Because most philosophies that frown on reproduction don't survive.

Wednesday, October 03, 2012

Is Borrowing Money To Pay For College A Bad Idea?

What I keep meaning to write about, is more about the broader conception of "liberal arts" that I'm trying to put together. However, an interesting side-discussion about college debt sprang up in the comments of a post over at Jennifer Fitz's blog, and when it comes to dashing off a quick post during a break, it's always easier for me to write about money than about more thoughtful concepts.

There are a lot of articles going around at the moment about a "college debt bubble". According to the most recent annual report by the Project on Student Debt, two thirds of people graduating college in 2010 graduated with student debt, with the average amount of debt for student graduating with loans hitting an all time high of $25k.

Some of the particularly high debt and low debt colleges are somewhat surprising. The very elite and expensive Williams College and Princeton University both show up on the list of lowest-debt colleges. State by state and college by college data can be accessed here. It's worth fooling around with a bit. For instance, I found that for 2008-09 graduates, the following three colleges had the following percentages of debt and average amount of debt:

No, that's not just because rich people go to Harvard, though that probably helps a bit. Harvard has by far the highest tuition ($54k this year with room and board, compared to $30k at Steubenville and 20k for in-state students at OSU), but it is also far more successful in providing its students with non-loan financial aid-- in part because it uses that high tuition as a way of extracting more money from wealthy students and using it to subsidize students of more modest means.  A college without Harvard's massive endowment and without its strong attraction to very rich students would not be able to pull this off. Clearly, it sometimes really does pay to go to an elite college, even if the tuition sticker price is higher.

But I digress. (Put a fun data tool in front of me and see what happens?)

Suffice it to say: A lot of people borrow a lot of money to go to college. More and more people are doing so, and they're borrowing more and more. Should we advise people not to do this?

On the one hand, it is clearly possible to get yourself into a lot of trouble with college debt. Some people, either by "paying" for their entire tuition with loans or by drawing college out to more than four years and/or going on to grad school (and using mostly loans to pay for it) manage to rack up some pretty impressive bills. Stores about the "college bubble" are usually accompanied by an "I am the 99%" style picture of someone saying he or she has $100,000+ in college debt. Well, if you have a $100,000 loan for a 15 year term (common for college loans) at 7% interest (common for non-subsidized college loans), your monthly payment for the next 15 years will be $899 dollars. In most cities in the US, that's more than you'd pay for housing. If you're a new college graduate trying to pay for that $899 bill and for housing, transportation, bills, food, clothes, etc. (and potentially for loan payments for a spouse as well) you can see how the numbers could well just not add up.

So if you're contemplating taking out debt to pay for college, you need to think about what the payments are going to add up to. Look at the financial offer letter you get from your college, see how much borrowing they expect you to do in your first year, then multiply that by 5 (to hedge and deal with the possibility they may change your grant to loan ratio in later years) and run that number through a loan calculator. For the last 11 years, MrsDarwin and I have been paying ~$250/mo towards paying off her college loans (I had enough scholarships and savings I didn't take any out). That seemed like more back when we were newlyweds with a monthly take home income around $2,000/mo and Los Angeles rent of $1,000 per month. However, I certainly would not consider it too high a price to pay for the education we got. Even though MrsDarwin hasn't worked for the last 10 years, I would not remotely consider that money a bad investment. That said, if your situation is such that you're looking at very high monthly loan payments to service your student debt, you need to do some serious thinking. Average first year income for recent college graduates ranges from around $30k for "liberal arts" majors up to $50k for some kinds of engineers and business related majors. You need to also hedge that with some assumptions about risk: the economy is more uncertain than ever, and although that could change, it's worth considering the risk that you'd end up for a while like the nearly 10% of recent graduates who are unemployed. (Student loan payments can be pushed out during unemployment in many cases, but additional interest and fees can rack up in the meantime.)

Another important thing to consider in this regard is why you're going to college. If, like me and MrsDarwin, you're going to college for the purpose of deepening and broadening your education, you need to think about how much getting that education is worth to you.

