Keeping College Debt Under Control

In good times, and especially in bad, college graduates tend to earn more money than their less-educated peers, and they have less trouble getting and keeping jobs. But does this mean that any college, at any price, is a sound financial investment?

No, it does not.

It disturbs me to see young people start their adult lives with debts that they will struggle, sometimes for decades, to repay. Many of them paid too much for what they got in return. They should have attended less-expensive programs that would have left them with approximately the same earning power, but without the heavy debt burden.

And if, as a society, we want to get more bang for our education buck, we should concentrate on providing more high-quality, relatively low-cost education options that can keep our kids, and us, from going so deep into hock.

It makes sense to spend an extra dollar on education when that spending will generate more than an extra dollar (discounted for future inflation) in additional earning power. A recent college graduate deciding between taking a job as a high school science teacher earning $50,0000 a year, or going on to medical school to become an emergency room doctor earning $200,000 a year, could justify spending a great deal of money on post-graduate education, because that money can be recouped later in life.

When choosing an undergraduate institution, the economic benefits of spending more on education are doubtful at best. Bachelor’s degrees come with a wide range of price tags, from an average of around $7,000 a year for in-state public schools to over $25,000 on average for private schools. The piece of paper from the private school costs about $72,000 more, but the added expense does not necessarily lead to significantly higher earnings later on.

Here at Palisades Hudson, we hire outstanding graduates from excellent business and economics programs. Some come from elite private schools, and others graduated from much less expensive state universities. There is no difference in how much they earn.

A 2008 article in SmartMoney Magazine that ranked schools based on their payback ratios, factoring in both earnings and tuition costs, found that no private school made it into the top 18. Even though private school graduates earned more, making an additional $3,000 in their third year out of college, the difference was not enough to make up for the higher tuition costs.

Private school graduates fare the worst when they enter professions with relatively level pay scales, like teaching, since there is little long-term benefit to balance their higher up-front costs. Students who have already determined that they want to work in one of these professions, therefore, get no economic benefit in return for the additional expense of attending an elite school.

Advocates for private schools will note that scholarships and financial aid packages are often generous and can keep a student from going deeply into debt. That is a fair point, provided that the student gives the aid package at least as much weight as the school’s perceived prestige or other factors (location, climate, party atmosphere or absence thereof) when deciding where to enroll.

Spending more for an education than it can return through higher lifetime earnings isn’t necessarily wrong or silly. It is simply a form of consumption, rather than an investment. People spend money on experiences that are unlikely to provide any financial payback on a regular basis. We go to movies, take vacations, and enroll in yoga classes because these things are personally satisfying. They may make us wiser, better or just happier people. There is no reason not to spend money on education for these same reasons if you can afford to do so. Some of the more expensive schools claim that, with their smaller class sizes and (allegedly) more distinguished professors, they provide more personal satisfaction, justifying their higher costs.

The problem is that many people who cannot afford pricy educations buy them anyway. Because they are repeatedly encouraged to think of education as an investment, rather than as a form of consumption, people who would not max out a credit card to buy a Caribbean cruise are willing to take on massive amounts of debt to pay for luxury schools. Two-thirds of students graduating from four-year undergraduate programs in 2007-2008 had some educational debt, according to calculations performed by On average, students had $23,186 in debt, and nearly one in 10 owed $40,000 or more.

A young person facing an inexorably ticking student loan clock may have to postpone other goals, like pursuing graduate school, buying a first home, getting married or having children. The constant need for cash can also limit new graduates’ career options and make it more difficult for them to switch careers later on.

The stress of student loan payments puts pressure on young couples’ relationships as well. The New York Times recently profiled one young woman whose fiancé broke off their engagement after learning the extent of her educational debt. The woman, an X-ray technician and part-time photographer, owed about $170,000.

As a society, we have become convinced that, when it comes to education, more is more. But not everyone is inclined or well-suited to be a surgeon, a top lawyer, a corporate division chief or a best-selling author. As the American population ages, our country is going to need a lot more home health aides, physical therapists, nurses and geriatric social workers. We will also need a lot of flight attendants, air conditioning technicians and auto mechanics. These fields all require some training, often considerable training, but they do not require the study of calculus or Chaucer. We need to spend more intelligently rather than simply spending more.

Just as with health care and housing, we are finding with higher education that the more we subsidize, shift and hide the costs, the higher the prices get — and the more we ultimately end up paying. We need to look honestly at the extent to which educational spending increases lifetime earnings and learn to view any expenses that are unlikely to be recouped as consumption, not investment. When that happens, I suspect that many young people will start saying “no” to the prospect of starting life in a deep financial hole.

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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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