The Real College Scandal

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Includes: BMY
by: SA For FAs
Summary

Neuberger Berman: U.S. student debt will restrain home ownership, consumption and economic growth for an entire generation.

Jeff Miller: Have you thought about who it is you’re listening to?

Thought For The Day: Parents who want to protect their children’s financial interests should not let them take on a debilitating level of debt.

Know Thy Commentator

“Most financial commentary comes without any assurance about the presenter or the quality of the research. I love the CNBC box that shows “Street Cred.” It usually means that the speaker is one of thousands of employees at a big firm.” (Jeff Miller)

Bristol-Myers Squibb I

“During the quarter, we…eliminated positions in…Bristol-Myers Squibb (NYSE:BMY). We generally sell stocks when they appreciate toward our estimate of intrinsic value or when new information proves our investment thesis to be incorrect…Bristol-Myers was sold after the company announced an acquisition that we believe was sub-optimal, signaling a reduction in the value of their core business.” (Oakmark Fund, First Quarter 2019)

Bristol-Myers Squibb II

“The assets being acquired via Celgene should add shareholder value over the long term, if not in the short term. The 11% premium to Celgene's current market cap isn't the highest premium paid for an acquisition, but it isn't a steal either. BMY's current yield is enticing enough to merit nibbling on some shares. This isn't back-up-the-truck territory, but in my estimation, at the present stock price, BMY is set to at least modestly outperform in the years ahead.” (Cashflow Capitalist)

College Debt

“The average student leaves school carrying $30,000 of debt. That means that total debt levels among the Millennial generation are roughly on par with those of Generation X and the Baby Boomers. But whereas these older groups have built up mortgage debt, the young are burdened almost entirely with student debt. Unsurprisingly, home ownership rates among Millennials are 10 percentage points behind where they were for Gen X 20 years ago. It is no stretch to say that unless things change, U.S. student debt will restrain home ownership, consumption and economic growth for an entire generation. It's also no stretch to expect this debt burden to influence views on economic opportunity and fairness: A recent Wall Street Journal poll showed Millennials to be the only generation in the U.S. that does not have a negative view of socialism.” (Neuberger Berman)

Thought For The Day

The college admissions scandal, wherein parents paid consultants millions of dollars to bribe college officials to admit their children to elite universities, is truly a sign of the times. It signals that higher education is a money center, where people go to make their fortunes. When you have $120 billion a year slushing around federal grants and loans to universities and their students each year, you have an attractive destination for the financially ambitious, astronomical higher-ed fees and, of course, $1.5 trillion of student loan debt. (When I went to college over 30 years ago, I was unware of the existence of private college consultants; today of course it’s a large and lucrative industry.)

More obviously, the scandal is a sign of “helicopter parenting,” the misguided effort to protect one’s children from any sort of setback. The problem with this approach is that, though intended to protect, it actually destroys children’s ability to face failure and learn coping skills. I’ll spare you the parenting sermon and get straight to the financial takeaway. A very large cohort of parents are, ironically, not sufficiently protective of their charges’ financial futures, as Neuberger Bergman’s Chief Investment Officer – Fixed Income, Brad Tank, makes clear in the above-quoted article. A market-watcher accustomed to monitoring financial bubbles, Tank had this to say:

In my estimation, the most significant bubble in evidence today is in higher education in the U.S.”

In the same spirit in which the old public service announcement used to say, “friends don't let friends drink and drive,” parents who want to protect their children’s financial interests should not let them take on a debilitating level of debt, such that homeownership and other life goals will be difficult to reach.

Higher education is a worthy pursuit, but the ends must justify the means, which is to exclude not just bribery, but also making payments ruinous to the household balance sheet. Tank rightly praises the City of Chicago’s “Star Scholarship” program, which guarantees public high school students with a B average free tuition in the community college system, followed by discounted tuition with four-year university partners. There are numerous other options, including online programs, for anyone willing to look. Perhaps the key is overlooking the pride, glory and prestige that the wealthy bribers had to have for their helicoptered children. For the majority who live in a world of financial trade-offs: Don’t let your kids’ balance sheets take on a crippling level of debt.

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