If you are going in order to get some kind of professional degree or certification, it becomes a much more straightforward and monetary task: You need to consider what your chances are of successfully utilizing the degree or certification you're pursuing, look at how much those who do successfully get a job based on such a degree make compared to your other options, and thus decide whether this professional education represents a good return on investment. Since you're not pursing a professional degree or certification simply for the joy of learning or for the experience, it makes sense to be very hard nosed about the analysis involved and determine whether the risks and costs involved are worth it. (In regards to professional degrees and certifications, make sure you consider the reputation and advantages of the particular college you're considering as well as the degree in general. There is a huge difference between the prospects of someone graduating from Harvard Law and the Whittier College law school. Also, be incredibly suspicious of for-profit and/or online colleges in this regard.)

But wait a minute. I keep addressing this question as if it's merely a matter of how much debt it's "okay" to take on in order to pay for college. Should people who are only 18-22 years old be racking up tens of thousands of dollars in debt at all when they don't know how much they're going to make in life? After all, they could be walking down the aisle from getting their diplomas, have a seizure, and remain paralyzed and brain damaged for the rest of their lives, unable to hold a job. What would you do with your "moderate" $25k in student loans then? Why not just go work for three to five years, save up, and then go to college if you still feel the need?

I think this level of debt aversion is probably mis-placed for several reasons.

First, one of the things that debt is good for is "income smoothing" over the course of your life. Most people earn very little when they're young and earn increasing amounts through their lives, peaking in their '50s. Given this, it makes sense to borrow money for large expenses that are best incurred when you're younger (going to college, buying a first house, etc.) You will earn the money to pay for them, you just haven't earned the money yet. If you can purchase such items much sooner by taking out a non-ruinous amount of debt, that's often the economically more efficient thing to do.

Second, you're likely to make the least money when you're young and inexperienced. Thus, giving over the years when you're 18-22 to education doesn't mean forgoing much income. You wouldn't make much then anyway. However, if you wait till you're 25 and then think about going to college, you'd be giving up much more valuable years of your career arc. Add to this that later in life you may have responsibilities that make it difficult for you to devote yourself fully to study (I certainly couldn't do that now, married with five kids) and that many people have more mental energy and flexibility of the sort required by intensive education when they're younger anyway.

Third, saving up for a big ticket item often takes much longer than buying it with a loan and then paying the loan off. When you're saving, there's always the option of skipping your "savings payment" one month, or using your savings for some emergency (or just other purpose) that comes along. Thus, even though when you take out a loan you pay interest while when you save you earn interest, it will generally take you much longer to save up $25,000 than it would for you to pay off a $25,000 loan.

Yes, there are potential pitfalls out there to borrowing money to help pay for college, but within a reasonable range it is an eminently reasonable thing to do in our modern economy. If your purpose in going to college is, as I argue it should be if you're going to go to college, to obtain an education that you believe is going to benefit you for the rest of your life, agreeing to pay for it in installments up until your mid thirties is not an unreasonable thing to do, so long as you believe it's reasonable to think you can handle those payments. Looking back from the vantage point of my mid-thirties, I certainly consider myself to still be benefiting from my and my wife's college educations. I have not problem with continuing to pay for them.


bearing said...

So if a couple of average Steubenville grads -- not you and MrsD -- marry each other right out of college, how many years before they can afford for one of them to quit to stay home with the kids?

bearing said...

Wait a minute --

From here I get $29,580 per year for Steubenville with room and board. (tuition + fees + 2 semesters room and meal plan)

Jennifer Fitz said...

Very well laid out, Darwin.

I think the only thing I'd quibble with is a bit of practical experience on adults who go back to college in their twenties or early thirties: While you and Mrs. D. no doubt took your education quite seriously, a lot of us were not so diligent through undergrad. I've known quite a few students who swore as 19-year-olds that they simply weren't smart enough to get good grades in college, who went back to school as parents with families working full time, and earned straight A's once they were serious about their education.

A bit like the loan/savings paradox. What ought to be the economic reality doesn't always play that way.

I do like your point about income smoothing and young vs. experienced-worker wages. (And as I've said, I'm not opposed to modest debt for college. Just the extremes.)

Darwin said...

From here I get $29,580 per year for Steubenville with room and board. (tuition + fees + 2 semesters room and meal plan)

Good catch. I hadn't noticed that they made it look lower by doing the room and board by semester while doing the tuition by year.

So if a couple of average Steubenville grads -- not you and MrsD -- marry each other right out of college, how many years before they can afford for one of them to quit to stay home with the kids?

Given that most people we know got married right out of college, had kids within one year, and had the wife stay home, we'd have to either hypothesize that everyone we know is exceptional, or that people somehow found a way. $60k in debt over 15 years gets you $539 a month, which is a lot, but not totally out of line with what a lot of people end up servicing for car debt, etc. If that's government subsidized debt (all of MrsD's was) that would go down to $414/mo for 60k.

bearing said...

