A leveraged buyout luminary is revolting against debt. Ironically Robert Smith, billionaire founder of tech buyout specialist Vista Equity Partners, generously has decided to wipe out the student loan balances for the Morehouse College, Class of 2019. Mr Smith made the announcement during his speech at the Morehouse graduation ceremony on Sunday. His gift is estimated at $40m for the class of 400.
Student debt balances have exploded for those graduating in the last two decades, threatening the long-term economic security of some younger Americans. As the political class has not found a solution, Mr Smith’s donation hints the private sector understands that a heavily indebted younger generation, with little left for personal consumption, is not good for Corporate America.
American aggregate student loan debt has grown at a compound rate of 12 per cent, since 2003, far faster than any other class of borrowing. That is also a far quicker growth rate than that of the US economy. College degree holders do enjoy a substantial wage premium to those without them. Still, college tuition costs have exploded, partly because of the demand fuelled by government-subsidised loans.
According to Federal Reserve research, millennial households in 2016 had a net worth of $90,000 compared to $130,000 for Generation Xers in 2001, in constant dollars. The relative poverty of millennials has naturally reduced their rates of marriage, fertility and home ownership compared to previous cohorts. For big business, the adverse effects of those trends are, for now, mitigated by a strong economy.
Eventually those debts will sting consumption even more. Private philanthropy can only go so far in alleviating a trillion dollar issue. Another possibility could be a student debt amnesty proposed by politicians such as Senator Elizabeth Warren. No matter what, all private equity types can appreciate the salutary effects of recapitalised balance sheets.
Is Robert Smith a kind man to help students with their debt? Or is he setting a bad example, when really this should be the work of government? Please tell us what you think in the comments section below.