Student Debt: It's Worse Than We Think
We’ve all heard the headlines: Americans have amassed huge piles of student debt. It’s relatively old news.
A recent article by Kevin Carey published in the New York Times (“What About Tackling the Causes of Student Debt?”) digs into the data to demonstrate just how bad it really is.
Mr. Carey, who directs the education policy program at New America, excavates the statistics to demonstrate these main points.
- Students—without assets or income—are limited in how much they can borrow for college. This limit is currently $31,000.
- Statistics obscure the fact that families may borrow much more than this limit, because parents can take out both federally backed and private loans to pay for college.
- Federally-backed Parent PLUS loans have grown considerably: in 2013, they accounted for only 14% of student loans, but in 2020 made up 25% of student loan volume.
- There is no cap on the amount of Parent PLUS loans a family can borrow, and these loans are relatively easy for parents to get, even if they have no credit history at all.
- Parents can also borrow private money from banks to pay for college; however, these amounts do not show up in national student loan statistics.
The result is that American families are deeply in debt to pay for college in ways that government statistics fail to capture. And as the price of higher education continues to increase—with no end in sight—we can anticipate that the national student loan burden will continue to grow for the foreseeable future.
How I See Student Debt From Where I Sit
As a private consultant working with all sorts of families, I see quite a lot of warped financial thinking as parents think about how to pay for college. Even families who lead very sound, frugal financial lives lose their reasoning when it comes to amassing debt to pay for college.
Interestingly, many folks who call to investigate our services find us too expensive. They balk at the price of our services, but blink not an eye as they tell me they plan to take out $50,000 or $75,000 or over $100,000 in loans to pay for college (or liquidate assets, take out home equity loans, or “whatever it takes” to get their kids through college).
This is what we do: help families save money by identifying high quality educational options that won’t break the bank or drive young people into debt.
And yet student debt seems to be the American way, and only a few political outliers (?) like Bernie Sanders and AOC seem to think it’s much of a problem.
I’m not going to get into the politics of student debt in this post. Rather, what follows is a set of observations and recommendations to families as they embark on the search for the right college, and as they consider how to pay for it.
Stop Talking About "Dream" Colleges
Somehow, a university education became the stuff of dreams. The image of college has become more about carefree playground for young people to mature, and less about the learning and development of skills that one may later to earn a living and contribute to society as a whole. College has become an indulgence, a luxury, an amenity-filled dreamscape. The reality that the purpose of college is to increase knowledge and gain skills, and that this goal can be accomplished at most any college or university. Education doesn’t happen in dreams (ask any high school student these days). It is a lot of work on the part of the student. Or at least it should be.
While traditionally learning has taken place communally in shared spaces, the advent of the Internet–plus our collective experience during the Covid-19 pandemic—together have illustrated that learning can happen without grand, old buildings, or manicured landscaping, or suite-style residence halls. Learning is about having a good teacher, a basic set of academic resources, and a lot of individual study. College is not a dream. It may be attached to ambitions and hopes for the future. But college itself is not a dream.
Stop Thinking College is "Priceless"
We’ve all seen the Visa commercial, ad nauseam. That commercial is all about the convincing consumers that debt is good—and without cost. That’s baloney. College has a very clear financial cost. Just as our “dream houses” and “dream cars” and “dream vacations” have price tags, so does college. And if we blow our wads on these dreams, we severely limit our ability to chase other important dreams (not to mention the essentials of life, like food, shelter, and an occasional night out on the town). Therefore, a clear-eyed look at these costs is critical. There is no free lunch, as they say, and the amount you spend (or borrow) for college will have ramifications in other areas of your financial life. It will do you—or your child—no good to ignore those ramifications.
Just Because You Can Borrow Doesn't Mean You Should
Especially since the financial crisis of 2008, mortgage lenders have become more cautious about extending loans to would-be borrowers. Not so with student loans. Both direct loans to students and Parent PLUS loans are federally backed, so lenders are happy to hand them out to pretty much whomever wants them. If the borrower defaults, the bank knows that the Feds will pick up the tab. So why worry whether the borrower has a credit history or assets or sufficient income to pay them off?
Furthermore, student debt cannot be legally discharged in bankruptcy, so again why should lenders worry? They’ll eventually get their money, even if they have to garnish wages in order to get paid. Since lenders are not careful about their lending, you—the consumer—definitely should be. You need to understand the terms of these loans, and you need to calculate the future student debt payments in a way that is not overly optimistic. Lose the rose-colored glasses.
College Is an Opportunity, But Not an Infinite One
An education gives us more opportunities in life. But paying more for college does not necessarily lead to more opportunities. We tend to assume that attending a better—and generally more expensive—college will necessarily lead to expanded opportunities. But opportunities mean nothing unless the recent graduate can actually take advantage of them. When the month begins with a hefty loan payment, it becomes an economic drag on the student’s ability to capture those opportunities. College may be carefree and amenity-filled, but once out of college, loan repayments can become a burden that can last well into middle-age. And with the levels of borrowing skyrocketing, those student debt burdens will continue to accrue both to the individuals who hold the debt, but also to the society as a whole, because indebted people may not be able to contribute to their full potential.
Not All Kids Are "Above Average"
Especially as parents, we all look at statistics with those rose-colored glasses. We see those means and medians and we consistently—if erroneously—place ourselves as always magically above those averages. As loving, proud parents, when we read that the average salary of a given profession is $50,000 upon graduation, we naturally assume our progeny will make much more than that—because our kids will certainly beat the averages. Then we base our decisions upon these rosy predictions. But we do not live in the fictional town of Lake Woebegone, where all the kids are above average. We never imagine that our child may actually fall below the average, and that it is quite possible that we will make the wrong bet by placing all that borrowed cash on the roulette wheel of life. And that is just what it is: a bet. Sometimes you win. But the law of averages means that at least half the betters lose.