Fair enough. To me the Steubie numbers look breathtakingly huge, but I am probably just naive. We don't carry any debt besides our mortgage.

I can't argue with your analysis. I think I place more weight on the risk of unforeseen circumstances making it impossible to pay off an undischargeable debt than you do, but this is obviously a matter of personal risk tolerance preference.

MrsDarwin said...


So if a couple of average Steubenville grads -- not you and MrsD -- marry each other right out of college, how many years before they can afford for one of them to quit to stay home with the kids?

As Darwin pointed out, many people we knew married early and had children right away, and those families made the financial choice almost from the beginning to have the wife stay home. I worked until I was eight months pregnant with Eleanor -- so, for 10 months of our marriage. It was a financial hardship for us to lose even my exceptionally meager income (derived from low-paying theater jobs and part-time work at a bookstore), but I think it would have been even more of a hardship for us if I had kept working and we'd grown even more dependent on having two incomes.

I'm sure there are different calculations to be made for people who marry later in life, when both have careers, or for people who don't have children right away, but if one plans to be a single-income family from the start, it seems to me that it would be better to plunge right in and grow in that single-income position than to drop down to one income after being used to that money.

I also consolidated my debt, which pushed it out further but eased the payments when we most needed the leeway, and we lived with Darwin's grandmother for a time, and for several years in Texas we drove one car. One does what one needs to do.

Jenny said...

I'm with Bearing on this one. We only have the mortgage and I can't imagine making those payments. But I do think Darwin's argument is sound.

I think a lot depends on the couple's willingness to live within or below their means. Many expect a certain standard of living--cell phones, cable, broadband, new cars, eating out--and will credit card these expenses to make the loan payments. Taking out these loans would be acceptable if you knew you would be able to deny yourself the creature comforts to make the payments.

And here is where the Steubie grads are exceptional compared to the general population. There is a culture of self-denial and delayed gratification. It is not surprising that the average graduate from a religiousy college is more willing to make the sacrifices required not to bury themselves in debt. The average graduate from State U may or may not have that same quality.

A good rule before taking out large debt is figuring out which type you are and I'm not sure how many 18 year olds have that much self awareness.

bearing said...

Jenny -

"And here is where the Steubie grads are exceptional compared to the general population. There is a culture of self-denial and delayed gratification."

That is an absolutely stellar point that hadn't occurred to me. I know a number of people from Steubenville (people in my parish are always asking me excitedly if we went there, when they hear we are from Ohio), and Steubenville graduates are nothing if not, er, unrepresentative of the population as a whole.

I suppose it would be interesting to find out the rate of student loan default from different universities. My own undergrad alma mater won't fare so well, I predict, but it is a land-grant school that has to accept everybody (a policy that has pros and cons).

bearing said...

Oh hey, I think I found the relevant tool for finding default rates:

Salixbabylonica said...

As a recent (debt-free, sorta unemployed) graduate from a small Catholic liberal arts school, I've been following this discussion of college choices with interest. There's a lot of interesting points here to mull over.

I would like to take issue with one point though, Darwin. I think you should take a closer look at the statement that almost 10% of recent college graduates are unemployed. My suspicion is that figure is quite misleading; the job market is a great deal worse for the recent graduates than that makes it sound. My understanding was that it is closer to 50% who are unemployed or underemployed. And the underemployment is the real killer.

My husband and I graduated in '08. Most of us got jobs reasonably quickly, but of the group I've kept in touch with, I'd say a solid 50% have been laid off at least once in the interval. My own husband was unemployed for 7 months last year when his employer hemorrhaged workers until it was down to a third of its former size. A good chunk of us work in childcare, food service, poorly-paid retail, or part-time and temporary positions. Anecdotal evidence from the two classes that followed us leads me to conclude that they have it even worse.

I'd be interested to hear whether your reading of the data bears out my impression that pegging the unemployment rate at a mere 10% gives an overly sanguine picture of a recent graduate's prospects.

bearing said...

Here's a bit from a comment I wrote on my own blog that bears repeating here:

DARWIN: "There are, apparently, still a lot of people who graduate debt free, though it's not necessarily because the tuition itself is low. A lot has to do with how generous the school is in providing non-loan (grant or work/study) financial aid."

