I Don’t Care How Much You’re Saving for College… It’s Not Enough
Okay, so now that our daughter is all settled into her dorm room as a freshman at U.C. Berkeley… or “Cal,” as the in-crowd calls it… and we’ve returned home to our recently emptied nest, I thought it would be appropriate and helpful for me to share a few things I’ve learned about saving and paying for the costs of college today. Because I’m here to tell you that chances are, no matter how much you’re saving… it’s not enough. And if you have time to change your savings strategy, now would be a good time to do so.
Saving for anything these days, by the way, isn’t easy. It’s not like you can expect to earn interest on money you deposit in the bank, and if you’re anything like me, whatever you’ve made investing in the stock market over the last 20 years… you’ve given back during the down years. And counting on home equity like so many of us used to… is hardly worth even talking about anymore.
What people are turning to as an answer is the worst possible answer to any problem… easy money at terrible terms… or as everyone calls them today: student loans. In fact, the skyrocketing costs for higher education are perhaps easiest to understand by thinking of the situation as the mortgage bubble meeting the third-party payer problem from our health care system… it’s truly the worst of both worlds.
In point of fact, depending on student loans to pay for college is like putting the your mortgage on a credit card whose balance can’t be discharged in bankruptcy. And I’d like to offer a few suggestions as to how you might consider avoiding them as much as possible.
It’s also worth acknowledging that saving isn’t easy for most people no matter what. Even if the environment for investing were better, with just about everyone’s incomes down or flat for much of the last decade, saving is just generally, pardon the language, a real bitch. And I have a few ideas that might help in that regard as well.
Okay, I’ll come right out and admit it…
I do have to admit that there are no easy answers for this topic as a whole. Fact is, having a kid go off to college has had a tendency to make me wish, if only for a fleeting moment, that I hadn’t spent all those years encouraging my daughter’s academic achievements, and instead encouraged her to consider a career requiring continuing education more on the level of cosmetology school.
One morning, a couple of days after getting our daughter all moved into her dorm room at Berkeley, we took her to breakfast and listened as she told us about her first few days as a college freshman. Among other things, she told us about how she was “rushing a sorority,” named Chi Omega, and hoping to join and move into that sorority’s house… a mansion that once was the home of Oakland’s Mayor… the following semester.
“The house has it’s own chef,” she explained excitedly. “The other night they rented a party bus and like 30-40 of us went into San Francisco to play laser tag,” something my daughter would likely never have done under any other circumstances. “And they put on tons of events that you guys could come to throughout the year. A lot are pretty dressy, so I’m going to need the rest of my shoes from home.”
A few days before, I had just carried a huge box filled to the top with nothing but shoes to her dorm room.
My wife was listening intently. I was eating my breakfast, although I can’t remember anything about it. My wife asked if I was feeling okay and I assured her that I was fine. As usual, we had a few stops to make on the way back to the dorms… our daughter needed a few things… can’t remember what on that particular trip… it’s all kind of a blur to me now.
I remember one day when we had to stop at Bed, Bath & Beyond… for $843.
On the way back to our hotel, after returning our daughter to college life… my wife said I looked better. I said that I felt better too. She asked if it was the food I’d eaten at breakfast and I assured her it wasn’t. She wasn’t going to let it go so I explained.
“It’s sort of like… well, we were all sitting there talking… having breakfast… listening to Tay… having a great time… and then it was like the waitress came over and handed me a check for $250,000… and it just made me a little queasy for a few minutes there that’s all… I’m fine.”
My wife was laughing… so I laughed too. I glanced at my phone’s screen… it was just after 11:00 AM. “Let’s stop at the bar,” I suggested as we entered the hotel’s lobby. “I’m ready for a drink.” She followed along… still laughing, but not saying a word.
Is This Really Necessary?
Before we move ahead, however, there’s been some discussion lately about whether kids even NEED to go to college today, the argument being that with the costs of college being what they are… and the job market being what it is… it’s very possible that investing in a college education won’t pay off.
My answer to diatribe is that it’s complete nonsense. Oh sure, there are some kids that simply won’t go on to college straight out of high school for a variety of reasons… some may chose to join the military, others may go directly into the workforce. And I suppose, if your son can consistently throw a 95 mph fast ball, there’s certainly an argument to be made that college can wait.
For the most part, however, the fact is that a college education is the right thing to do for all sorts of reasons, money being only one of them.
