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.

Initial Thoughts on College

I've caught up on reading Bearing's series on post-secondary education, and having done so I'm eager to start formulating some thoughts on the topic in general and on Mark's guest post "Why College Is a Bad Deal for America" in particular. I feel the need to sidle up to the topic and lay some groundwork, not just because I'm too short on time (trying to finish the novel, as I should be doing right now) to write a single exhaustive post, but also because I'm aware that this is a topic on which I have strong feelings influenced by my own history and the limited data set that personal experience provides.

Let me start by outlining my own personal background on the topic. I've written in the past about my own progress from a Classics degree to working in Marketing (and now, Finance -- pricing is one of those disciplines that can end up on either side of the divide.) What may or may not come through from that is the extent to which my personal pride ended up becoming wrapped up in proving that I could "make it" as a provider despite having a humanities rather than a technical degree. Many of the guys I hung out with socially in college were in business or computer science, and so I got a lot of "now you'll know how to say 'would you like fries with that?' in Latin!" ribbing. It was good natured enough, but I had (and have) more than my fair share of pride, and it tended to make me angry. Thus in addition to the need to provide for a family right out of college (MrsD and I married at 22, had our first child at 23 and our second at 24) I had a strong personal determination to prove that in the long run I could make as much or more than people who'd gone into fields like business, engineering and computer science.

So when I hear someone arguing that getting a college degree in general, or a non-career-oriented college degree in particular, is a bad investment, my first reaction is an entirely emotional competitive urge to respond, "Oh yeah? Can you match this?"

Secondly, my personal experience is very much formed around corporate office environments (in marketing and finance) where college degrees are almost a must. Yeah, sure, there are the famous college drop outs like Michael Dell and Bill Gates, but the companies those men founded employ almost exclusively college graduates when it comes to well paid salaried jobs. (If anything, I'm on the anti-credential side of the corporate spectrum, since I'm one of those who considers MBAs mostly useless degrees.) So when I look around me at the type of success that I'm most familiar with, purposely not going to college seems like a bad idea, because it mostly locks you out. (There are exceptions, but it's tough.)

Alright, so with those preliminaries out of the way, so that people will understand where I'm coming from and be able to contextualize what I'm saying accordingly, the approach I'd like to take is to lay out some thoughts in broad outline, and then delve into those points individually in further posts. Since these points are necessarily brief, I'll number them for easy reference in discussion. The ordering means nothing in particular.

1) I think that people are right to be concerned with the rapidly escalating cost of college education (undergraduate and graduate) and with the extent of student debt that people are getting into in order to finance their educations.

2) A great many people go to college believing that college guarantees them a job, or even a "good job". In our current economy, this is clearly not the case. Even people with degrees that are very job focused are having more difficulty getting jobs right now, and for those with less job focused degrees, things are even harder. That said, if things are hard for college graduates, they are even harder for people without college degrees and hardest of all for those without even high school degrees.

3) While one can argue that this maybe shouldn't be the case, a four year college degree is generally considered to be the minimum threshold for being a "well educated person" in our society at this time. As such, if you don't have a college degree, you're going to end up having to answer the question "why not?" to one extent or another (clearly, this will vary depending on your professional field and social milieu) and you will have to deal with people's unspoken assumptions based on your lack of degree.

3) All of that said: College is not a good deal for everyone. People who go to college but don't finish end up with debt and lost time, but don't have appreciably higher income or lower unemployment than those with only high school degrees. (Whether they learned and grew a lot is, of course, another matter, but I'd assume that dropping out isn't a great sign in that regard.) Further, some of the data out of the Academically Adrift studies suggests that among those who finish to college, unemployment is three times higher (and pretty similar to the rate for those with just a high school diploma) for those in the bottom 20% of academic ability as compared to those in the top 20% of academic ability.

4) On the other hand, we have a strong tendency to take a finding about society in general "college is a bad deal for some people" and apply it to each individual person regardless of circumstances. I'd argue that someone who has a lot of academic ability, and a strong desire to pursue a four year degree in some field, should not be dissuaded with the general observation, "College is a bad deal for some people." It's people who excel at and appreciate academic study who will get the most out of college both personally and professionally. Further, given that your children are more likely than the average member of the population to be like you (both as a matter of nature and nurture) while you shouldn't unduly pressure your children to follow your path, you probably also shouldn't assume that they should look like the general population. So if you and your spouse are both college graduates who did well in college and have gone on to successful careers, don't look at the overall population and say, "Well, 40% of people are graduating from college now, and many of them aren't doing so well, so probably most of my kids shouldn't go to college." If your kids are like you in ability and inclination, urging them to skip the college degree they want and get a certification in some skill like plumbing or welding instead is probably not a good a idea. (If they want to pursue one of those fields rather than college, that's a whole other situation.)

5) I think it's important to come to a broader understanding of the "liberal arts" as those arts and sciences appropriate to a free person. This means encouraging "liberal arts types" to study a bit of more hard-edged topics, and also making sure not to relegate more technical subjects strictly to training as opposed to education.

6) While I'm sympathetic to the search for "third ways", part of what made college such a valuable experience for me was living for four years with other people who where also studying academic subjects in depth, and the "community of scholars" feeling that creates. Goodness knows, it was imperfect, but I had a fairly intensive liberal arts education in high school and I've tried to do a fair amount of self teaching since, and I don't think either one is remotely comparable to the college experience.

7) While I'm a very big advocate of people getting an undergraduate college degree if they have the ability and inclination, I think people should very carefully weigh whether going to grad school is something really ought to do. It's often very expensive. If your hope is to get into academia professionally, it's an incredible career longshot. If you are doing it for more general professional advancement or benefit, I think you need to think hard whether the time and cost is going to have a sufficient return on investment. And if you're doing it because you don't know what else to do (or because it's just fun) I think you need to be very hesitant unless you can pull it off without incurring debt. Borrowing tens of thousands of dollars is a bad way to avoid making decisions.