Higher Education?
As the price of attending college gets higher and higher, we have to wonder if it is really worth the price
(Oops — this post was sent early. this is the same with this little explainer in the lede. Sorry. R)
A recent Ron Lieber column in The New York Times is pegged on the fact that the cost of attending some colleges for one year has now reached $100,000.
Yikes.
Here is a link to the Times story. (The Times website said I could share it. I hope the link works for you.)
Meanwhile, I’m in “share an excerpt mode. And the Lieber story made me think about the advice that I offered to students on the topic. I wrote a long Appendix in my book about The Rules, addressing the challenges presented by the high cost of higher education.
Here’s what I said in the book:
Appendix E
Education and Avoiding the Student Loan Trap
BIG PICTURE: Spend as little money as possible on postsecondary (after high school) education. If you or your student wants to pursue a four-year college degree, start with two years of less-expensive community college. Then transfer to an in-state public college or university to complete your degree. SAVE YOUR MONEY.
WARNING: For this strategy to work well, students must understand how community college credits will transfer to a four-year college. Four-year colleges do accept credits from community colleges. The catch is: Do those credits fulfill the specific course requirements for the degree the student wants? Frequently, students earn a large number of community college credits that may not fulfill the requirements for the degree they want to pursue. That could mean they need an additional semester or year of study. If you are planning to transfer, be sure to study the degree requirements. If you are going to make a course correction and change majors, do it at the less-expensive junior college level. Know where you stand with your credits in your planned major.
BE AWARE: A typical four-year college degree today has a value similar to that of a high school degree a half century ago. A college degree is expected by many employers, but earning a degree guarantees nothing. While college graduates may be searching for jobs, individuals with special skills, such as computer coding, may earn big salaries even if they do not have a college degree. Such cases may be uncommon, but they are examples of the “no guarantees” of postsecondary education.
Upon obtaining a four-year degree, many students realize they need an additional year or two or more for an advanced degree in some field of study. Therefore, SAVE YOUR MONEY for when you are really going to need it. By the time students are planning to attend graduate school, they will be more focused, and the odds of getting a reasonable return on their investment in education will be much higher.
WARNING: The following information is very basic and generalized. Student loans are a $1.75 trillion business that is constantly growing and changing. There are hundreds, if not thousands, of lenders and more than 45 million individuals with student loan debt. If you are of an age to be considering student loans for yourself, a child, or another close relative, you ought to be sufficiently Internet-savvy to explore the information available online and get up-to-date details about loan programs, requirements, and some of the pitfalls this book describes. Our objective, if you continue to read the information that follows, is to make you aware of the extreme risk imposed by student loans and to encourage you, if you must take on this kind of debt, to do so very, very carefully and only if absolutely necessary. Student loans are easy to obtain, difficult to manage, hard to repay, and nearly impossible to discharge in bankruptcy. Do NOT let yourself or your family fall into the student loan trap.
Education Is the Answer.
Now, What Was the Question?
In the United States, the idea that higher education will provide the answer to many of our nation’s most challenging problems is widely accepted. There’s just one problem. It’s not true. Here are a few questions followed by an answer you might hear.
How do you make sure children are successful in life? Education!
How do get ahead at work? Education!
How do we, as a society, overcome inequality and prejudice? Education!
If you don’t have a lot of money, what is the one thing you can borrow money for and be sure you will be able to pay it back? Education!
Boring. Stuff.
Education is an important resource people can use to solve problems and get ahead in life, BUT NOT AT ANY PRICE!
Education—specifically postsecondary education—has changed significantly and become much more expensive since the end of the Second World War and the era of the GI Bill. Once upon a time, a college degree was a reliable path to a good job and a better life.
Unfortunately, the “once upon a time” story was not true for everyone in the 1940s and ’50s. The G.I. Bill (post WWII) discriminated against Black soldiers from the South. The benefits were administered by state governments and were not made widely available to Black veterans in southern states.
