Receding equity markets. Falling housing values. Sub-prime credit crunch.
For students not following economic trends, recent national headlines, such as those, would appear irrelevant to their lives. On the contrary, these national financial issues affect more than meets the eye, including the job search, student loans, financial aid and several other aspects of life.
While recession, in technical terms, means six months of negative growth of the gross domestic product [GDP], economic slowdowns need not meet that definition to be of serious concern.
According to economics professor Edward Deak, GDP growth under 2 percent does not meet the ongoing needs of the labor market. With fourth quarter 2007 numbers around 0.6 percent, according to Deak, the economy will be contained in its ability to net new job growth through 2009, which could mean fewer entry-level positions for graduates.
At the same time, due in large part to sub-prime credit issues, lending is in a bind nationwide.
Creditors have less confidence in lending, and as a result charge a higher premium over the rates set by the Federal Reserve [Fed]. Even though in the last nine months the Fed has repeatedly cut rates, down from 5.25 percent to 3.5 percent, most lenders have kept their rates the same.
While these rate cuts have kept national borrowing rates under control, finance professor John McDermott explained, they can also lead to inflation.
Inflation during times of slow to no economic growth is referred to as “stagflation,” and could lead to increased costs of living without any increases in salaries.
“My main concern would be the impact on my salary as I try to juggle housing and commuting costs once I’m working,” said Aaron Rude ’08.
While most salaries do have a built-in cost-of-living increase to compensate for inflation, McDermott said that increase is usually lagged by about a year, leading to a period of decreased purchasing power.
Lower confidence in lending could also create difficulty in taking out student loans. Deak explained that student loan companies may have difficulty raising the funds to loan to students in such a low-confidence market.
Another concern for students affording college is the real estate market. As housing prices continue to drop, Americans on average have more debt than equity in their homes for the first time since the 1940s, according to the Fed. This means that the homeowner owes more of the value of his or her home to the bank.
Many families finance their children’s college careers through home equity loans, borrowing against the remaining equity in their home.
As that equity number continues to shrink, a family’s ability to afford the expensive private education of an institution such as Fairfield can become impaired.
“Fairfield will continue to remain deeply committed to helping our students with need despite the current economic conditions and trends,” said Erin Chiaro, director of financial aid.
“However, to be safe,” she said, “it is recommended that students interested in borrowing a student loan for the 2008-09 year should secure their student loans as early as possible.”
In order to limit other exposure to an economy in a slowdown, grads-to-be can take some precautionary steps.
“Don’t be too picky with jobs, as opportunities may be scarce,” said Deak.
Deak also emphasized the importance of gaining work experience and networking with a wide range of contacts, while being conservative with debt, such as that incurred by credit cards.
McDermott noted that even in a slow economy, it remains important to invest aggressively into a 401(k) plan at a young age, especially up to the point an employer matches input.
“Most importantly,” McDermott said, “always work to improve your skills and marketability in the workforce.
“This way, regardless of economic condition, you will always be sought after.”
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