. According to the study, “the average full-time worker over age 25 with a bachelor’s degree earns nearly $1 million more than those with a high school diploma.” Therefore, those with more debt due to pursuing a master’s degree, M.D., or J.D. will have greater ability to pay off their debt over time. This should make us feel better; it is statistically proven we will not be in debt forever. Despite this, it might as well be forever as paying off student loans can take decades. Additionally, the benefits of a degree still do not justify the rise in student debt, as there are many issues within the Federal system of student loans.

According to the “Student Loan Servicing” report by the Consumer Financial Protection Bureau (CFPB), student loan debt is up to $1.2 trillion (a decade ago it was $300 billion,) spread among 40 million borrowers, with an average debt of $30,000 per borrower. The annual report “Trends in Student Aid” by the College Board, revealed a 48% increase in loan borrowing from 2000-01 and 2005-06 (in inflation-adjusted dollars.) This increased to 65% by 2010-11. Although loan borrowing decreased by 23% from 2011-12 to 2015-16 student debt has only continued to increase.

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Looking at those who received their degree from a public four-year, the average debt level went from $11,300 in 1999-00 to $15,900 in 2014-15, a 40% increase overall. For a private four-year, the average debt went from 15,000 in 1999-00 to 19,900 in 2015-16, a 32% increase overall. Those who did not complete college had even higher debt averages.

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To some, it is too soon to call the student loan debt issue a crisis. The White House study acknowledges there are changes to be made, but public concern should be low. Additionally, economists such as Joel Elvery from the Federal Reserve Bank of Cleveland agree with this. According to the CFPB, the average monthly payment for those in the 20 to 30-year-old range is $351. Despite statistics like this, Elvery believes that post-grad earnings and repayment options offset these charges.

So how did we get here? Why has this happened? I will do my best to answer these pressing questions. However, the most important question is why should you care? If everyone eventually pays back his or her student loans, how does this affect the economy?

The Economy

If you take a step back and look at the big picture student loan debt affects everything in one way or another. Consumer spending and the housing market are the main concerns. Barbara O’Neill, a specialist in financial resource management for Rutgers University, believes student loan debt has slowed down the economy. As student loan payments become a priority, major life decisions (aka the ones that cost you the most) such as purchasing a car, and buying a home are put off for longer spans of time. Living to witness the entire U.S. financial system collapse does not help one’s views on financial well-being. If people doubt their financial ability, it is only logical that frugality will be the result.

The Census Bureau revealed that the housing market has dramatically shifted from owner-occupied to renter-occupied, which is mostly thanks to millennial’s (the most recent college graduates.)

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When looking at homeownership trends, the Federal Reserve found that fewer 30-year-olds have bought homes since the recession. Millennial’s join the work-force, wages rise, but purchases of single-family homes were down 6.0% in May according to the Commerce Department. Although this rose in September by 3.2%, the combination of high housing demand and low supply (you can only build so many homes) has increased housing prices.

One of the largest investments Americans will make in their lifetime is the mortgage. Mortgages are an important part of our GDP, and if purchasing of mortgages continues to decrease, there are consequences. For example, those who are currently trying to sell their homes are forced to sell below value, or worse off, not sell at all. We can’t blame millennial’s and their student debt entirely for issues in the housing market. Nonetheless, there is no denying that millennials are the future of our economy, and their halt in spending will have long-term negative effects.

Another concern is the fact that not everyone pays back student loans. In 2015, The Federal Reserve Bank of New York performed an analysis on repayment. They found that only 37% of borrowers were actively making payments, and 17% were delinquent. From the pool of borrowers that were struggling, 70% were from lower income zip codes. However, 35% of people from higher income zip codes also struggled with repayment. Higher delinquency rates are associated with not finishing school, but default rates still exist for those who did complete school. The highest percent of people who default (35%) have loans for $5,000 or less. This just goes to show that everyone is struggling with student loan debt in some shape, way, or form. It’s not fair to blame the borrowers entirely when all they wanted was the opportunity to get an education. Allowing more access to student loans was a good idea overall, but it is time we face the reality that the government may have been too generous.

