Tag Archives: finance

What’s a Good Education Worth?

Fred Wilson has an interesting take on the student debt issue:

So we are big believers in the value of a higher education and we have invested in it for ourselves and our children.

I told the University President and the faculty members all that. But I also told them that I am deeply concerned that about the cost of a high quality education and the fact that it is getting out of reach for many. And I told them that I am not sure the return on the investment is as high as it once was for many degrees. And finally, I told them that too many students are walking out of college with a student loan burden that is crushing and that they can't and won't pay back. 

So how you reconcile these two opposing views and what can we do about it?…

But we also need to get more creative about the financing of higher education. We should measure the return on investment students are getting from the institutions they attend and the degrees they obtain and tie the amount of loans they can get to the returns they are likely to achieve. Students that attend institutions that can deliver higher returns should be able to take out larger loans.

Repayment terms need to change as well. Loan repayments should be capped at a percentage of current income. I know a woman who has been out of graduate school for more than a decade who dedicates one of her two paychecks a month to paying back her student loans. She is spending half of her take home income on her student loans. That is nuts.

Bubbles are driven by easy money that drives irrational behavior. Our student loan policies have been doing some of that. We can and should change our policies to force more rational decisions in the purchase of higher education in this country. 

There could be some pretty strong arguments made against tying the amount of a loan to the likely return of a degree. Someone who majors in English Lit with a concentration on 18th century poetry doesn't seem likely to have a high paying job, i.e. a high return, but you never know. There's also a compelling case for allowing kids to go on an intellectual exploration during their undergraduate years, and if you tie their loans to the return on any given degree you're likely to stifle that exploration.

But that's a nit-pick. Fred's core point, that we need to rethink how we structure and pay for higher education, is spot on. With two kids at NC State our family can tell you that the effects of reduced state funding are very real, and they are having a significant impact on students' abilities to fund their educations. Reduced state funding is leading inexorably to higher costs, which means more debt for students and an increasingly urgent need to figure out a way to turn the tide on student debt. 

This Ain’t Your Dad’s Wall Street

Mark Cuban does a great job explaining why Wall Street is no longer the economic engine it once was:

Over just the past 5 years, the market has changed. It is getting increasingly difficult to just invest in companies you believe in. Discussion in the market place is not about the performance of specific companies and their returns. Discussion is about macro issues that impact all stocks. And those macro issues impact automated trading decisions, which impact any and every stock that is part of any and every index or ETF.  Combine that with the leverage of derivatives tracking companies,  indexes and other packages or the leveraged ETFs, and individual stocks become pawns in a much bigger game than I feel increasingly less  comfortable playing. It is a game fraught with ever increasing risk.

So back to the original question. What business is Wall Street in ?

Its primary business is no longer creating capital for business. Creating capital for business has to be less than 1pct of the volume on Wall Street in any given period. (I would be curious if anyone out there knows what percentage of transactions actually return money to a company for any reason). It wouldn’t shock me that even in this environment that more money flows from companies to the market in the form of buybacks (which i think are always a mistake), than flows into companies in the form of equity.

He then offers up some ideas about how to return Wall Street to its original role:

My 2 cents is that it is important for this country to push Wall Street back to the business of creating capital for business.  Whether its through a use of taxes on trades(hit every trade on a stock held less than 1 hour with a 10c tax and all these problems go away), or changing the capital gains tax structure so that there is no capital gains tax on any shares of stock (private or public company) held for 1 year or more, and no tax on dividends paid to shareholders who have held stock in the company for more than 5 years.  However we need to do it, we need to get the smart money on Wall Street back to thinking about ways to use their capital to help start and grow companies. That is what will create jobs. That is where we will find the next big thing that will accelerate the world economy.  It won’t come from traders trying to hack the financial system for a few pennies per trade.

Less than Zero

Before I start let me please ask one thing: family and friends who know me well, please try to keep the snickering to a minimum as you read this.  Here goes.

One of the requirements of my day job is working with our finance committee to figure out how to manage the association's money.  Cash management is a given for any company, but like many non-profits we have emergency reserves that we have to manage and make sure they will indeed be there for a rainy day.  (The thought of me managing emergency reserves is what probably has my family and friends snickering since I'm the same guy who in college, and the ensuing years until marriage, managed his checking account via ATM. If there was money there I took it and if there wasn't I just shrugged, wondered where the hell it had all gone and resigned myself to eating peanut butter until the next payday arrived). The association's bylaws limit what we can do with the reserves so there's really not a lot of thinking to do.  We just have to find the best possible return in money market funds or CDs and we have to make sure they are structured so that they're fully insured. Here's the rub: CDs and money market funds currently have rates that range from zero (that's right, nada) to one or two percent.  Unless inflation stays that low then our money is effectively losing value as it sits in the bank.

All that's to say that if you have financial reserves with which you need to play it safe then you're going to have to accept break even as a good deal for the time being.  Along those lines Fred Wilson has a very pertinent and must-ready post here.