Or, “No, Virginia, there is no Santa Claus.”
In 1897, an editorial in the New York Sun responded to an 8 year-old girl named Virginia that there was, in fact, a Santa Claus. And now Santa has appeared in the form of a slim man in aviator sunglasses who resides not at the North Pole, but in the White House.
In 2022, President Biden just announced the cancelation of $10,000 in student loan debt for Americans making less than $125,000 per year. He also intends to cancel another $10,000 in debt for recipients of Pell Grants, thereby helping those who have come from the lower rungs of the economic ladder.
Ho, ho, ho!
The Supreme Court struck down this plan, and Biden responded with a new and different plan. It seems that there will be some back-and-forth here, and probably–at some point–Congress will have to weigh in on this idea of loan forgiveness.
I am not going to comment on the wisdom of this policy here. It’s clear that lawyers and banks and Congress and the courts and others are going to file lawsuits challenging, amending, and revising the policy.
So, I’m not going to discuss the policy. Rather, I’m going to talk about this belief. This fervent belief that families across the country share. That somehow, magically, the cost of college will somehow be affordable, even if we do not save, do not economize, do not make a plan, and ignore the burden of debt. If we just wish it hard enough, we believe, Santa will come through.
He won’t. College is ungodly expensive. And you need to make a plan.
Forget student loan forgiveness: college is expensive
Many things bother me about the cost of college these days. And there are many reasons why college costs have skyrocketed. A report by Yale faculty points to the possibility that university administrators have proliferated, while faculty salaries and budgets have stagnated. Some, including me, have pointed to the arms race in amenities (e.g., climbing walls, luxurious residence halls, lazy rivers, “free” massages, puppy therapy). And there is no denying that systemic racism is part of the explanation, as eloquently described and painstakingly documented by Adam Harris in his book, The State Must Provide: Why America’s Colleges Have Always Been Unequal—and How to Set Them Right.
Regardless of the reasons for the high cost of higher education, the fact is that many, if not most, American parents are in denial about how they will pay these extraordinary costs.
A recent survey of over 2000 parents by EAB illustrates the problem. Parents not only underestimate the costs they will be asked to pay, but they also have very little idea of how they will pay for these expenses.
Here’s a screenshot from the report.
What does this mean for college costs and student loans?
It means that an awful lot of parents don’t make a budget. They don’t make a plan. They have no idea what they might have to borrow, and they have not calculated what they can really afford.
They also don’t realize, often, that their kids cannot actually borrow very much. The maximum a kid can borrow—without income or assets—is $27,000 over four years (there will be nothing for years five and six…). Anything beyond that, the parents will have to sign for.
I also find that many parents do not discuss the issue of debt with their own kids. I know one young woman who blissfully went off to a private college with the full support of her parents. Upon graduation, Mom and Dad threw her a party and later gave her the loan agreements. Only then did she realize she was $100,000 in debt, with an expected monthly payment of $1161.08.
If she wants to be able to pay off the debt in 10 years before she, herself, has a family and mouths to feed. Her parents were just too ashamed and afraid to talk about their finances before the young woman went off to college. But their shame and fear became the young woman’s burden, rather than an opportunity for economic stability.
Excessive debt is not an opportunity. It is anything but.
Student Loan Debt: A Burden Too Big to Ignore
Many parents, sadly, are in denial. They don’t save enough and don’t make a financial plan. Research colleges without any understanding of how financial aid works, or how rare those scholarships really are. Believe that somehow, miraculously, their son or daughter will get that mythical “full ride” to the college of their dreams. They may as well buy a lottery ticket. Though they may have a better chance of winning the Megabucks than getting that full ride.
And I understand it. I empathize. It’s more fun to dream than to count our pennies or make a budget in Quicken.
And we don’t want to admit to our kids that our finances might limit their options. Who among us wants to watch our kids aspire and achieve and do their best throughout their formative years, only for us, the parents, to have to say, “I’m sorry, honey, but we simply cannot afford that dream college—you’ll have to settle for something less.”
Of course, in other aspects of life, we don’t hesitate to put limits on what our children can spend. We don’t give them credit cards and tell them to buy whatever they want at Saks Fifth Avenue (or, well, most of us don’t). Don’t present brand new Mustangs or Mini Coopers to our kids on their 16th birthday (or do we?). While we might splurge occasionally, we don’t take our families out to dinner at the Michelin 3-Star restaurants for a weekend meal. We think about how we spend our money, and our kids understand that we are making the family ends meet.
