Monday, April 29, 2013

Student Debt? Don't Don't Bite the Hook.

For a variety of reasons I have been thinking a lot about student debt. About six years ago, before I ever thought about getting into a personal finance ministry, I wrote a list of 10 financial rules for young couples as a gift to a young woman and her husband. In that document I stated that, “Borrowing for school (with and only with a goal) is OK. Scholarships and work study grants are better.” I explained that a goal included things like, “I will earn a MSRN with a specialty in geriatric medicine. Since the Baby Boom is passing into old age, I will be guaranteed employment for the next 20-30 years.” Or “I will earn a BS in petroleum engineering. The developing world will need and desire an increasing amount of petroleum based products for the foreseeable future. Since it is becoming more difficult to tap new reserves in places like the Gulf of Mexico or refine lower grade crude I will have a job.”

Student loans were once a somewhat undesirable alternative for students without the family resources to pay cash, who for one reason or another were not eligible for enough scholarship money. It was OK because over a lifetime it was expected a college graduate would earn about $500,000 more than the same person with only a high school diploma.

Much has changed since the good old days. When I earned my first degree at Furman University, it was considered a bargain in a quality private liberal arts education. No more! The cost of attending Furman runs about $42,000 a year. That is Ivy League type cost. Furman isn’t an Ivy League School. Nobody cares if you knock your Furman class ring on a prospective employer’s desk. When I paid for my second degree in engineering from the University of South Carolina in the early 1980s I could take all the courses I could choke down for a paltry $600 a semester in tuition. With a scholarship, a work study grant, savings from our jobs, and my wife’s income, we could swing that without taking on any debt. No more!

Since those days the cost of higher education has run out of control, five times the rate of inflation. I think one of the main reasons for this distortion in our economy is the presence of large numbers of student loans offered and/or guaranteed by the Federal Government. Universities can raise their prices without lowering their student population. There is always more money. Just borrow it.

My generation discovered the quickest way out of student debt was bankruptcy. The laws were changed. Student debt is not forgiven, even in bankruptcy. If your child does not graduate, that debt is not forgiven; if your child can not find a job, that debt is not forgiven; if your child is dead and you cosigned for that loan, that debt is not forgiven. (Really, look it up.)

Student loans are growing out of control. Student loans have topped credit card debt. As of a few seconds ago, the student debt loan clock has passed $1,087,850,725,000. For new graduates that number works out to nearly $27,000. If you add graduate students to the mix the number is more like $42,000 in debt per student. This kind of debt is crippling. If a graduate even tries to live a normal middle class American life style starting with that kind of burden, they are condemning themselves to a lifetime of debt slavery.

Except in very rare circumstances, I can no longer recommend student loans. If you are a semester away from a medical degree and you find yourself a few thousand short. OK. If you are starting medical school with no resources, consider a hitch in the military or the National Health Service Corps. A few years of service to your country beats a lifetime of debt. There are similar opportunities for teachers willing to relocate to urban slums or impoverished rural communities for a few years.

Even with a good plan, too many things can go wrong. Even without a degree or a job, student debt remains and continues to grow if deferred for reasons of economic hardship.

There is a lot of scholarship money out there. It is very difficult to get. However, think about the math. Scholarship math works like this. If it requires 100 hours of research and writing to earn $10,000 in scholarship money, that works out to an after tax income of $100 an hour. Pretty good pay for someone still in high school working on a part time basis.

I think the new model can be found in this post I put up a couple of years ago.
Children and Money (True Story)

Even if a student does not qualify for scholarships straight out of high school, a Pell Grant expended at a community college while living at home will give that student a chance to mature while moving towards a degree. If that student kills it at the community college level, their chances at receiving a scholarship at an inexpensive in state public university offering 4 year degrees will be much greater. If they finish their bachelor’s degree with honors the sky’s the limit. They will probably get a job with an employer who offers educational benefits. My employer paid for my master’s degree.

By the way the student in that earlier post is currently working as a bio-mechanical researcher at the National Institutes of Health, while he completes his requirements before applying to medical school.

Quite frankly, although an 18 year old high school graduate is legally considered an adult, almost all of them simply do not have the financial sophistication to fully understand the ramifications associated with student debt. Many of them also lack the maturity to use that money in a completely responsible manner. I have read too many horror stories of university debit cards connected to money from student loans used for beer, road trips, and new clothes. That debt does not go away because a young person made a foolish mistake.

Then there is always a job. A student can work part time or even full time for a few years to help fund their own education.

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