The Screwed Up System

The main problem with student loan debt is that as tuition prices rise, a number of loans distributed must rise too. It is a continuous, vicious cycle. Private universities who have strong financial aid programs claim the right to have high tuition prices to make up for the deficit of those covered by aid. The problem is no better in public universities. Back in the 1970’s, public four-year institutions were the cheapest alternative. Although they are still cheaper than private universities, it is unknown how long it can stay this way. According to the College Board’s “Trends in College Pricing” from 1986-87 to 1996-97 there was a 3.9% average annual increase in tuition; from 1996-97 to 2006-07 there was a 4.2% increase, and by 2016-17 a 3.5% increase. As you can see, this is a pretty steady increase per year. Today, tuition plus room and board at a public four-year costs around $20,000, when it was closer to $10,000 in 1996.

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One of the reasons for this is the decrease in state funding. According to the Center on Budget and Policy Priorities, the average state is spending 18% less per student post-recession. The worst part is that these tuition spikes only make up for the deficit due to less state funding. The opportunities for students are not as plentiful as they could be when faculty must be fired to make a tight budget work.

A more obvious reason for tuition increase is economics 101: supply and demand. As more people enroll in college, the demand goes up. Despite there being plenty of colleges for every American, the supply or availability of spots at high ranking universities decreases. Colleges love to see how much they can charge before demand goes down. So far, we have all given into this experiment and paid the price. Additionally, the promise of a wonderful education from an affordable state school creates even more demand, but at some point, there must be cut-offs.

Finally, the main concern is the system itself. According to U.S. Department of Education, undergraduate students are allowed to defer loans if they have half-time enrollment in school, graduate school, face economic hardship, or a period of unemployment. Deferment is available for up to three years in most cases. Although this is a way to help students, some students use it as a way to put off loan payment for long periods of time. The current interest rate for direct loans is 3.76%. However, if the average borrower has $30,000 in undergraduate loans, $40,000+ in graduate loans, and interest, this can lead to repayment issues. Perhaps not default in every case, but it only takes a few late payments to hurt your credit score. If your credit score drops, eligibility for other loans such as for cars and mortgages are negatively affected.

Thankfully, there are precautionary measures that exist. The Obama Student Loan Forgiveness program provides many solutions for loan repayment. This includes income-based payments and interest rate reductions. Better yet, loans can be forgiven after 20 years if enrolled in the corresponding payment plan Pay As You Earn. Even with options of Pay As You Earn, the people in lower income regions are the ones who are still struggling with repayment. All these preventative measures will likely help, but it will take years to see the results. If tuition continues to rise at a steady rate, the need for student loans will increase ten-fold, and only so many steps can be taken to aid students in repayment.

There is no perfect solution, but ideally, putting tighter restrictions on loan availability and deferment could lower student loan debt. In addition, many borrowers are not fully aware of the binding loan contracts they are signing. If our high schools prioritized loan counseling as a part of college advisement, students may feel less inclined to borrow or make the effort to attend a more affordable university. Student loan debt is something that will most likely haunt us for decades to come, but hopefully, a decrease in student loan debt over time will jumpstart the economy. The economy may be doing well now, but the reality is the student loan debt crisis is a bubble waiting to burst. If we can decrease student loan debt, then the spending habits of young adults will also change and therefore increase long-term economic stability.

 

The Student Debt Crisis: How Your Degree is Causing Economic Unease

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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?

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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.‘ ”

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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.”

 

 

 

 

 

 

 

 

 

 

How Your College Education is Paying for Touchdowns (or Lack Thereof)

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The college experience is priceless. How can you put a dollar sign on meeting the most diverse, interesting, and intelligent group of people you will ever encounter, and high-fiving complete strangers when your team has 2 touchdowns by the first quarter?

We all know we’re paying too much for college. We all complain and cry a little everyday as the interest bumps up our once “small” loan debt to numbers beyond our comprehension. We pay a large sum of money for an education that sometimes feels wasted on us due to procrastination and the occasional frat party. Some even skimp out on buying textbooks to save a few bucks.

