Economy impacts students

By: Omkar Baxi

Posted: 10/3/08

As the country's major financial institutions and businesses report record losses and deep financial trouble, college students and their families are starting to feel the economic crunch, according to Ed Nelling, associate professor of finance at Drexel University.

According to Nelling, recent and upcoming college graduates will be affected by the economic situation in three major areas: jobs, credit and investment.

Vibhas Madan, department head of economics and international business at Drexel, explained how the financial trouble of key firms and businesses on Wall Street has rippled throughout the markets to affect the average person on "Main Street."

"Basically, most of this economic downturn can be traced back to the bad housing market. High-risk, high-reward practices by many banks led to mortgages on an enormous number of houses, which the buyers could not reasonably own. These bad lending practices eventually caused various banks to be in deep financial trouble," Madan said.

However, the real problem rippled out of these bad bank assets when investors began to lose trust in key businesses, according to Madan.

"At this point, banks became more cautious about lending, creating a credit freeze that stopped businesses from working effectively," Madan said.

Madan gave an example of how a bank's unwillingness to lend can affect the average worker down the road: consider a business like a hotel or restaurant that makes most of its profit at the end of the year. They still have to pay their employees throughout the year, so they borrow from a bank and take care of their payroll, repaying the debt at the end. However, when the banks become more cautious, it becomes harder for the business to secure money for payroll and they are forced to layoff some of their employees.

Nelling also cited this behavior as a possible consequence for recent college graduates saying, "One of the major effects the market will have on students is the higher competition for a relatively lower amount of jobs. Now the market may stabilize in a year, or in the next five, but the job issue is likely to affect upperclassmen right now."

"A trend that we have seen in almost all economic downturns is that when the market goes down, students decide to pursue higher degrees. They perceive greater competition in the job market and think that attaining a higher degree will help them succeed in the job search, so graduate school admissions typically rise in an economic downturn," Madan said.

However, students pursuing higher education, both undergraduate and graduate, have a harder time securing loans in a bad market, according to Madan.

"Students, and anyone with a low credit history, will have a harder time borrowing money, whether it is for a college education or a first house," Nelling said. "Banks are simply not as willing to give out loans when the market is bad."

In an address to the Senate prior to the voting for the "bailout" bill, Democratic presidential nominee Barack Obama cited the credit freeze as a major reason why the government should intervene in the economy, since it directly affects the average citizen.

"If we do not act, it will be harder for Americans to get a mortgage for their home or the loans they need to buy a car or send their children to college," Obama said.

"There is a silver lining to this situation, though. Most people wait too long to start investing in the markets, but students need to realize that people no longer work in one company for 40 years. They need to make their own financial and investment decisions. And this downturn in the economy is a great time to start investing since they will enter the market when it is low and probably profit from it," Nelling said.

The window for investing at the current, cheap prices will close soon, according to Nelling, since the government is expected to intervene and stabilize the economy. The "bailout" plan recently shot down in the House of Representatives proposed that the government should acquire the bad assets that have caused the economic downturn, thereby injecting the markets with more confidence and motivating banks to start lending again.

While the plan has not passed in the House, the Senate passed the resolution with a vote of 74 to 25 late Wednesday night, according to CNN Money. The revised bill will now be sent to the House and a decision is expected Friday, according to Reuters.

"The [proposed legislation] - it should be called 'cleanup' not 'bailout', since that's what it is - will help the economy. It is definitely not perfect, but the major concerns brought up, such as oversight, should be discussed afterward. Politicians should agree that they will talk about those things, but they need to take action soon," Madan said.

While any legislation will not instantaneously fix the markets, Madan said it will have a positive effect in the short term by motivating banks to increase lending. For college students and recent graduates, this will likely translate to less difficulty in securing jobs and loans. According to Madan, the legislation is financially sound, and its failure in the House can be attributed to politics rather than economics.

"Politicians failed to convey to their constituents that this is not a bailout for Wall Street, but will in fact help 'Main Street' - and the risk of losing popularity stopped them from voting for the bill. Short term, short sighted political wrangling defeated beneficial legislation," Madan said.

In his statement to the Senate, Obama mentioned that this bill would not be a panacea for the financial troubles. While other services may have to take second priority, education would not, according to Obama.

"Barack Obama … will create a new American Opportunity Tax Credit to make the first $4,000 of college completely free each year for most students. This would cover tuition at nearly all community colleges and two-thirds the cost of tuition at the average public college or university. Only Barack Obama will make college affordability a priority as president, whereas John McCain's proposed spending freeze would eliminate any chance for a drop in costs," Zach Friend, an Obama spokesman, said.

The McCain campaign was not available for comment at the time of publishing.