Generally speaking, college equips kids for future success in many ways. Many people come to discover their future career while attending college as an undergraduate. There’s learning academic discipline, becoming more cultured or open-minded, and developing critical thinking and problem solving skills, et al. And a bachelor’s degree is a pre-requisite for the myriad of graduate school programs that unquestionably do lead to relatively higher earnings throughout one’s lifetime.
And countless studies show things like more highly educated people more likely to be healthy and live longer… more likely to vote, volunteer, and not be dependent on public assistance programs.
Most people know all of this… according to the U.S. Department of Labor’s Bureau of Labor Statistics (“BLS”), of those that graduated from high school in 2012… 66.2 percent were enrolled in a four-year college program by Fall of that year… and perhaps somewhat remarkably, 87.8 percent were full-time students. By gender, 71.3 percent of girls and 61.3 percent of boys went on to college that year. and by ethnicity, 66.6 percent of whites, 82.2 percent of Asians, 58.2 percent for blacks, and 70.3 percent of Hispanics started college in 2012.
The unemployment rate for those age 16 to 24 that were not enrolled in school in October 2012 was essentially unchanged from 2011 at 16.5 percent. For young men and young women without a high school diploma the unemployment rate in 2012 was similar, 28.8 and 28.7 percent, respectively. Not surprisingly, the jobless rates of young men and women with a bachelor’s degree of better, were only 8.0 and 6.2 percent, respectively.
Now, admittedly, it’s also true that graduating from college these days is no guarantee of finding a job, let alone financial success in life. In fact, according to projections by the BLS, 14 of the 20 occupations with the most job openings over the next 10 years won’t require a college education. But, most of those jobs, health aide, customer service rep, retail salesperson… aren’t considered anywhere near “high paying,” or rife with opportunity for advancement. In fact, most don’t even offer any meaningful benefits like health or retirement plans.
According to the College Board, 20 percent of men and 16 percent of women earn less than the average wage of someone with only a high school diploma. But, averages can be deceiving, and the fact remains that many jobs require a bachelor’s degree just to interview or be considered for advancement.
And on top of all that, a recent study conducted by Georgetown University’s Center on Education and the Workforce, showed that not only does education pay off over the average earner’s lifetime, but also that the gap is widening.
In 2002, on average someone with a bachelor’s degree could expect to earn $2.3 million during their lifetime… that’s 75 percent more than the $1.3 million that someone with only a high school diploma could expect. By 2009, the college grad in that example was earning 86 percent more and I feel certain that today the premium earned by the college grad is higher still.
So, no matter how you slice it… for the vast majority of kids today, college is THE path to take.
The Costs of Going to College Today…
If you haven’t looked closely at what it costs to go to college today, you’re in for a rude awakening, let me tell you. Last summer, my wife, daughter and I went to Northwestern to tour the campus. At the conclusion of the tour they told us parents the price tag… $57,000. No one in our group said a word. I almost swallowed my tongue.
I wanted to ask, “Is that for the whole four years?” Knowing darn well that it wasn’t.
I know why no one said anything… there wasn’t really anything to say. I mean, I could have asked something about whether it included room and board or books or whatever, but it didn’t really matter… sort of like asking if the $100,000 sticker price on a new Mercedes includes floor mats or not. You know what they say, if you have to ask…
These are the moments when you think about how much you might have saved by encouraging your wife to have a few glasses of wine during the last trimester or how you could have let your child watch more television and play more video games during the evenings instead of paying attention to all that homework nonsense.
The thing is, we were only at Northwestern University. It’s like 20 minutes outside Chicago right on the shores of Lake Michigan in a cute little town named Evanston, Illinois. We were there in August when no one goes to school there… and it was sunny and the lake was beautiful. But understand… during half the school year the temperature with the wind chill, and what’s euphemistically referred to as “the lake effect,” makes anything over a three minute walk outside life threatening. No one looking at Lake Michigan in February would be the least bit surprised to see penguins popping in and out of the water and onto shore.
I might have understood it had I found out that the University of Hawaii’s tuition cost $57,000 a year, but Northwestern? Don’t they pay you to live in weather like that?