Today, the “education is the answer” story has become more myth than fact for EVERYONE!
It is true that many students, probably a majority, benefit from postsecondary education. They may, however, graduate with a large student loan debt—a financial burden that can have a major impact on their futures. It is also true today that a large number of students who enter postsecondary education programs fail to complete their studies or fail to benefit, even if they receive a degree or certificate. They are left burdened with debt that they may never be able to pay off.
And yet, the “education is the answer” myth remains powerful and pervasive.
Why?
It is promoted by politicians and government sources because it sounds like a plausible answer to difficult problems. It is promoted by the education industry because it keeps schools in business; it puts students in classroom seats. And the myth is gratefully supported by the student loan industry. It keeps them in business and makes them a great deal of money.
As a result, parents and students, with all the good intentions in the world, are being lured, hooked, and reeled into a student loan trap.
What all these people should be saying is this: Education is the answer, as long as it is at the right price.
Reality Check
Colleges and universities are big businesses. They offer a service—education—that, when purchased in the right quantity, provides students with a product: a degree. The retail price of a year of education service at a typical four-year college or university ranges between $25,000 and $75,000. Therefore, one of those degrees runs you anywhere from $100,000 to $300,000.
That is very expensive! So the college and university industry has successfully lobbied the government for money to help students pay for college (to buy their product). Some money is available through grants—free money that doesn’t have to be repaid. But most of the money that is offered to help students buy education comes in the form of student loans. The government and colleges make it very easy for students to get lots and lots of money in loans to help pay for education products.
For-Profit Education
When a big pool of money becomes available, enterprising private business operators take notice. Business schools and trade schools have existed nearly as long as colleges and universities. But with all that money available—the government grants and loans—private, for-profit education became much more profitable and much more aggressive in seeking out students who were not attending colleges. The for-profit schools offered opportunities to study technical subjects or trades and earn certifications. Then, the for-profit industry even began operating for-profit college and university programs.
Here is what you are looking at today. Thousands of education businesses—some nonprofit and some for-profit—are actively seeking customers (students). They all have marketing departments actively recruiting customers (students). The marketing effort creates a picture of a beautiful educational experience and suggests that the customers (students) will receive great rewards for their education purchases in the future (high-paying jobs).
The Financial Aid Department: Right Arm of the Sales Department
Since education products at either a nonprofit or a for-profit business are expensive, all of these businesses have financial aid departments. The purpose of a financial aid department is to show the customers (or their parents) how they can afford to pay for the products the education businesses are selling and, in some cases, even arrange student loans for them.
Financial aid departments at schools are exactly like the finance departments at auto dealerships. The car dealer finance person’s job is to show customers how they can borrow money and buy a new luxury SUV. Financial aid departments exist to help customers go into debt to purchase a degree or certification.
Educational financial aid departments actually have an extra advantage over a car dealership. The “finance person” at a car dealership has only the information on a credit report to use to assess a potential customer’s needs and bargaining position. The education industry asks for more.
Most education businesses require their customers to complete a Free Application for Federal Student Aid (FAFSA) form. The FAFSA detailed financial information from the student and family. Applicants for federal loans must complete the FAFSA.
Private colleges may also require students to complete a College Scholarship Service (CSS) profile. The CSS, operated by the College Board, charges a fee to complete the profile plus a fee to send it to each college an applicant selects. The CSS is used by the colleges to distribute financial aid money they control.
Because of these financial disclosure requirements, college financial aid departments have a much stronger bargaining position when dealing with their customers (students). They know more, so they have the ability to make their offers more appealing to help them close the sale.
The education industry financial aid experts will identify the free money first—the grants. Then they may identify work opportunities that will allow the customers (students) to work and earn some money. Then, if they want to make the product more affordable, they will offer discounts (scholarships). And finally, they will make up the difference by recommending student loans.
