Monday, May 16, 2011

Student Loan Debt, Part II

Rule of Thumb:  Never borrow more in Student Loan debt that the first year's salary in the profession you plan on going into.

Today on Morning Liberal Claptrap, we had a story that gives one hope that NPR might be finally shedding its socialist phase and getting back to regular reporting.  NPR used to be great, back in the days of Bob Edwards - before they hired the anchors with the funny names who sound like they are laughing and giggling while they talk.  And before they referred to any employee as a worker a la Karl Marx.  Maybe, just maybe, they are realizing that such crap is far past its sell-by date.

I doubt it, though.

But today, a piece on student loans and student finances, and surprise, surprise, they don't make the students out to be "victims" of anything except their own folly.  And they have a reasoned response from Mark Kantrowitz that spells out the hard reality of student loan debt.  Kantrowitz questions borrowing more than $10,000 a year for many college degrees and questions borrowing more than the first year's salary in the chosen profession one is going into:
"It's smart if it's enabling you to invest in your future," Kantrowitz tells NPR's Steve Inskeep. "But if you borrow more than your expected starting salary after you graduate, you're going to struggle to pay your loans."

As an example, Kantrowitz says that if you're going to borrow $10,000 a year for four years, you should hope that the field you've chosen has a starting salary of at least $40,000. If you are going to be borrowing more than that, he suggests looking for a less expensive school.

"I can see someone borrowing perhaps $10,000 a year if they're majoring in science, technology, engineering, mathematics, computer science, or nursing," says Kantrowitz, the publisher of the FinAid and Fastweb websites.

"But I can't see borrowing that amount of money for a degree in art, or humanities, or sociology, because the jobs just don't pay as well for those fields of study," he says.

That might make some people wince — especially those who focused on liberal arts in college. Kantrowitz says it's not that those majors are worthless, but that students have to face the reality of how they're going to pay back the money they've borrowed for their education.

"So what are the most worthless degrees or, at least, the hardest to monetize later on in life? Kantrowitz says he often hears from religious studies and theater majors who have a hard time paying back their loans. "

Pretty rational thinking.  Pretty sobering thoughts.  I had to check the dial to make sure this was really NPR.  I mean, after all, where were the cries for government intervention?  Was no one going to be labeled a victim here?  And what about the workers?

And it is an odd thing, too.  To some extent, we are victimizing college students, by (a) telling them that going to college is essential to getting ahead in life, (b) not providing ANY financial training whatsoever in their lives, in high school or college (when it should be part of any basic education), (c) by raising the rates of tuition at many times the rate of inflation, (d) by not explaining to students that a college education, like anything else, has to pass a cost/benefits test, and (e) putting the onus on an 18-year-old to make what could be the largest and most significant (and crippling) financial decision of their lives.

It is funny, but kids pay tuition hikes at colleges without making so much as a peep.  No protests, no sit-ins, no riots, like in the 1960's.   As I have written before, Colleges and Universities raise tuition rates at will - far above the rate of inflation - and run bloated bureaucracies and infrastructure.  Where is the mandate or onus to make a college education cost-effective or affordable?  If GM started raising he price of the Cobalt to $50,000 each to cover the cost of their bloated overhead, people would stop buying - and go to a competitive make (which illustrates why import duties are a bad idea for consumers).

But for colleges?  Where is the competition?  One of the students interviewed did take advantage of the two-year two-step - attending a two-year school (far cheaper) to get the freshmen and sophomore course work out of the way, before transferring to a more expensive "name" school.  But schools in general are sold on the basis of their name and prestige, and employers look for name brands in schools when hiring - even if that brand is based on little more than the sports team (as a Syracuse grad, I can attest to that).

And perhaps that is one reason why the folks at Morning Liberal Claptrap were strangely silent about this aspect of the student loan debate.  To criticize the nation's Colleges and Universities for selling a bloated socialist bureaucracy that, incidentally is also the bastion of liberal thought, is, well, unthinkable.  After all, it is the nation's leading academics who shall save us!  So we can't mention the fact that they can't balance their own budgets, except on the backs of the students.

