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Financial Insights

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College Education vs. Debt and Savings

25 January, 2018

For at least 50 years, politicians and policy makers have championed a college degree as the surest path to prosperity and upward mobility. This assertion has merit: numerous studies show college graduates have significantly higher lifetime earnings in comparison to their less-credentialed peers. But a single-minded focus on getting a degree may overlook some of the costs embedded in this career track.

To help Americans attend college, the government provides grants and low-interest student loans. The combination of more students seeking a degree, and subsidies to make it affordable drives up the price. According to statistics released November 2017 by the Labor Department, college tuition has increased 400% since 1990, a rate four times higher than the Consumer Price Index.

In a self-perpetuating loop, tuition increases force more students to borrow, in ever-larger amounts. The upshot: even when they earn more money after graduation, these “start-up costs” reduce their economic advantage. This is especially true with student loans, which exert a financial drag on many graduates long after they’ve left college 

A Tale of Two Cousins

“A Tale of Two Cities” is a historical novel by Charles Dickens that begins with the sentence “It was the best of times, it was the worst of times.” The novel tells the story of two men who have a physical resemblance, but very different life stories. In a similar manner, this article considers the career paths of two cousins.

Nick (and Nora)

Nick is 37, married to Nora, with three kids, ages 10 to 2. He is a teacher and Nora is a speech therapist. Between them, they have three college degrees, and earn right around $100,000. They live in a Midwestern college town, and just bought their first home.

Nick and Nora borrowed heavily for college, and graduated with a combined student loan balance of $80,000. Thirteen years later, they still owe $40,000, with minimum monthly payments of $300. Besides their mortgage, they also have a car payment. Other than Nick’s employer-funded teachers’ pension, the family’s only savings are $1,000 in an emergency fund.

Nick and Nora admit that student loan debt was the reason they delayed having children, and couldn’t afford to buy a home until two years ago. Combined with the cost-of-living increases that come with a growing family, saving has been a challenge; 

emergencies have often been paid with credit cards. On their current schedule, Nick admits they will still be making student loan payments when their oldest daughter is a college freshman.

Josh

Nick’s cousin Josh is 31, single, and currently living at home. He tried college for one year, but it wasn’t a good fit. Josh works for a machine repair company and does some custom welding on the side, for a total income of between $35-40,000. He also is an aspiring property manager; with his father’s financial assistance, he has acquired two rental properties.

Josh owns a restored Lotus sports car, and with three of his friends, is part of a racing team that enters a $500 “lemon” in weekend endurance races around the Midwest. 

Josh is frugal, almost to the point of being cheap. Other than the mortgages on the rental properties, he has no debt. While he doesn’t skimp on his automotive hobbies, he currently has $50,000 in the bank.

The Key Difference

Other than sharing a last name, Nick (and Nora) and Josh have very little in common. Their life stories feature different educational backgrounds, different careers, different family units.

Nick and Nora are textbook examples of the college career path: they have degrees, professional designations and work in their field of study. According to the conventional narrative, they are on the career track that leads to the American Dream, at least the financial version of it.

Josh doesn’t have a college degree, and probably never will. But he works, saves, and has some financial ambitions.

In this overview of their financial lives, two items stand out like flashing neon signs:

Cousin #1: $40,000 student loans + $1,000 savings

Cousin #2:      $0 student loans + $50,000 savings

In the tale of these two cousins, who has the better financial condition? The assessment doesn’t hinge on college degrees, or long-term employment prospects; it’s the debt and the savings. That’s the key.

It may not be the easiest route, but the surest path to prosperity and upward mobility is minimizing debt and maximizing savings.

The Best Financial Education

These anecdotal observations are not meant to diminish a college education. Both Nick and Nora recognize they have professional, personal and social benefits because of their college experiences. At the same time, they see that their decisions to borrow 15 years ago limit their financial options today.

So how do you make good decisions about borrowing for college? It’s tough. Not many 18-year-olds know their career track; they usually decide – and change their minds – after they start college. And the job of financial aid counselors is to find money for college, not figure out how you’ll pay it back. But should you trust the get-a-college-degree narrative, and hope the money will work out, when sometimes it doesn’t?

All debt, even low-interest student loan debt, weighs on your financial progress. A college education is worthwhile, but when it comes to money, being smart about debt and saving is worth more. v