Here’s the most important thing students and their families need to be completely aware of. Education businesses (nonprofit or for-profit) are all working hand in hand with the student loan industry. They all benefit (keep their jobs and earn more profit) by encouraging students to take on student loan debt. They are not lying awake nights worrying about what it will take to pay off that debt.
Welcome to the Student Loan Jungle
Customers (students) can apply for federal student loans or private student loans. There are subsidized and unsubsidized federal loans. Parents can also take out federal loans. Interest rates for federal loans vary from year to year and are set by Congress. Sometimes they are very low (3.75 percent in 2021) and sometimes they are higher (up to 6 percent in recent years).
Private loans are offered by banks and other profit-making businesses. The choices are endless, and they may allow customers to borrow extra money to cover living expenses. Private student loans are frequently “securitized”—a financial services industry device that turns the loan into an investment in the same way that mortgages were “securitized” before the 2008 housing bubble and economic recession. This means the loans are broken up into smaller amounts, bundled into investment securities, and sold to investors. As a result, the original loans may now have dozens or hundreds of owners. If you are the person who took out the loan, you do not have anyone to go back to and hold accountable if there are problems.
Additionally, federal loans can be “consolidated” and refinanced by private, for-profit companies. There are lots of companies that want you to do that. Once a loan is refinanced, maybe it can be refinanced again, or maybe not.
If a federal loan is refinanced, you may lose a valuable benefit—loan forgiveness. If you are struggling to pay off a loan and have been dealing with bill collectors, a refinancing may restart the statute of limitations on the loan and allow bill collectors to restart their collection process.
The one thing you need to remember through all of this loan and refinancing business: The companies are all making money. They are not doing this to benefit students or their families; they are doing it to earn more profit.
Here's a summary: The federal government and lots of companies are willing to loan customers (students) money that will not have to be repaid until after the time when the customer (student) is supposed to graduate. It will feel like you are getting free money. It will feel good. In today’s student loan market, nearly anyone can borrow enough money to pay for a college degree or professional school certification. Then, about six months after graduation, the customer (student), and possibly the parent or another relative who was foolish enough to cosign for the loan, will have to start paying that loan back.
How Much Debt?
The short answer is lots. An undergraduate in 2022 can borrow up to $57,500 in federal loans. Graduate students can borrow up to $138,000 in federal loans. The average college student graduates with about $30,000 in student loan debt. That’s an average. For every student who graduates debt-free, there’s a student with $50,000 in debt or more.
What Is the Guaranteed Return on Your Education Investment?
Nothing.
You earn your degree. You receive your certificate. What is it worth? That’s up to the job market. The degree or certificate may qualify a student for certain employment opportunities. Or it may qualify a student for further education investments (an advanced degree of some sort). But remember this: Degrees or certifications do not guarantee any return on education investments.
Worst Case Scenarios
Many students (and their families) manage to pay off student loan debt successfully. But some do not. Why is that?
In some cases, it may be due to unrealistic expectations. Spending up to $100,000 on a degree in a notoriously low-paying field, such as art history or literary criticism, can lead to big trouble.
But what about the case of the business major who only has $20,000 in debt? The student gets a good job and starts paying off the loans. But then the ex-student’s company is acquired, and the ex-student loses the job. It takes several months to find a new job. The ex-student misses some payments. There are penalties and additional interest. A new job is found, but the ex-student still has to keep up with rent and pay for food. Then the new job doesn’t work out, and more payments are missed.
The $20,000 debt balloons to $30,000 or $40,000. The ex-student tries refinancing. Now the loan payment is smaller, but it will take 20 years or more to pay it off.
The agreement terms for some federal loans include a benefit that will cancel the balance of the loan after 20 or 25 years. The refinancing of a federal student loan eliminates that possibility.
Over the course of the loan, the ex-student will pay much more in penalties and interest than the original $20,000 that was borrowed. And there’s no way to escape this debt. It is nearly impossible to discharge student loan debt in bankruptcy.
