College Debt for Life?

When I was in college in the '80s the growth rate for college tuition was 10% much higher than the rate of inflation at the time. And it appears that things have not changed since then. The cost of college continues to growth faster than anything else and beyond reasonable expectations (see graph at right).

The result is that many Americans now graduate with a huge debt that takes decades to pay back and prevents them from buying a house and otherwise establishing a normal middle-class life.

What was new to me this morning is that even senior citizens are affected by college debt. SmartMoney.com reports the Federal government is docking an increasing number of Social Security payments to pay back college loans, up to 15% of the monthly benefit. Now these are not deadbeat seniors who failed to pay back their own loan after 40 years but rather parents & grandparents who co-signed loans for their children or grandchildren.

So beware, co-signing a loan can follow you into retirement!

Trade Schools

“College is like a fountain of knowledge - and the students are there to drink”

A Washington Post story notes that More college-educated jump tracks to become skilled manual laborers.

"They started out studying aerospace engineering, creative writing and urban planning. But somewhere on the path to accumulating academic credentials, they decided that working with their hands sounded more pleasant -- and lucrative -- than a lot of white-collar work. So bye-bye to term papers and graduate theses, and hello to apprenticeships to become plumbers, electricians, auto mechanics
and carpenters."

The poor economy has been a boon for trade schools. The electricians' union program in Washington D.C. has 2,500 applications for 100 slots. And nearly 4,000 are competing for the 300 slots at a plumbers and pipe fitters school.

Pay for trade jobs is good. Apprentices start out at half salary with raises every six months. After five years licensed journeymen can expect to be paid $65,000 to $85,000 a year, depending on the amount of overtime. That beats four+ years of college, graduating deep in debt, and with no job.

In Europe many students begin an apprenticeship at age 18 right out of high school. But in the US, high school counselors rarely recommend trade school (except for their worst students). So American youth try college first and then switch to blue collar. The average age for beginning apprentices in the US is 25.

Bottom Line

This weekend my wife and I bumped into an old friend who is moving in the opposite direction - from blue collar to white collar. He was a long-time union employee at a TV station. However with better technology and greater automation, the station was able to layoff 38 technicians. Now my friend is completing a BS degree in Labor Relations and then plans to study law so he can go back and sue the pants off big companies.

There is merit in having some real-world experience before graduating from college.

Expensive Colleges

“A university is what a college becomes when the faculty loses interest in students.” - John Ciardi

I thought college was expensive nearly 30 years ago when I attended. I also learned then that there is an “education inflation rate” that is always higher than national inflation rate. Back in the 80’s the rate of educational inflation was 10%. So it should come as no surprise that rates today are outrageous. With tuition hikes outpacing the growth of household incomes year after year. student borrowing has doubled in the past decade.

Here are the most expensive colleges by total cost for the 2009-2010 school year from CampusGrotto.com

Total Cost = Tuition + Room and Board
1. Sarah Lawrence College, $54,410
2. New York University, $51,991
3. The George Washington University, $51,730
4. Bates College, $51,300
5. Skidmore College, $51,196
6. Johns Hopkins University, $51,190
7. Georgetown University, $51,122
8. Connecticut College, $51,115
9. Harvey Mudd College, $51,037
10. Vassar College, $50,875

The lowest total cost in the top 100 most expensive schools was $46,860 for just a single year of study.

Bottom Line

See The Rising Cost of Education for more information and what to do.

See also my post on Student Loans

Student Loans

“It's easy to get a loan unless you need it.” - Norman R. Augustine

On Instapundit.com I learned some things about student loans that I did not know.

“They’re the worst debt you can get — huge, at unattractive interest rates, and non-bankruptable.” – Instapundit.com

The New York Times reports

“Thousands of recent graduates have been unable to find jobs or are earning too little to cover the payments for loans that are sometimes as high as $50,000 … as many borrowers have learned, student loans are among the most ironclad debts, on par with child support, alimony and overdue taxes. They stick with you no matter what … Even death isn’t a good enough excuse for discharging some private loan debts. And the government can wield a heavy hand to collect what it is due: If you fail to repay your federal loans, it can garnish up to 15 percent of your wages or take your tax refund or part of your Social Security benefits.”

About two-thirds of graduating students will have a loan to pay off (typical size is $22,500 but the NYT describes one student who managed to get $150,000 into debt.). Sadly, loans are unavoidable for most students due to outrageous fees. When I was in college tuition rates rose much faster than the rate of inflation and my school still had record enrollment and overcrowded dorm rooms. Families were willing to pay any price for college degrees.

Here are some options to reduce the debt:

• Invest early in a 529 Investment plan – it’s like a 401K for college. With favorable tax incentives, you put away money when your child is young and can only spend it when they reach college age. When college investment plans were first advertised I recall that you were locked into a single college (i.e send money to MIT when your child is born.) But SavingForCollege.com claims that with a 529 plan, “you can be a CA resident, invest in a VT plan and send your student to college in NC.”
  
• Earn a National Merit Scholarship via the PSAT test. Of the 1.5 million entrants, some 50,000 with the highest PSAT/NMSQT® Selection Index scores qualify for recognition in the National Merit Scholarship Program. Whether you get any money is up to the colleges you apply to and their standards. I was offered a 4-year Merit Scholarship from Michigan State University that covered most tuition costs but no merit scholarship for Cornell University. When Cornell called me to ask why I had rejected their acceptance, the answer was simple - I couldn’t afford them.
  
• Apply for the “needs” based Federal Pell Grant. If you can prove to the government that you are poor enough, you might get a Pell Grant.
  
• Check with the Financial Aid department of the colleges you apply to for any unusual funds that you’re eligible for. Alumni may leave scholarship money for American Indian applicants, children of Rotary members, etc. Check also with local organizations and local companies, like Lions Club, for scholarships.
  
• Students should get a summer job. When I graduated, Harris Corporation offered “scholarship” internships to top students from local high schools. I ended up working for Harris for five summers. To maximize the paycheck I worked 2nd and 3rd shifts for the extra pay differential.
  
• Students can work at college. I worked in the dorm cafeteria my freshman year. The following year I returned to campus too late and all cafeteria positions were already assigned. I walked directly to the office of the head of my department (mathematics) and asked for a job. He said yes and that began nearly 10 years of teaching starting as assistant and leading to class instructor and course coordinator. A dorm friend of mine, an engineering student, got a job at college soldering electronics and said the hands on experience was great.
  
• Live cheap - buy used books and avoid spending money on frills. Cheap can also mean choosing a state school were you live to get a lower resident rate, living with your parents, and or going to a community college for your first two years. Yes there are some snobbish jobs that prefer Ivy League graduates but in the long run the name of the school won’t matter so long as the education was good. I’ve looked at resumes of job applicants from Russia, India, Canada, etc. I know nothing about the reputation of the schools they attended so instead I look at past job history and their ability to answer questions during the interview.

Bottom Line

If you have a Student Loan and are unable to make payments, read the complete NYT story, Student Loans. There is detailed advice on steps you can take with different lenders to get a deferment and forbearance.

For more information on 529 plans check out morningstar.com
http://news.morningstar.com/articlenet/article.aspx?id=287783

Avoiding a loan is NOT easy. I managed to cover expenses without one but only by working summers at Harris Corp, working the rest of the year at college, living very cheap and having a Merit Scholarship. I was very lucky.