‘Don’t borrow for college,’ Harvard economist warns ‘- why he says it’s a ‘waste of money’
Thinking of borrowing for college? Don’t do it: it’s far too risky, far too expensive and, in many cases, a waste of money.
These are strong and unexpected words coming from a university professor and an economist. To be clear, I’m not saying anyone should give up on getting a college degree. But there’s a much cheaper college route – and it doesn’t require becoming a ruthless, ruthless moneylender, namely Uncle Sam.
Think about it: how many of us would borrow at high or very high interest to have the opportunity to invest in something with a 40% chance of total loss? Not a lot.
But 18-year-olds face these risks when borrowing for college. Two out of five will enter the hallowed halls of college to drop out. The majority will have borrowed for the lien. As for college graduates, more than two-thirds will leave in debt.
Parent PLUS loans bury families in college debt
These “parental” loans probably represent additional borrowing by children, as parents guilt their children into paying back or getting the repayment as a smaller bequest to their children.
Since the true borrower of “parent” loans is unclear, no one knows the full extent and distribution of informal and formal student debt. Today’s college students graduate with nearly $33,000, on average, in formal student loans. About one in seven officially owe more than $50,000.
Uncle Sam now charges students 3.74% interest on their loans, up to a maximum of $32,500 over four years. But there is no limit to what he will lend to “parents”. And the current rate on “parent” loans is 6.28%! That’s more than four percentage points more than Uncle Sam pays when he borrows long term.
How to go to college and not get into excessive debt
It is more than possible to earn a college degree without directly or indirectly borrowing potentially insanely large amounts of money at extremely high rates.
There are thousands of colleges and universities. Find a cheap one. This may mean attending community college for three years and transferring to a better school as a senior.
Or you can work for a few years to save for college and establish the fact that you are independent of your parents and shouldn’t lose any grants or scholarships because of their earnings.
Another option: attend community college, but simultaneously take inexpensive online courses that provide certificates. A range of elite schools, including MIT, Harvard, Stanford and my employer – Boston University – offer such courses.
For example, if you are a resident of Iowa, you can get a degree from the University of Iowa for less than $25,000 per year and online training at Yale. The extra costs to study online at Yale, with certificates of completion including grades? Almost nothing.
Then, when applying for jobs, you can state on your resume that you graduated from Iowa, but went to Yale. It’s worth codifying a secret: get the best of both worlds: a cheap, debt-free degree and a very expensive education.
Do whatever it takes, short of borrowing, to go to college if that’s your goal. But also know that two-thirds of Americans lead full, highly productive lives without the aid of a college degree lost in a box in the attic.
do your research
If you are from a low or middle income family, colleges with high prices may end up being cheap because the net price they would charge you is very low. It is important to compare prices to understand the net price of each school.
Parents must take steps early to at least limit specific assets, if not income, that will increase the net price of their children’s college education given what goes into the government’s need-based formula.
And applicants must for their own research-based rankings of departments of interest in the schools to which they are applying. National rankings are popularity polls; they are not serious comparisons of excellent research – which, in the end, is the basis of exceptional teaching.
It’s time for Uncle Sam to stop exploiting America’s youth to try to get a higher education.
I believe students should be allowed to borrow on the same terms as Sam lends long-term (i.e. 30-year Treasury bond rate). And student loans should be treated the same as other IOUs when it comes to refinancing and bankruptcy discharge.
Yes, it will mean less income for students bleeding dry. But Uncle Sam can be content to help destroy our children’s climate and leave them with official and unofficial tax obligations far beyond their ability to pay.
Surely that’s enough mischief and malevolence for any good uncle.
Laurence J. Kotlikoff is a professor of economics and author of “Money Magic: An Economist’s Secrets to More Money, Less Risk, and a Better Life.” He got his doctorate. from Harvard University in 1977. His columns have appeared in The New York Times, WSJ, Bloomberg and Financial Times. In 2014, The Economist named him one of the 25 most influential economists in the world. Follow Laurence on Twitter @Kotlikoff.