NOW ME: I have to say, I'm glad you pulled this stuff up. I really had no idea that there was such a disconnect between the tuition charged by a school and the debt load of its graduates. I had it in my head that there would be a roughly linear relationship, but you have demonstrated that it is not so.

Adding new material here: One of the things that has started to annoy me about colleges is the lack of transparency. I actually like the business model of using wealthy payers to subsidize less-wealthy payers (and, of course, selected customers that you wish to attract because they make you look good). I remember once reading (here?) about a nonprofit medical clinic that had a two-tier model, providing free care to low-income patients which was subsidized by the "subscription" boutique medical care they provided to wealthy patients. I think that's a great idea in general.

What bothers me about it is the you-don't-know-the-deal-you're-getting-until-you're-already-invested system. It's rather hard to shop around widely when you can't find out your "package" until you're already accepted (and it isn't free to apply, and of course they want you to come and visit the campus, etc....)

It all reminds me of this karate school we once looked into near our house. I called to ask how much for karate classes for the kids, and they wouldn't tell me. It was all, "Oh, we offer a free class! Bring your kid to our free introductory class! And after that we can talk about prices." Yeah, like I'm going to set my child up to get all excited about your class before you tell me the price? I refused to come to the introductory class without pricing info and they still wouldn't tell me. That was definitely enough info for me to know it wasn't the right place to take my family. But it looks like colleges follow a similar sales model.

Darwin said...

I'm double posting a comment that I also posted over at Bearing's place, since she quoted part of my comment and that discussion here:

Do you get the impression that most of the financial aid you describe is need-based (calculated from the FAFSA?) I know our family doesn't expect to qualify for any, but we sure wouldn't think it reasonable to shell out the cash that FAFSA thinks we can contribute.

A lot of the aid is need-based. My experience is a bit out of date (though I did have some close friend 15 years ago who were applying to the most expensive and academically competitive colleges in the country, and while costs have gone up even more since then these were colleges that were over $40k/yr even then) but from what I ran into back then and what I've read in sources like the WSJ's recurring advice sections for parents of college students, the definition of "need" can be far wider than a lot of people would expect.

Among the colleges that have large endowments and the ability to attract very wealthy students, they'll put very high tuition numbers out there which only a tiny fraction of the student body actually pays all of, and then the endowment and the tuition paid by rich students is used to subsidize the rest of the students. The WSJ college sections have talked about families who make very solid six figure incomes who qualify for surprising amounts of financial aid grants based on "need" given high expenses (housing, etc.) and the number of other kids in the family.

Anyway, I tried to see if I could save a report at the CollegeInsight site which shows average grants versus average tuition and average debt for Harvard, Steuvenville, OSU and Ohio Wesleyan (which I throw in because it's a non-Catholic small liberal arts college which happens to be in our town of Delaware, OH.) The data is pretty illustrative:

Harvard has expenses of $50k, but they give 66% of their freshman grants and the average package of grants totals for a need-based financial aid recipient was $37k.

By comparison, Steubenville charges $29k per year and gives 75% of their students grants, but the average total grant award is only $7k.

So Harvard left their average financial aid qualified student to cover $13k/yr while Steubenville left their average financial aid qualified student to cover $22k. Add to this that the average Stuebenville student is probably much poorer than the average Harvard student, and it's clear why they graduate with three times as much debt per debtor student (and a much higher of percentage of students owing debt) than Harvard students, despite Harvard tuition being $20k higher.

OSU's average grant package is similar to Steubenville's, but their tuition is $7k lower.

Ohio Wesleyan is the worse deal of all, leaving the average student getting financial aid to cover $24k/yr with something other than grants.

Darwin said...

And agreed, it's frustrating that this is so non-transparent. Though FWIW there seems to be more data out there now than previously. There's been some federal regulation in the last few years that has forced a bit more transparency in regards to standard financial disclosures.

Darwin said...


Your account certainly sound true to me: the situation for people who graduated in the last 5-6 years is bad. The way this recession seems to work is that the most vulnerable people (those with the least experience) have had a much, much harder time finding jobs, while filling jobs that require 6+ years of higher level experience on the job are actually still pretty hard to fill in many cases.

I don't know of reliable data on underemployment. One of the problems is that underemployment is hard to describe rigorously, other than in terms of people who are working part time but would rather be working full time.