What happens now? Do the ex-student’s parents drain their retirement savings to help their child? Do they put their own futures at risk?
Welcome to the student loan trap.
Warning: Loan Forgiveness and Loan Servicing Companies
Companies that collect payments are central figures in the student loan industry. Making loans and spending money for education is the easy part of the business. It is when the loan payments come due that things get complicated. There were, in 2022, seven companies that “serviced” federal student loans.
This part of the student loan industry has been especially troublesome for some borrowers. In 2022, for example, a lawsuit against Navient (a company that stopped servicing student loans in 2021) ended with a $1.85 billion settlement over accusations that it had misled borrowers into costly repayment plans and predatory loans. Loans serviced by Navient were turned over to a company called Maximus.
Similarly, a company called FedLoan Servicing, operated by the nonprofit Pennsylvania Higher Education Assistance Agency, has announced that it will stop servicing all federal loans by the end of 2022. It is transferring all its federal loans to other servicing companies. This is significant because FedLoan was the only company servicing the federal student loan forgiveness program.
The Public Service Loan Forgiveness (PSLF) program, created in 2007, promised to eliminate the remaining loan debt for federal loan recipients who made payments for 10 years (120 qualifying monthly payments). In 2017, when people were first eligible for loan forgiveness, 28,000 public service workers applied for debt relief. Only 96 applications were approved.
Some of the problems with the program have been corrected. Temporary measures enacted during the Covid pandemic resulted in additional loan cancellations. Still, problems with the program persist.
The lesson for student loan borrowers is this: If you think you are taking out a loan that is eligible for a forgiveness program, it is essential to study the fine print and document everything on paper. You need to maintain a print file of all documentation, because the content of websites can change. You need to be aware that multiple companies may be involved in the loan and the repayment process—your loan may be shuttled from one company to another, and information may be lost.
It is especially important to study the details for repayment plans and document your payments. You must be aware that choosing the wrong repayment plan may make you ineligible for loan forgiveness—and phone operators at the loan servicing company may not know that. Know for certain that if you “consolidate” or refinance a loan in any way, you will become ineligible for loan forgiveness.
If you think you will be eligible for loan forgiveness, you must know the program rules inside and out. Document everything you do and every payment you make on paper so that you can prove your eligibility beyond any doubt. Then hope for the best.
Conclusion Number 1
Spend as little as possible on postsecondary education. If you are following the traditional college and university route in today’s work environment, you are likely going to want an advanced degree. Save money for that.
Be certain you read all the fine print. Learn about the terms for forgiveness programs, the statute of limitations for the debt, how the terms are reset with refinancing—all the little “gotcha” details that can cost you money and peace of mind.
If you’re going for a certification, do your homework and be sure the education business you are working with actually delivers on its marketing promises.
The education industry (nonprofit and for-profit) wants you as a customer. Enrollments are dropping. It has to fill seats. It wants you and it is working closely with the student loan industry to load you up with debt.
You’re smart. You want more education. That’s a good idea. But seriously, do not be a sucker.
Conclusion Number 2
Education is wonderful. There is nothing more satisfying than working with good teachers, experiencing classroom challenges, engaging with your fellow students, and learning stuff—sometimes just for the sheer gol-durn joy of learning stuff.
For college students, or for anyone, classes in language and history and Shakespeare will enrich your life. Many classes you take may be irrelevant to the task of earning money, but they may prove to be life changing in other ways.
A great benefit of postsecondary education comes through learning how to learn. You discover how to equip yourself to adapt and change as the world around you changes—and change it will, you can be sure of that.
Education is valuable. It is much to be desired and pursued. But, at the same time, you must be careful and refuse to overpay for it, get into debt, and put yourself in an untenable financial position.
Be smart. Be wise. Be skeptical. Remember that education is a business and you are a customer. Remember Rule No. 4. Never pay interest. And if you must break that rule, do it with eyes wide open and only as a last resort.