Starbucks' Student Debt Fillip: Too Little, Too Late?

Zacks

As part of its continued thrust for ‘Corporate Social Responsibility’ activities, premier coffee roaster Starbucks Corporation (SBUX) has recently announced a first-of-its-kind full tuition reimbursement plan for its employees. Starbucks employees will be sponsored an online bachelor’s degree program through the Arizona State University.

Titled ‘Starbucks College Achievement Plan’, the unique program offers U.S. employees, or ‘partners’ as the company defined, an opportunity to choose from over 40 undergraduate degree programs in the university. Benefits–eligible partners, who work an average of 20 hours per week at any company-operated store, will be eligible for full tuition reimbursement for each semester. They do not need to make any commitment to remain at the company post graduation.

The innovative “free college” program by Starbucks highlights the willingness and urgency in the corporate world to address the deepening student loan debt crisis that has skyrocketed to over $1.2 trillion. The ‘Adopt-a-Student-Loan’ could offer a viable opportunity to corporate firms to tackle the federal student loans and loan guarantees, as well as the private student loans that aren’t federally guaranteed. However, the obvious question that creeps up now is whether such efforts are too little and too late to counter the colossal debt. Let us look into this trillion-dollar problem.

Student Debt Crisis: How Severe Is It?

Student loan debt is the second highest form of U.S. consumer debt behind mortgages and has been the biggest driver of consumer borrowing since the recession ended in Jun 2009. According to a Fed report, the number of borrowers between 2004 and 2012 increased by 70% from 23 million to 39 million. During this period, average debt per borrower also amplified by 70% from about $15,000 to $25,000. Currently, the average college graduate owes approximately $30,000 in student loans, with the tally increasing to $40,000 for every 1 out of 10 graduates.

The burgeoning student debt was also attributable to higher enrollments and higher college costs over the period of time. According to a report by nonprofit public policy organization Brookings Institution, during 2002 to 2012, inflation-adjusted (2012 dollars) college costs (defined as the sum of room, board and tuition costs after subtracting federal, state, private aid, and discounts by the institution) surged 41% within public four-year institutions and 9% for private four-year institutions.

In addition to higher demand, the easy availability of loans from diverse companies such as Nelnet, Inc. (NNI) and SLM Corporation (SLM) further served as an enticement for students to take the plunge as the federal government emerged as the prime lender with lesser credit requirements and reduced monthly repayment facilities. (Read: Student Debt: The Next Frankenstein?)

No wonder then that as recession led to job cuts and fewer new employment opportunities, default rates moved north and increased to as high as 11% this year – higher than the rate for auto, home, personal loans.

Government Intervention

In order to alleviate the burden of student loan debt, the U.S. President Barack Obama passed an executive order, wherein borrowers will be required to repay no more than 10% of the discretionary monthly income. The plan, expected to be in place by Dec 2015, will benefit an additional 5 million borrowers. Any unpaid debt will also be forgiven after 20 years. At the same time, the President urged government officials to renegotiate contracts with federal student loan servicers to avoid more defaults.

However, experts argue that the number of students who will actually benefit from this program is like a drop of water in the bucket. Federal data reveal that only 1.8 million out of an estimated 40 million borrowers nationwide have enrolled for similar programs that offer cheaper student loan repayments. Instead of being broad-based, these programs are criticized of being a “safety net” that aims to convince borrowers to avoid defaulting on their loans. It is under such circumstances that corporate reimbursement programs like that offered by Starbucks gain the centre stage.

The Critics

However, despite offering a life-line to employees who fail to complete their degrees due to mounting debt, a tenuous work-life balance and a lack of support, Starbucks’ program has been widely condemned as a publicity stunt without any fruitful contribution to the societal cause. Experts opine that in-person classes are extremely critical for low-income workers to succeed in education. They believe that Starbucks’ online education clause will deny these employees to gain an in-depth knowledge.

Arizona State University is also reportedly seeking to rake in $200 million profit from its online arm by 2020. In order to achieve this target, the university will have to enroll more students than it does currently, thereby focusing more on quantity rather than quality of students. This is further expected to erode the quality standards of their education. In addition, the tuition fees for the Arizona State University online courses, which vary from $482 to $543 per credit, are found to be higher than the community college programs for having a corporate tie-up.

Moving Forward

Regardless of the negative publicity, Starbucks’ corporate sponsorship for student education is likely to win laurels from the broader society. It is high time that other firms should also come forward with a customized ‘Adopt-a-Student-Loan’ strategy to have any headway to the student debt crisis. Several firms like General Electric Company (GE) and The Coca-Cola Company (KO) already contribute in their own way to fund the education of their employees.

If these corporate biggies can now devise an ‘Adopt-a-Student Loan’ program of their own, it might further yield in more focused employees, thereby improving job performance and productivity. The extra cash in employees’ pockets from such sponsorship and reimbursement programs could also benefit the economy in the form of increased consumer spending. The win-win deal, therefore, is worth a try for the overall improvement of the economy.

Read the Full Research Report on SBUX
Read the Full Research Report on SLM
Read the Full Research Report on NNI
Read the Full Research Report on KO
Read the Full Research Report on GE


Zacks Investment Research

View Comments (0)