Tags: Mohamed El-Erian | education | reform | student debt

El-Erian: Education Bubble Threatens Health of US Economy

El-Erian: Education Bubble Threatens Health of US Economy

By    |   Tuesday, 10 November 2015 09:00 AM

The U.S. higher education system can be added to the unstable bubbles that have threatened the economy in the past 15 years.

Mohamed El-Erian, chief economic adviser at Allianz and former CEO of Pimco, warns of the potentially devastating effects of a U.S. education system that leaves students ill-prepared for the work force and buried under mountains of debt.

“The return on investment in education is falling, because the economy is growing slowly and changing rapidly, making it difficult for some graduates to secure employment that takes advantage of their knowledge and skills,” he writes for Project Syndicate. “Universities are often slow to adapt their curricula to the economy’s needs, while new technologies and business models are exacerbating the winner-take-all phenomenon.”

Student debt has tripled in the past 10 years to more than $1.3 trillion, with more than half of it being held by households that half a net worth of less than $8,500. Still, a college education is necessary to improve the chances of getting a job – 2.5 percent of college graduates is unemployed, compared with 7.4 percent of people without a high-school diploma.

“What policymakers must determine is how to invest in education in ways that maximize these benefits, without creating new risks,” El-Erian writes. “U.S. politicians need to take full responsibility for economic governance, seeking not only to boost growth, but also to avert a reduction in long-term growth potential.”

He said the Federal Reserve’s easy money policies have allowed lawmakers to avoid fiscal reforms that would help the economy grow. He recommended tax reform, tighter tuition controls and incentives to save for education.

“None of these measures will be easy,” he says. “But if implementation continues to lag behind realities on the ground, the challenges will be far greater down the road.”
Student debt is holding back millennials from buying homes and spending on furnishing them. Households with student debt of $25,000 to $50,000 are less likely to own their own homes than people with smaller financial burdens, according Goldman Sachs Group Inc.

That amount of debt offsets any positive effect that a college degree has on household income for people 25 to 34 years old, according to research from the New York-based bank. For some potential home buyers, it's better to have no college education and no student-loan burden.

The homeownership rate among younger households with student debt of $25,000 to $50,000 was 12 percentage points fewer than the age group's average, according to Goldman.

The portion of households with that amount of debt has grown more than sevenfold in the past several decades.

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The U.S. higher education system can be added to the unstable bubbles that have threatened the economy in the past 15 years, says Mohamed El-Erian, chief economic adviser at Allianz and former CEO of Pimco.
Mohamed El-Erian, education, reform, student debt
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2015-00-10
Tuesday, 10 November 2015 09:00 AM
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