Besides that, all that kept going around and around in my head was, “If Northwestern is $57,000, what in the Sam Hill must Princeton or Yale cost these days? Even more than that?” Look, if you multiply that annual tuition by four years as an undergraduate… add on at least ten or fifteen thou for bells and whistles… factor in spending money and airfare back and forth a few times a year… and on one hand you could have your bachelor’s degree from Northwestern University…
On the other you could attend a community college while paying off a 3,000 square foot, four bedroom, 2 bath, 2 story home a block from the lake in Evanston, Illinois. Own it free and clear by the time your 22 years old. I realize a four year college degree is important in life, but a free and clear home by the lake at 22 years old is quite a nice little head start in life too, wouldn’t you say?
Of course, you could try to cut a few corners to save some dough. Like I suppose you could send your kid to college without a laptop computer, right? She doesn’t really need a cell phone either, I suppose. Or, a printer… an iPad… television… fridge… microwave… text books? There’s nothing wrong with sharing text books, right? Just share the damn book and settle for a ‘C‘ in that class, okay? It won’t kill you. (I’m kidding, of course… I kid. I’m a kidder.)
Heck, we live in Southern California, and I couldn’t help but realize that if my daughter actually went to Northwestern, just the winter wardrobe alone could have come close to wiping out the annual salary of any first year teacher in the public schools. How in the world does anyone save enough for this?
Then there’s the people who jump right into the discussion by saying… “Tell her to get a job.”
Well, thank you for that Professor Einstein, why didn’t I think of that? That’s going to change everything… my daughter getting a part-time job at minimum wage will totally turn this financial picture on its head. Genius… pure genius. I’ll go run and tell her the good news… now she can work at Starbucks and not concentrate so much on getting good grades.
According to Bloomberg… over the last 35 years… since January of 1978, to be precise… the cost of a college education at four-year universities in this country has increased by 1,120 PERCENT.
Care to contrast that with health care costs in this country, because you can’t. Medical care has only increased by 600 percent in that same time. A college degree has been increasing four times faster than the Consumer Price Index… the price of food has only gone up 244 percent since 1978. Nothing in this country has gone up over the last 30 years like the cost of going to college.
Why SO High?
The Associated Press recently reported that… DUE TO STATE BUDGET CUTS… between 2008 and 2010, the average tuition at four-year public universities in the U.S. went up by 15 percent. In states like Georgia, Arizona and California, tuition at public universities increased by more than 40 percent.
Well, that’s just great… state budget cuts are contributing to this debilitating situation?
Why is it that everything I write about ends up being rooted, at least partially, in the foreclosure crisis. State budgets have been significantly reduced by diminished tax revenues… that’s property taxes, sales taxes and state income taxes. Many of our cities are in serious financial trouble, some have already filed bankruptcy.
So, the Great Recession that has taken a bite out of everyone and everything has also contributed to the meteoric rise of college tuitions at public universities… a rise that will only further increase the earnings gap between the “haves and have-nots” in this country… absolutely perfect.
But, it’s not only the states cutting their funding to balance their books that’s causing the increases because Bloomberg also reported that the cost of tuition at private universities in this country has gone up by a hair under 30 percent… just over the last five years!
Some of the factors involved in the rising costs of college are simply the result of increasing demand and the resulting competition among institutions.
According to the National Center for Education Statistics, between 1990 and 2000 enrollment increased 11 percent, but between 2000 and 2010, enrollment went up by 37 percent. In an environment where demand increases so dramatically each year, universities have to spend a lot of money to attract potential students away from competitors who are located all over the country.
Obviously, a campus that has state-of-the-art academic, recreational and living facilities gets more students by being much more appealing. But always looking your best while staying up-to-date with the latest technology isn’t cheap. Drexel University, for example, recently modernized its campus. The transformation reportedly left Drexel $467 million in debt… and the net price of attendance at Drexel is now among the highest in the U.S.
Many colleges also compete by offering more scholarships, but believe it or not, the scholarships often cause tuition costs to rise. The money for merit-based awards, for example, are sometimes funded by tuition increases. So, when students pay their tuition, they could also be subsidizing the university’s scholarships.
The Great BIG Student Loan Debt Bubble…
Student loans are easy money offered at unfavorable terms to people who can’t fully appreciate what they’re getting into and are under duress… meaning they’re in no position to bargain or say no. These loans are just like the sub-prime mortgages that fueled the housing bubble and ended in a spectacular implosion that took down all of Wall Street’s investment banks in a matter of months, and continues to shake the global financial system almost seven years later.
Student loans are “securitized” before being sold off in bonds, at least half of them by Sallie Mae.
