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.
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