Op-Ed: Crowdfunding, bubbles, donuts and Millennials

A quick question: What’s the connection between bubbles, donuts, Millennials living at home with their parents and a new crowdfunding model recently approved by the Securities Exchange Commission?

You’re probably stumped. The first part of the answer lies in an alarming trend affecting an entire generation of Americans that has far-reaching economic implications in this country and even the world. The second part is how a rather obscure federal regulation that was recently passed that’s related to crowdfunding can become a harbinger of new opportunity for recent college graduates and become a big boost to the American economy along the way.

The first connection is the college bubble. We’ll define it roughly as college students getting hosed by institutions of higher learning that keep jacking tuition rates and failing to teach our kids much that is actually relevant.

This comes at a time good jobs are hard to find for new graduates and the income of all Americans is stagnant. It’s not a formula that’s going to breed a successful younger generation of American workers.

The data speaks for itself: Tuition rates, adjusted for inflation, have jumped 129 percent in the past three decades while the real median family income has risen about 8 percent, according to the Institute of Education Sciences.

The Shackles of Student Debt

In conjunction with this, student loan debt has climbed rapidly over the last two decades. Writing in a Federal Reserve Bank paper published earlier this year, authors Felicia Ionescu and Marius Ionescu write that student debt reached $1.3 trillion in 2014. Yes, trillion. Or about the annual gross domestic product of South Korea.

Five years ago, total student loan debt surpassed total credit card debt for the first time. With 70 percent of individuals who enroll in college taking out student loans, the recent college graduates are the most indebted in history, lugging around an average debt load of $27,300.

So let’s break this down: Young Americans are financing something they obviously can’t afford on the hope — prayer? — they’ll hit the jackpot with a decent job when they graduate to pay the bill coming due. Yet many of them can’t pay off these loans because they can’t get good jobs. So they’re stuck. People say you should invest in education…but does it count as an investment if the return is ZERO?

The New Donut Shape of Cities

Which leads to a conversation about donuts. No, we’re not talking Krispy Kreme or Dunkin’. These donuts describe what’s happening in cities across America such as Charlotte, N.C., Houston, Tex., Denver, Colo., and elsewhere.

The Weldon Cooper Center for Public Service at the University of Virginia published a fascinating study earlier this year titled, “The Changing Shape of American Cities.” Author Luke Juday writes that many American cities have historically had a “donut” model in which a ring of thriving suburbs occupied by wealthy, educated residents lived in a safe setting and surrounded a city center populated by a poor, minority population living in crime-ridden neighborhoods that were increasingly being abandoned.

Today, however, is arising the “new donut” featuring a resurgence of historic downtowns and urban neighborhoods that’s often driven by an influx of educated Millennials. Beyond this thriving inner core, Juday writes, are neighborhoods that were once the domain of middle-class professionals and their families that now attract lower-income residents.

Beyond this ring is an expanding countryside attracting the middle-class population that once populated the inner ring. Even in the face of longer commute times that are much less attractive to younger workers, wealthy residents are seeking rural seclusion while still holding onto urban paychecks.

Here’s key data from Juday’s study:

—Millennials who are significantly more educated and have higher incomes have increased in the center of cities across the country, while at the same time the Baby Boomer generation forms a smaller proportion of the inner-city population than they did in 1990;

—In most cities, a decrease in income and education levels from 1990 to 2012 is evident several miles outside the inner core, while households below the federal poverty line are migrating outwards from city centers;

—Most growth in housing units and population continues to come at the outer edges of cities, a population that is more educated and has higher incomes, but is less likely to be younger adults.

What do we read into this trend? The good jobs to be had are often in the cities.

So the Millennials carrying around their student debt are heading to these cities where they can find a decent-paying job and still enjoy the amenities they hold dear, such as cultural attractions, brew pubs, nightlife and close proximity to work. They are getting married later and not much interested in owning a home…so apartment renting and city living is just fine.

Those that can’t get jobs and aren’t heading to the cities are in a tough spot. Good jobs aren’t readily available in Smalltown, USA. Or even Mediumtown, USA. But they’re still shackled by this student debt. Which, by the way, is the ONLY debt (other than what is owed to the IRS) that cannot be discharged in bankruptcy no matter how dire your situation.

Millennials Are Homebodies

Which brings us to another alarming trend that’s also afoot: Hello Mom and Dad…we’re back!

As outlined in a paper for the Federal Reserve Bank of New York titled, “Debt, Jobs, or Housing: What’s Keeping Millennials at Home?” Millennials are living at home, still. Even after they get out of college with their degrees. The paper outlines how young Americans’ residence choices have changed markedly over the past 15 years.

Millennials are entering the housing market at lower rates and lingering much longer in their parents’ households. The ownership of homes among those 30 or younger is steadily deteriorating. Other data suggests Millennials are retreating rather alarmingly from the housing and auto ownership markets, meaning the economy isn’t getting a boost from newcomers to those markets.

Why are cars and homes out of reach for Millennials? Not to sound like a broken record, but once again a couple of factors are at play, according to the paper: The aforementioned student debt and a lack of jobs due to the recent recession.

The Game-Changer

It’s a pretty bleak picture we’re painting, right? But wait, we at Allegiancy have what we think is a game-changer to all this dreariness and we fully intend to capitalize on it.

Tucked into Title IV of the 2012 JOBS Act is a rather obscure regulation related to crowdfunding. It’s known as the new Reg A and it allows small businesses to raise up to $50 million through public stock offerings. The new regulation bumps the amount businesses can raise from $5 million to $50 million and allows regular folks to participate in these investments for the first time.

So what does this have to do with bubbles, donuts and Millennials living at home? It means that later this year, when we at Allegiancy are offering $30 million in preferred equity securities under these new regulations, we can grow our business.

We can hire those recent college graduates and give them a good job right here in Richmond, Va. They won’t have to go to the big city for a good job. Not only will they be able to finance their student debt, but as we grow and take on new commercial property assets to manage, their income increases and home ownership is attainable. So long Mom and Dad! Oh…and by the way, we are hiring young people with alternative degrees and no student loans…and even some (GASP!) of our staffers have no degree at all. Education is what happens between your ears; it doesn’t have to be in some formal classroom.

And although we may be the first to make use of the new Reg A crowdfunding rules, we won’t be alone. There are about 27 million private companies in the U.S. who will now be able to access capital markets much more easily. Imagine what a boon to the American economy this new crowdfunding model can be. If these companies grow by 20 percent, that will create as much new value as the ENTIRE S&P 500…and then some!

Where We Go From Here

The potential to tap into this new crowdfunding model is open to any business owner savvy enough to run with it. The financing is now within reach for the plumbing shop owner in Peoria who wants to expand and take on new employees and equipment. The successful restaurant entrepreneur in Wichita who wants to become a small chain now has the opportunity to obtain financing. The trucking firm in Amarillo that wants to add to its fleet can buy more trucks and hire drivers, mechanics and managers.

It’s the story of how a new crowdfunding model is the answer to bubbles, donuts and Millennials living at home…stay tuned!