The one thing I would point out, however, (though it's cold comfort) is that the situation for people in the same age range who don't have a college degree is even worse. The same article I got the "just under 10%" figure from on recent graduate unemployment put the unemployment rate for people the same age with only high school degrees at 20%, which is just staggeringly bad.

So on the one hand, many recent college graduates at stuck with debt that it's hard for them to pay for. On the other, they do have some advantages in competing with non-college-graduates for the few jobs that are available, even if those jobs often aren't what they'd like.

This is one of those things that tends to happen when the job market gets really constrained. My grandfather used to tell a story about how in the mid-thirties he was one of hundreds of unemployed men who showed up to get a job pumping gas at a new gas station, but was turned away when the owner announced that since there were so many people there he would only hire people with college diplomas. That cut his list down to a couple dozen that he then interviewed.

bearing said...

"My grandfather used to tell a story..."

You know how it's illegal to use an IQ test that is irrelevant to the job performance to weed out job applicants? I swear I recently saw an article somewhere about someone who was planning to file suit to try to make it equally illegal to require an irrelevant bachelor's degree, on the same grounds (de facto discrimination against protected groups). But then I was never able to find the article again. *sigh*

bearing said...

Even though it is easier to get information about average grants, it is stil pretty impossible to find out what they are going to offer a particular individual.

I can't think of any other industry that manages to float along happily with a model that is basically, "first tell us how much money you have, and then we will tell you what our price is." Talk about asymmetric information...

Darwin said...

I can't think of any other industry that manages to float along happily with a model that is basically, "first tell us how much money you have, and then we will tell you what our price is."

Yeah. The advice is that that is why you should apply to 3-5 colleges and not decide which one to go to until you've sat down with offer letters from all the ones that accept you and weighed that advantages of the schools versus the packages they've offered you.

Of course, I have to confess: I didn't do that, though I know a few people who did. I ended up deciding I really wanted to go to one of the three colleges I'd been applying to and never finished applying to the other two.

Jenny said...


Not only how much money do you have, but how much money does all your close relatives have irregardless as to whether they will actually give you any of their money.


I'm not sure how many people go through the proper steps. Choosing a college is a very emotional experience and it is hard to make it on finances alone. I only filled out two applications, one of which I had zero intentions of attending. I got a scholarship offer from my parents' alma mater without even applying, but I still had no intention of going there. And I did get an unasked for application to Yale in the mail which really stoked the ego. But I never did fill it out because I couldn't justify the application fee when I knew there was no way I was going. Maybe Yale would have put together a nice financial package for me, but I didn't see it as a feasible option.

bearing said...

If I remember right,my parents never even filled out the FAFSA for me. (I was eligible for a tuition break because or a relative who worked at a local public university, and that was the default choice I was supposed to make, even though at the time that university didn't have engineering.) I wound up with the merit scholarship elsewhere,, so in the end it was ok.

JMB said...

I just wish the college tuition bubble will burst soon. I have a junior in high school and completely depressed about his prospects.

I'm not in theory against student loans. I did not have one, but my friends that did, took school very seriously and found decent employment when they graduated. They did not find themselves smoking pot in a sublet in Brooklyn or treking through India or South Africa for a spell after graduation. All those things are fine, but if you have to pay the Man back, you don't have the choice but to take your job search seriously. Education for education sake gets diluted when someone else foots the bill.

Anonymous said...

It seems obvious that the answer the the Steubenville question is 'family support'. Family doesn't have to be 1% rich or even rich at all to smooth the path enough to make it easier.

federoff11 said...

Having a freshman in FUS this year, I''m not sure how much "family support" we can offer with 10 other children at home! My grandfather paid for my son's first year there (YEA GRANDPA!) but we'll need to foot the bill for subsequent years.

We NEED the college bubble to burst, and for our colleges to stop taking so much federal $$$ that only serves to raise tuition costs.

And, yes, I'm a Steubenville grad myself- I listened in my theology classes, I got married at 23, had a baby that next year, and had one just about every other year since. How can a single-income family that is open to life afford college!!!???!!! Both hubby and I have Master's degrees, he pulls in a little less than 6 figures, our only debt is the mortgage, but we STILL can't swing college!

Anonymous said...

Uh, a grandparent is family, last I heard.

federoff11 said...

Uh, one grandfather can't pay for 10 kids x 4 years of college at $23 K each year. No other family can help out.

Jenny said...

Wow, I just did the math on that. Nearly $1 million. You do need the bubble to pop!