Except when it comes to college. This is when we resort to our belief that Santa will bring a tuition check for Christmas, that Elijah will walk through the door during Seder dinner with a bucket of gold coins, and that the Tooth Fairy will leave a mature stock portfolio under the pillow. Or maybe that Ellen DeGeneres will invite your kid onto her show and present you with a big cardboard check.
Oh, wait. Ellen has been canceled.
At least we still have Santa, Elijah, and the Tooth Fairy.
Dreams. Hope and dreams. And maybe some student loan forgiveness from the Federal Government.
No, Virginia, there is no Santa Claus. Maybe, just maybe, you’ll have a bit of our debt canceled by the Feds (but I wouldn’t count on it just yet).
But even a little $10,000 present is not going to change the fact that most Americans will still owe gobs of money to faceless bankers who gleefully make money off our collective inability to plan, to save, and to place some sort of financial limitations on our kids.
If you do not put some limitations on your family spending, the world will.
College Loan Debt Restricts Opportunity
Think about it.
According to NACE, the National Association of Colleges and Employers, in 2021 the average salary of a newly-minted college graduate was $55,260. Here’s the report. Remember that some will make more, but many (half, statistically speaking) will make less.
Let’s start an average of $55,260.
Assume that the federal government will take 18%, leaving the student with $46,107 in take-home pay (not including any state taxes, which we won’t calculate just yet).
With $50,000 in student loan debt at 6% interest and intent to pay off in 10 years, that monthly payment is $555, or $6660 per annum.
That leaves our student with $39,447.
Assume the student lives in a two-bedroom apartment in Chicago (because they have to be in an urban area to make that average salary), that goes for $2423 per month but is shared with a BFF from college.
That leaves our students with $24,903, or just over $2000/month.
Adjust for utilities, public transportation to and from work, food, weekend spending money, occasional take-out, the cell phone plan, streaming video services, streaming music services, dating apps (essential!),
How about a car? A car payment (?). Auto insurance? Gas? A new set of tires? Parking? Tolls?
Oh, and then there is health insurance. Will that be covered by the employer (small companies don’t offer it, so I guess you can’t work there)? Or will you, as parents, cover that cost until your son or daughter is age 26?
And then there is the fun stuff. The destination wedding of a college roommate in Jamaica. A long weekend of skiing in Vail with a bunch of buddies. I know some kids whose cannabis budget alone is several hundred dollars a month.
Oh, and what about those air tickets home to visit Mom and Dad?
Sigh.
Savings for a down payment on a starter home? Savings in the 401k or IRA account? Savings so that THEY can pay their own kids’ college tuition someday?
Fuggedaboudit.
Of course, the earnings of this average student will go up. On average. If they start out at average. Or if they continue as average.
But think about what that $555 per month, or $6660 per year, could make possible. Savings. Further professional development. A present for mom on Mother’s Day….
You see the point. You need a plan. You need to learn about how financial aid works. You need to assess your own ability to pay, and you need to assess colleges’ willingness to give your son or daughter discounts (Pro tip: kids with the best academic records get the biggest discounts). You need to save way more than you think. You need to understand 529 accounts and prepaid tuition plans.
Don’t plan on student loan forgiveness
As we have seen with the political and legal back-and-forth about student loan forgiveness, it’s not really a good plan to count on government beneficence to rescue us from our financial folly. Heck, most of us are wondering if Social Security will be fully available to us when we retire.
No. Given that we have–either by design or by accident–privatized higher education in this country, the burden for paying for it will remain the responsibility of families for the foreseeable future.
To ignore this responsibility is folly–and could very well limit a child’s future opportunity. And to make this belief that the government will come to our rescue and bail us out the foundation of our family financial plan?
What word shall we use? Folly is perhaps not strong enough. Self-delusion? Idiocy? Insanity?
Then again, it might happen. The possibility exists that the political system could unite to provide student loan forgiveness and reduce the cost of college education. But these are long odds, and your child is growing up fast and your nest egg is not growing fast enough.
College counseling to avoid student loan debt
At Great College Advice, we generally work with families who have made solid plans for their kids’ college education. Still, there are many who really don’t have any idea what they can afford or how they might be able to reduce the cost of college.
We can help families understand how to assess their budgets and how to predict how much a particular college might charge their student (for every kid may pay a different price—sort of like seats on an airplane). And help folks understand the landscape so that they can make good decisions based on facts, a family’s values, and the budget. We aim for educational opportunities.
But we don’t believe in Santa Claus. Sorry.
If that makes you sad, give me a call.