But while politics are all very well and fine, they don't directly help the individual.  If you are a student, the onus is on you to figure this all out.  And as an 18-year-old, I highly doubt you will.  Rather, like most students, you will party a lot, have a good time, get mediocre grades, and study advanced naval-gazing, because it is "easier" than the "hard courses" and you will just naively hope that a "good paying job" is at the end of this pipeline, perhaps as an entho-musicologist (as illustrated in the NPR piece).

If you are in school or contemplating going, my advice is as follows:

1.  Realize that Student Loans are Forever:  Sallie Mae may initially sound like a naive country cousin, as David Sedaris famously wrote, but she will break both your kneecaps like a Mafia enforcer, if you are late on your payments.  Student Loan debt can survive bankruptcy and is famously hard to get out from under.  You should not take on this debt in a cavalier manner.

2.  No Partying:  It is tempting, as an 18-21 year old, to live the high life, often literally.  You are away from home and there is beer, pot, and sex to explore.    But such distractions can derail your College career - and no one wants to hire the "C" student from college.  Why?  Because you've demonstrated to the potential employer that you are willing to really screw up great opportunities.    No employer in their right mind would hire such a student.

3.  No Spending:  There are fancy clothes to buy and of course, the car your parents gave you needs some serious "modding" - right?  It is tempting to spend, and spend a lot.  And credit card companies, as well as student loan companies, will tempt you to go heavily in debt at a very early age - so you will spend the rest of your life paying off that sweater from the mall.

4.  Work:  Getting a job to pay for expenses is hard.  But I did it - so can you.  And when you realize how staggeringly difficult it is to make $10, it will help put into perspective how hard it is to pay back $10,000 - with interest - over time.  So you will be less inclined to borrow.

5. Consider Not Going:  If you realistically are not college material, don't go.  We push people who should really be going to vocational schools to go to college these days.  They could get ahead learning a valuable trade, instead of struggling at Liberal Arts and then flunking out after two years.  If college is not for you, spend your money more wisely and learn how to repair an air conditioner, or weld steel, or whatever.  Even in the midst of this recession, there are job openings going unfilled for lack of skilled people.  And yet, our Colleges and Universities continue to churn out hundreds of thousands of unemployable and unskilled people every year.

6.  Have a Career Plan:  Career plans usually don't work out as you might expect.  But having a plan is a start.  And if you are structuring your College experience to lead to a job down the road, chances are, you will be studying something that is useful and worthwhile, which, while it might not lead to the career you planned, may lead to something related.  Studying advanced naval gazing is never a good idea, even if the courses are easy.  Taking the easy way out never is the best idea.
Now, there are some who will say "This is all wrong!  College is a chance to expand your mind and learn all about the great authors!  The great philosophies of life!  It should not be made into a crass, commercial enterprise or some sort of job training!"

And I would agree with you somewhat there.  But it is the Colleges and Universities that are to blame for this trend - by making an education so staggeringly expensive that one has to approach it with a serious cost/benefit analysis in mind.  The Colleges and Universities have brought this upon themselves.

And perhaps, long-term, there is a light at the end of this tunnel.  If more students start to question the cost of College - and start shopping competitively for schools - then schools will have to lower tuition rates to be competitive - and that means no more bloated bureaucracies and unused school buildings.

Demographics could force this issue - forcing some Colleges and Universities to go bankrupt due to declining enrollment.  You can't raise the cost of your product many times the rate of inflation for decades, without reaching some tipping point.  And if perceived value of the product drops, then people may turn away or look to less-expensive alternatives.

But such overall market trends may take years to come to fruition.  In the meantime, it is caveat emptor and 18-year-olds will continue to be expected to make these major life decisions, with little or no financial acumen or training.