Good Students Finish First
Colleges compete with one another for good students. And this competition is financial. They give the best financial deals to the best students. Thus, the best way to reduce the cost of higher education is for the student to get better grades, higher test scores, and pursue excellence in every area of their lives. Students who are less attractive to the colleges will end up paying more. And if the cost of attendance is higher than what the family can afford using current income and assets, the family will end up borrowing for the privilege of their child being able to rub shoulders with those great students who are paying less for the same education. Furthermore, once out of college, employers will also value good students over average ones. Those who win awards, perform research, lead student organizations, and otherwise excel are the ones that will rise to the top of the hiring pile. You don’t get ahead by piling up debt; you get ahead in life by making sound decisions, pursuing excellence, and delivering on your promises.
Colleges Care About Financial Health: THEIRS, Not Yours
Universities, for better or worse, behave like businesses. Like any large enterprises, they have expenses: payroll, utilities, payroll, fertilizer for the lawns, payroll, lab supplies, and more payroll. They need your money to pay the people who serve your student, and to pay for the cushy amenities your child deserves. They have budgets to maintain and financial targets to hit. They don’t much care about where the money comes from. It can come from your 529 college savings account, your retirement funds, your monthly paycheck, the equity in your home, or those easy-to-get student loans. What happens to you and your family after graduation is not their worry, nor their responsibility. For now, they’ll use your borrowings to pay their current expenses
College Is Not an Investment. It's a Service.
An investment is something you can buy now and sell later—preferably for a higher price than what you paid for it. An ounce of gold bullion. A share of stock. A home. Pork bellies. Of course, an investment could go up or down. But the concept is that you can own it now and then sell it later. A college education is more like a massage. Or a vacation. Or a Broadway show. It is something that you experience for a fixed period of time, and then it’s over. Presumably you know more and can do more than when you began the experience. And you do get a little piece of paper (suitable for framing) that attests to the fact that you performed all the required tasks to complete the experience. But try to go and sell that little piece of paper, and no one will buy. The college experience is neither a commodity nor an investment. Of course, we can theorize that the things you learned and the skills you developed during this experience will make you a more attractive laborer in the labor market. And conceptually, it is an “investment” in yourself for the future. But what makes you more attractive in the labor market is neither the amount of money you spent nor the name of the institution that imparted that knowledge and cultivated those skills in you. Future employers will pay you for what you can do in the present and the future—not for what you have experienced in the past.
Discuss Student Debt and Costs as a Family
I know several young people who graduated from college with bright, shining visions of their future—only to be handed a pile of student loan notes upon graduation. It turns out that the parents of these starry-eyed young people took out tens of thousands (and in one case, well over $100,000) in student loans to finance a college education. These parents did this in the belief that they were offering their child opportunity. They never asked their child if they’d like to finance their future (mortgage their future?) with debt that they would be paying off well after they have their own kids. They never explained interest rates or payment plans, or discussed the impact of debt upon graduation. Therefore, these piles of debt amount to an anvil around the necks of these young people. Instead of an opportunity, debt can become a burden that closes off that opportunity. Before they can pay their rent, buy a car, or buy ramen noodles—much less pay for their Netflix and Spotify accounts or save for a summer vacation—student debtors must make payments on these student loans. They must pursue jobs that are lucrative enough to enable them to pay off these loans—even if they are jobs that they detest or are otherwise poorly suited for. This is why young people today are clamoring for loan forgiveness. They are angry at the way in which debt has limited their options. Parents do their kids no favors by not discussing the impact of debt. Some debt can be good. Too much can be ruinous. So, talk about it. Now.
Professional Advising to Save Money and Stay Out of Debt
One of the most important aspects of what we do is to help families stay their financial course as they navigate the college selection process. Emotions can run high, and when that happens, we can all become financially silly. We help parents make sound educational decisions that will maximize opportunity while minimizing student debt. We help them lead with their head, even we acknowledge that the college process is often more an affair of the heart.
Thus many families find it financially smart to hire us as consultants. Their investment in our professional expertise can help them save tens of thousands of dollars, and sometimes hundreds of thousands–all without sacrificing educational quality. We employ no gimmicks or crazy “promises to negotiate.” We just give you sound advice so that you can make the best educational and financial decisions for your family.
How does it work? Well, it’s best explained by telling you about a family that came to me several years back. After having a great conversation with the student about her preferences and priorities, the parents got on the line and explained that they had a very clear and strict budget, and that their aim was to come in at or below that budget. It was a reasonable budget–a bit higher what what four years at the flagship university in their home state would cost.
Let's Go Shopping!
My first task was to teach the young woman how to understand tuition pricing, and how to estimate what her costs would be at any college that might tickle her fancy. Once she learned how to do it, she became a pro at separating out those colleges that would offer her significant merit scholarships, and which would not.
This empowered her. And much of the emotion of the process was eliminated. She just started with an understanding of what her price would be, and she summarily removed from consideration any schools that would not offer a price within the budget.
In the end, she ended up at a school that she had initially disregarded (it seemed too close to home). But after looking at the school closely, she was able to see the enormous value of the school. It soon became her first choice.
Not only was she accepted, but she also gained entry into the college’s prestigious leadership program. She graduated four years later with an honors degree, a ton of leadership experience, and zero debt.
Thus for the price of our fee, the family was able to win from every perspective. And since she graduated, this young woman has been able to pursue exciting job opportunities in South America, Europe, and now the US. Unburdened by debt, she was free to follow whatever opportunity came along–without fear of financial ruin.
You, too, can achieve this win-win-win outcome. Just give us a call.