I always hear about the crushing cost of student loans, and I hear about the need for loan forgiveness, but I never hear anyone wanting to do something about the cause of this crushing debt – the cost of college. Reading through the top colleges article in Money Magazine this week, I see that the average cost to go to a private school is around $250,000! Even going to a state school will cost about $100,000. If you were to invest the state school money instead, you’d have almost $30 M by the time you were ready to retire. Average $100,000 over your career instead of $60,000 because you went to college, and you’ll only make $2 M more over your working lifetime. Add maybe another $500,000 for health insurance, but you would still make ten times more investing the money than you would “investing” in a college degree.
Realize also that college was not always seen as the only way to make a living. A couple of hundred years ago it was just where the wealthy sent their children so that they could be educated on the finer things in life and be able to make intelligent conversation on arcane subjects at cocktail parties. People who actually needed to work for a living had better things to do than learn Latin and Greek. Only with Generation Y do people think that it is a choice of going to college or sleeping under a bridge. Now, even musicians and artists think they need to go to college.
In reality there is a choice if college is not worth the price: If you can’t get a good paying job without a college degree, you create your own job by starting a business. It could be something as simple as running errands for busy people, cleaning homes, mowing lawns, or taking care of children. You could also start as a small vendor at events and work your way up into running a store. With a little creativity you can create a business to provide a service people don’t even know they need yet – hey, look at bottled water! Basically anything for which there is a need for where you live. With a little creativity you can create a business to provide a service people don’t even know they need yet – hey, look at bottled water! People have done it before and so can you.
That said, certainly there are jobs that you can get only if you go to college. Things like being a nurse or doctor, an engineer or school teacher, a software designer or architect. There are rewards that come with these careers that go beyond money. The issue is that the cost of getting the degrees needed for these careers have skyrocketed. Yet people are complaining about the size of the loans people have coming out of college, but never try to address the root cause – the cost of college itself. They believe they are powerless to change anything, yet they never even bother to call their state legislators and complain about the costs.
The reason college costs are getting so high is actually the loans themselves. If a normal business were to raise its prices by 10% and do this every year, fewer and fewer people would patronize the business. This would be partly because they felt the product was no longer worth the price, and partly because fewer and fewer people would be able to afford the product at all. Because college is seen as an absolute necessity, however, people are willing to keep paying more even when tuitions, fees, and costs increase every year. Because they can get student loans, and then complain about them for the rest of their lives, people are able to pay the higher tuition rates even though they don’t have the money to pay cash maybe never will.
And why aren’t the colleges worried about the students not being able to pay back the loans? Because they aren’t the ones who feel the pain when the loans go into default. The American taxpayer ends up paying for it, while the colleges get their money upfront. That’s right – if Suzy decides to go to Harvard and pay $400,000 for a degree in divinity so that she can get a youth minister job that pays $30,000 per year, you and I are the ones who get to pay for it. Harvard gets its money.
Schools are able to defy economic laws because if they raise costs, parents and students just take out bigger loans. If they can’t pay the loans back, they just default – or have the loans “forgiven” through the work of politicians trying to buy the student vote, and the taxpayer gets to pay the cost. Schools – even public schools – continue to have private planes, dozens of administrators with salaries over $200,000, multi-million dollar landscaping budgets, mansion for their highly paid university presidents, and lots of faculty that teach only one class or two and yet take home six figures. The value is nowhere near the cost, but that doesn’t matter.
There is really little that can be done about private colleges – they can charge what they want. But there is something that can be done about state schools. If enough people insisted that college costs were inline with what people could reasonably pay, prices would come down. Sure, universities would need to do away with a lot of the luxuries they now enjoy, and college life would be a little less posh. They would need to cut staff, cut salaries, and cut perks. They would also need to do away with elaborate student exercise facilities and lounges, and they would need to restrict high speed internet use to educational purposes. But what do you really need but a few classrooms, books, and a professor to get a degree and learn what you need to know to be successful as a professional?
And what about the private schools? Just cutting the cost of public schools would cause fewer students to go to private schools, forcing them to lower prices or see an exodus. If public school was $15,000 per year, while private universities were $60,000 per year, few people would be able to justify the higher cost. Also, if we stopped giving out taxpayer-subsidized student loans for private schools, that would also put pressure on them to cut student tuition and fees, or at least dramatically increase tuition assistance. Harvard would look mighty empty if only those students who could afford to pay the whole freight attended, and the quality of their students would also decline. They would still be pricey, but not at the levels seen today.
So if you’re 24 and complaining about your student loans, how about asking your local politicians to cut the cost of state schools instead of looking for loan forgiveness. In fact, how about asking them to disallow student loans at all for public schools so that they would be forced to cut rates to what parents could pay? It will be a blink of an eye before you’re ready to send your children to college. Wouldn’t it be nice if you could afford to just pay cash?
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.