Yet, do we ever blame football? Basketball? The attractive men’s volleyball team? Of course not.

According to the Huffington Post, our greatest unknown fears are put in writing : College football is stealing our education.  The student loan debt crisis is old news but here are the current statistics. There are 43.3 million Americans with student loan debt, he total U.S student loan debt being 1.26 trillion. About 70% of college students end up with $30,000 in student loan debt. All in all, the price of tuition continues to rise and therefore so does the debt.

The issue is not that education is expensive because of course we all know that going in. The issue is that the uptick in tuition may not be going to the things that lead to our success but the athletic department instead. According to the Huffington Post, schools with strong football teams correlate with increased tuition up to 55% or in some cases 65%. Pouring more money into football at many schools leads to faculty or degree programs being cut. Ironically, the claim that athletic departments bring so much to the school has not been proven. The opposite has, that “Over 80 percent of collegiate athletic departments actually lose $11 million dollars or more for their universities yearly.”

It is difficult to claim that USC as a whole has allowed academics to suffer due to football. Evidently, USC graduates do very well. However, is it really necessary to pay the equivalent of a mortgage every year? Especially when our team is realistically pretty mediocre…

Interestingly enough, the White House claims that “student loan debt is an investment in human capital that typically pays off through higher lifetime earnings and increase productivity.” They released an entire study “proving” student debt helps instead of harming the economy. The proof lies in the fact that students with the most debt have usually gone through graduate school which means higher income and opportunity in the future. However, what happens when you get zero financial aid assistance during undergrad? What do you do then?

Perhaps taking a closer look at the White House study would prove me wrong, but at the end of the day, even if high unemployment leads to higher enrollment rates at universities how is the average American expected to manage such large amounts of debt with such an unpredictable job market?

Sources:

https://studentloanhero.com/student-loan-debt-statistics/

http://www.huffingtonpost.com/robert-greenwald/college-football-is-steal_b_8282690.html

http://blogs.wsj.com/economics/2016/07/19/student-debt-helps-not-harms-the-u-s-economy-white-house-says/

The Curse of the New HQ

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And then he said…”we’re moving!”

In America, the taller the skyscraper, the more successful you are. As companies blossom, it is not unusual for CEO’s to announce moving on to bigger and better things. However, the fate of these companies is often destroyed by the terrifying curse that haunts those with lofty goals of a shiny new building.

Economic indicators are all around us. Unemployment, GDP, and CPI are the ones that grab our attention but because our economy is so massive, it is easy to miss the little signs here and there. So why would moving to new headquarters be problematic when business has never been better? In many of these cases, the company did not properly attempt to look into the future and consider what could go wrong. Nonetheless, for some of these companies, they never could have predicted bleeding money for years after the fact.

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Back in 2000, The New York Times doubted the strength of the internet. Although it was clear as day that the world would never be able to turn its back from the internet, what wasn’t clear was the fact that more accessible news lead to lower print sales. By 2007 they should have figured it out but alas, they still moved into shiny new building which led to an extremely uncomfortable financial situation. Let’s just say the accountants went gray real quick trying to crunch those numbers. The only solution was to sell the building and hope for the best.

MySpace? What’s that? Oh right that social media site that got destroyed by Facebook. Thanks Zuckerberg. In 2008, MySpace naively believed they would continue to dominate. Naturally an upgrade was necessary to house the increasing amount of employees. Of course, MySpace declined quickly after moving to new HQ, and today MySpace is owned by Time Inc. It technically still exists but as an entertainment site for music and videos rather than social media.

In these cases, perhaps the outcome of losing money could have been foreseen. However, one must remember the economy is its own animal. The ebb and flow of the market cannot be controlled as much as we like. In business, risk is unavoidable and therefore moving to new HQ isn’t the worst idea. The issue is timing. The curse will remain for all those eager CEO’s trying to jump ship because it is an enormous risk to take. Only the lucky few will go on unscathed, all we can do is watch preferably with popcorn and economic outlook sheets in hand.

http://www.businessinsider.com/poorly-timed-headquarters-2009-11?op=1/#space-3