I am going to walk into a mine field with this post and try to take on one of the most intimidating, controversial, and sensitive topics out there: college and student loans. So, buckle in, because this post is going to be a bit longer than the rest by necessity. In this article we are going to cover:
- Types of loans available
- The cost of college
- The benefit of a college degree
- Personal considerations
The reason student loan debt is such a hot topic is because Americans have over $1.5 trillion in student debt with the average borrower having over $37k in loans. This creates a drag on new graduates ability to buy cars and homes, and often leads to a boomerang child that moves back in with their parents so they can make debt payments, even when the economy is doing better than ever. It has caught the eye of politicians who want to either cancel all debt of make college free.
Types of Loans
One of the reasons student debt has ballooned is because it has become so easy to get student loans and the stigma of taking loans has decreased, all coming at a time when college costs have increased dramatically. The types of loans available can be split into two categories: Federal Loans and Private Loans.
- Stafford Loans, also called direct subsidized federal loans, carry an interest rate between 3.76% and 5.31% (for undergrads and grads) and allow you to borrow $5,500 to $12,500 for undergrads and up to $20,500 for graduates. These can have terms of 10-25 years. These loans are need-based.
- There are unsubsidized federal loans that are not need-based, which allow you take out loans on the same terms. These are usually for students that come from families that cannot demonstrate financial need. These loans also have terms of 10-25 years.
- Direct PLUS loans are for graduate and professional students and require a credit check. You will often need a co-signer if you have bad credit. These loans are more expensive with interest rates of 6.31% and loan origination fees of 4.3%. These loans also have terms of 10-25 years.
- Parent PLUS loans are offered on the same terms as Direct PLUS loans but are for undergraduates. In some private loan schemes it is possible to transfer the loan from the parent to the child, but not always.
- There are also private loans that come in nearly every shape and size. The only constant is that in most cases you cannot write off this debt, even if you declare bankruptcy.
The benefit of federal loans, aside from lower rates, is that there are programs for debt forgiveness if you go into certain occupations. There is also the chance that politicians could offer some other solutions that could provide forgiveness to borrowers with federal loans, although this is a wild card and should not be considered likely.
Cost of College
The cost of college varies considerably with expenses ranging from tuition to room and board to books to fees to bus passes. You’ll be faced with choices on in-state public, out-of-state public, and private universities. In 2017 you could expect a sticker price for tuition + housing to be, on average $34,740 for private universities, $25,620 for public out-of-state universities, and $9,970 for public in-state universities. However, averages are misleading. Many of the top private universities such as Stanford, Harvard, Yale, Duke, and others now have tuition costs of $45-50k. Some small private liberal arts colleges have topped even that. Vassar, Trinity, Amherst, Tufts, and Bucknell all charge over $55,000 per year. In most cases you need to add another $10-15k to cover housing, meals, books, and other student fees.
This means your all-in costs are roughly $25k/year for public, in state, $40k/year for public out-of-state, and $50k/year for private, but with the possibility of it going to over $70k. That means you’re looking at $100-$200k+ for a college education. This can balloon even farther if graduation takes more than 4 years – which is an area where public universities struggle with relative to their private counterparts.
However, the sticker price listed above can be misleading. At many top private universities only a small fraction of the students pay the full price, and many go for free (see Harvard for example). This means that you need to do your homework, check for available scholarships, and know the true price before ruling out options based on price. In many cases going to a private school can be cheaper at the end of the day than going to an out-of-state public school.
Benefits of a College Degree
As the economy has continued to move away from manufacturing and towards more high-skilled labor the value (and demand) for college degrees has increased in the workplace. College graduates earn about $500-1000 per week more than high school graduates depending on their degree and have substantially lower unemployment rates, with Doctors, Lawyers, and PhDs having unemployment rates of less than a third that of high-school graduates.
This trend is only accelerating through time as the economy is becoming more information and digitally driven. Furthermore, with the decline in workplace pensions and unions it’s not just the take home pay that makes the difference. Higher pay means higher overall matches on 401(k) plans and in many cases better health benefits and leave policies.
With respect to just earning college grads are expected to make $1 million more than their peers with just high school degrees on average, and those in the highest paying fields like science, math, and engineering making up to $3.4 million more!
There are two considerations – is college right for me and which college is right for me – that you need to think about.
Given the income and employment gaps outlined above everyone should give serious consideration to pursuing a college degree. For many this is an easy decision as they already know they want to go to college and are more focused on choosing the right university. However, for those who don’t consider themselves “college” material it can be a torturous decision.
There are ways, however, to experiment and become more college-ready without breaking the bank. Community colleges that offer two-year degrees are a good way to learn a trade, train for many good-paying jobs in fields like nursing and med-tech, and to academically prepare for a four-year university. Best of all, tuition is less than half what public in-state tuition is. Furthermore, the local nature of these programs, and the number of part-time programs available, mean it is often possible to continue living with parents and/or work full time.
For the choice on which college is right for you, I strongly encourage public, in-state universities unless you receive substantial non-loan student aid from other options. Although many critics will say that you don’t get personal instruction and that you become a “number” in the system, this is not true. The truth is that every class will be different, and you will get out of it what you put in. Some professors will give ample individual attention if you need or request it and some will not. I had the privilege of attending and teaching at three different universities (2 large public, 1 elite private) while pursuing my PhD and I can say that some of my best professors were at large public universities. They had open door policies and knew me by name. There were many who didn’t, but it was more driven by the faculty AND the student attitudes than by the amount you paid in tuition. That is not to say that you should not consider the alternatives – but you should consider the value of the degree and not the sales pitch that you get from a glossy brochure.
The other consideration all students should make is whether or not to work during university. For me, working was both a way to pay for college and to participate in some costly events like one-time trips. I worked in a variety of places ranging from SCUBA shops and rock-climbing gyms where I could have fun while making money. I also worked at the university where I could learn more while making money – this work included lab work, tutoring, and teaching labs and courses. The tutoring was especially interesting as I specialized in tutoring athletes on the basketball and football teams, which meant that I would occasionally get great tickets or party invites as a thank you. And, although most are now retired from their pro sports careers, one is still in the NFL playoffs this year, which gives me a bit of a chuckle. My advice here is to NOT work during your first semester – get used to the academic work load as failing is too expensive. However, if you can work part time while getting your degree it will help you avoid debt.
To borrow or not
If you can avoid student debt, don’t take it. You should only use it to pay if you can’t afford college. It should not be used as a source of funds to live in a nicer apartment, to fund parties, and to pay for spring break. That is a recipe for coming out with massive amounts of debt. However, if you need to take out loans, due it responsibly, and do it as a value-shopper getting the most bang for your buck at a public, in-state university.
Also, when it comes to borrowing, I encourage people to think about what they are borrowing for. Borrowing to get a STEM degree (Science, math, and engineering), MD (doctor), or JD (lawyer) means that you’ll likely come out with higher earnings and be better positioned to pay off those loans quickly. Conversely, borrowing to get an advanced degree in something like theology, archaeology, anthropology, or communications may have a terrible return on investment. This doesn’t mean those aren’t worthwhile degrees, but if you are driven by financial considerations, which readers of this site usually are, the return on investment can be lousy.
There are a variety of loans available to cover the cost of college. These loans are not cheap and can stay with you for decades, creating a drag on finance. However, as the economy changes to a more digital/information economy the value of a degree continues to increase, to the point where you almost can’t afford not have a college degree.
Be responsible, try to minimize debt, and pursue lower-cost (public in-state) and higher-value (STEM degree) options, and you’ll come out in the end in better shape, even if some debt was unavoidable.
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