This is a post from staff writer Robert Brokamp of The Motley Fool. Robert is a Certified Financial Planner and the adviser for The Motley Fool's Rule Your Retirement service. He contributes one new article to Get Rich Slowly every two weeks. By popular request, J.D. has added photos of cats once again.
Yes, this is another article bemoaning the cost of a college degree, and the amount of student debt that many graduates take with them alongside their diplomas — assuming they graduate, which doesn't always happen. (Paying off students loans without a college degree must be the epitome of rock-and-hard-place-ishness.)
You've read all the numbers about how the cost of college has risen far faster than the median household income, and how there's now more student loan debt than credit card debt. But besides the fact that debt stinks, graduating with a $30,000 I.O.U. (or more) has plenty of other harmful effects:
Student loans bring future consumption to the present. Debtors (often being paid entry-level salaries) have to devote a portion of their income to what they would otherwise be spending on cars, homes, kids, and iThingamajigs (well, they'll still buy those last things, but put it on the credit card, which is just more future consumption being spent now, with interest). This drains money from the overall economy, benefitting no one but the universities and the student-loan providers.
Families feel like they don't have a choice. If you're told you absolutely need something, and you can borrow the money to get it, then you'll borrow whatever it takes.
Student loans drive up the price of college. Universities increase their price tags far beyond the overall rate of inflation because they can; easy money has removed many of the natural constraints on the price of a good or service.
Imagine this scenario: Student loans were completely eliminated. What do you think would happen to the price of a diploma? It would plummet, because only people who have saved thousands of dollars could attend (and we know that few people have thousands of dollars laying around, especially outside retirement accounts). Prices would have to adjust so people could somehow afford it without debt.
I'm not necessarily advocating this (well, maybe kinda) because many people could never afford a degree without debt, but I think it illustrates how loans have contributed to skyrocketing prices. Easy money was also a contributor to the recent housing bubble, and we know how that turned out.
Teenagers/young-20-somethings are borrowing money to take classes that will do nothing to further their career. In my first year of college when I was studying to be a priest, I had to take a class related to exercise (because the world needs more buff priests). I chose weight-lifting, which was a grand way to spend a few hours, but it wasn't worth the money my family paid for it, and certainly not worth paying for with borrowed money.
If you have a college degree, I'm sure you can recall a few classes that did nothing to enhance your career, your human capital, your personal productivity, your financial literacy, or knowledge of nutrition. (Those last three come from Motley Fool co-founder David Gardner, who during a recent conversation offered those as three topics everyone should be taught.)
My suggestion: 7th and 8th graders should go on a series of three-month apprenticeships with carpenters, electricians, salespeople, farmers, bankers, computer technicians and programmers, cooks, etc., and they couldn't graduate until they passed an exam after each rotation. I used to teach middle schoolers, and I know how little learning can go on during those years. The apprenticeships would be far more enduringly educational, enhance the country's economic efficiency, and might tire the kids out so much that they couldn't be so mean to each other.
Many careers aren't worth the extra debt. A teacher with an Ivy League degree is not likely to earn much more than a teacher with a degree from State U. With most careers, the amount you make — especially in the early years — falls into a fairly narrow range. Yes, a fancy-name degree can open some doors and lead to a network of contacts that also have found easier-opened doors. But if someone knows that they're going into a job with a low- to middle salary, and limited potential for a growing income, then they should do everything they can to get a degree without student loans.
It's now becoming multi-generational. A recent NPR story told of the woes of a single mother with two kids. The family will be borrowing $124,000 to put the kids through college. But here's the kicker (in case that wasn't enough): Back in 2004, the mom borrowed $60,000 to enhance her own skillset. It led to a higher income, though she had to move across the country to get it. According to the story:
She [the mom] has no savings, no money put away for retirement, and is thinking of taking on a second job to pay off her kids' loans. And she even has a little bit to pay off in student loans from her first degree — from 1996.
Now, this family didn't make the best decisions (you know, lying in the bed you borrowed and all that), but, unfortunately, this family's dilemma is becoming more common.
It doesn't make sense to borrow money to climb a wall. As this Marketplace segment points out:
The Wall has become code for the amenities arms race on campuses across the country. Colleges say students and parents are demanding this stuff.
I'm comfortable putting this one on the parents and kids; colleges feel like they have to be competitive with other colleges. The more families of potential students say, “I'm not going to your school, but rather going to another school, because I want to pay for an education, not recreation,” the more universities will stop building jungle gyms.
So what's the Ivory Tower's responsibility?
Let me start off by saying I'm a big believer in personal responsibility as well as accountability for one's decisions, even the bad ones. But are colleges taking advantage of 18-year-olds, who have little appreciation for the decades-long consequences of debt? Of course, their parents are part of the decision, and perhaps should know better (especially since they're usually not on the hook for the debt). But as I suggested earlier, colleges have a lot of leverage; kids and parents feel that a degree is essential, and they're mostly right.
As I've written before, despite all my grumblings about the cost of college, my wife and I still contribute to our kids' 529 college savings accounts. At this point, it's a required ticket that needs to be punched before you can enter many types of professions. (Darn you, college cabal!)
My opinion? The Ivory Tower Industrial Complex is succumbing to a conflict of interest, and not doing what's in the students' best interest. I think it's unethical. I worked at a university for a year, and found the wasted money and inefficiencies appalling (except my job, of course; it was crucial to the university's mission and future prosperity… maybe). They should stand up and say, “Enough is enough. We can't, in good conscience, send these kids out into the world with tens of thousands of dollars in debt.”
As for how to actually pay for college, here are a few past GRS posts on that topic:
- Scholarships for fun and profit
- College savings: The basics of saving for college
- Surviving student loans
- Paying for college: A high school student's quest to stay debt-free
- Calibrating and circumventing the cost of college
- How my parents and I partnered on a win-win savings plan for college
Finally, I'll add one tip that financial planner and GRS contributor of yore Dylan Ross told me at the recent Garrett Planning Network annual conference: College prices can be negotiable! Ross says, “It may be worth trying to negotiate tuition and or financial aid — particularly if the student has skills the school may find desirable or is applying to one of the school's less sought after programs.” You can negotiate college tuition? Now that's a useful personal finance tip.