Sallie Mae sounds like she’s the sister of Fannie Mae and Ginnie Mae, but it’s nothing like that… Sallie is not even related to the other two. Sallie Mae used to be a government-sponsored enterprise (GSE”) until the company was totally privatized in 2004. Today, Sallie trades publicly as SLM Corporation.
So, Sallie Mae, a private lender and the largest student loan lender and loan servicer in the country… has continued to generate astronomical profits based on soaring levels of government guaranteed student debt that cannot be discharged in bankruptcy, which it offers at relatively high interest rates… and the increasing costs of a college education.
Even under the rate caps in the latest plan from congress, if market rates rise (and they will), undergraduates could end up paying as high as 8.25 percent on their student loan debt and graduates as much as 9.5 percent. For PLUS loans taken out by parents to pay for their children’s college, the rate could go to 10.5 percent.
Recent estimates are that American consumers owe over $1.1 trillion in such student loan debt, and one look at the cost of college tuition makes it easy to see why. They say the average graduate is coming out of college owing $27,000 in student loans, but it shouldn’t be difficult to predict, based on the numbers in this article alone, that the amount owed by graduates is only going higher in the future.
And so what happens to students who graduate, but can’t find a job and therefore can’t repay their student loans? Well, here’s a clue I found in an article on the Huffington Post that appeared in May of this year…
“A company spokeswoman said that Sallie Mae has modified more than $1 billion in private education loans since 2009 with interest rate reductions or extended repayment terms.”
Oh, good Lord… just how I would want my daughter to begin her adult life… right after college or graduate school… by having to apply to some bank for a loan modification.
Let’s get them into the whole loan mod process early, that way, by the time their in their forties, they’ll be prepared to be tortured and screwed around trying to save their homes by getting their loans modified?
And look, I don’t care about averages… I can see student loan defaults happening… A LOT. Already, after two years almost 10 percent of student loans default. After three years, it goes to 13.4 percent. Federal student loan borrowers get an automatic six-month deferment, but that’s just not going to do much for someone who owes $50,000 or even $100,000 and just got out of college.
That’s like waking up the day after graduating with a delinquent mortgage AND bad credit.
You can also apply for additional deferment from your actual lender for reasons like unemployment, attending graduate school and military service. So, it’s basically hardship… borrowing more… or join the army that gets you the additional deferment… terrific.
There’s also a forbearance program available that can last up to 12 months, but interest keeps accruing so you’re balance keeps rising like a negative amortization loan. And to qualify you have to have some sort of hardship like a serious illness… so I guess you can always hope for one of those to hit you right after college.
And there’s an “Income-Based Repayment” program, which caps your payments at 15 percent of your income… although President Obama recently signed an order to reduce that percentage to 10 percent for student loans originated after October 2011.
They say the “best part” of the Income-Based Repayment plan is that if you’re enrolled in it for 25 years… any remaining balance will be released.
Whew… now that is a relief. Once our young graduates have finished their indentured servitude, repaying the predatory loans they were essentially forced into in order to over pay for their educations… because we taught them that getting an education and contributing to our society was the right thing to do… once they’ve served 25 years, giving 10 percent of their income to some bank who took no risk because the loan was guaranteed by the taxpayers… then their balance will be wiped out.
Gosh, thanks Mr. Student Loan Banker. That’s absolutely swell of you.
In a speech last May, Richard Cordray, Director of the Consumer Financial Protection Bureau, said…
“Student debt has become the defining feature of their lives… the millstone around their necks that holds them back from a full financial future.”
Well, that’s certainly why my wife and I have worked so hard for so long to raise our daughter and give her every advantage, and I know that’s why she’s worked so hard herself… in order to finish wearing a millstone around her neck that holds her back from a full financial future for 25 years after college.
Now that’s what I call the American Dream realized… that’s why you should get straight As… be at the top of your class… and get admitted to a school like U.C. Berkeley… so you can finish your doctorate six figures in debt begging for a loan modification, as you default and watch your credit card rates zip right up to 29 percent…
I’m sorry… I don’t mean to be overly dramatic about any of this, but does anyone see this working out any differently for millions of young people today than what I’m describing? If I have such a hard time saving up enough to pay for college, what makes anyone think that our children are going to be able to repay those same amounts… plus interest… any easier?
There has got to be better ways to handle this… and there are. Just tune in next week for…
PART 2: Saving… College, Retirement and the American Dream