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Monday, June 21, 2010

College Debt: Is It Worth Taking on Debt for an Ivy Degree? Some Practical Advice

A while back, I wrote (yet once more) on the college debt situation, featuring the now-notorious NYU grad with $ 200,000 in debt. I received this response from a reader:

You know, I wish I was in the camp that looked at the financial situation before deciding on where to go to college. But what about those who realize they are getting themselves into an unreasonable amount of debt in the middle? There are perks in terms of facilities and recruiting (and internships which can lead to jobs). And is it worth transferring to a state (and I live in a state with a not so great school system) school after already going into so much debt?

I agree even after doing it that it is foolish to take out massive loans on the promise of a high paying job. But that promise does get more likely if you go to a school well known in its field.

So is it worth it to go $200,000 K into debt for a religious studies degree? Probably not. But if you want to go into say consulting or investment banking...

Oh, how horrible to feel the monkey of debt on your back. How horrible to be so conflicted about your choice WHILE you are in college.

Before I respond (not that I have the answers, needless to say), let's review the college scholarship reality. There are MERIT scholarships and NEED scholarships. Ivies don't give merit scholarships because they don't have to. My children got merit scholarships at schools that wanted them--where their SATs and National Merits were desirable.

Need is another matter. If you make under say, $80,000/yr--you can probably get a full need-based scholarship at any Ivy or other private school of prestige. If you are in the middle-class doughnut hole, between @100,000-180,000/yr--you will get nothing, even though an Ivy--or any private--education, may be more than 1/2 your take home pay.

My family is at the lower end of the doughnut. I realized that my kids would have received FULL SCHOLARSHIPS if one of us quit our job. Amazing! Some self-employed people of my acquaintance manipulated their income downward during the crucial pre-college and college years. While most of the kids receiving need-based scholarships ARE genuinely needy, there are ways--as a Wall Street Journal column recently put it--to "game" the financial aid system. The kid with the NEED scholarship may be the child of a cardiologist who has many business expenses--like a company car. Salaried people like us can't do that.

Anyway, the year before the big meltdown, the new prez of Harvard announced that families who made between $100,000 and $180,000 would only have to pay 10% of their income. I think Stanford may have followed suit. That would be quite a reasonable price for an Ivy education, one I could have easily fit within my frugal budget.

BUT not all kids--even the smartest and most accomplished--can get into an Ivy. I doubt my children would have gotten into Harvard, Yale, or Stanford, though they may have gotten into Penn or Cornell. Just don't know. Other private schools could not match the Harvard/Stanford plan, so those in the doughnut remained, facing a $50,000 bill.

Back to my questioner: what should a student do who has already completed one Ivy year and feels the hot breath of future debt on the back of the neck?

1. Transfer to a state school. This is not a great idea. Anyone who gets into an Ivy is wooed with goodies out the wazoo by state schools. These offers don't apply to transfers. So, you don't get the prestige of the Ivy, but you also don't get the goodies the state school would have heaped upon you as an incoming freshman.

2. People in business might disagree with the above. They would discuss the "sunk cost fallacy."

In economics and business decision-making, sunk costs are retrospective (past) costs that have already been incurred and cannot be recovered. Sunk costs are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken. Both retrospective and prospective costs may be either fixed (that is, they are not dependent on the volume of economic activity, however measured) or variable (dependent on volume).

Behavioral economics recognizes that sunk costs often affect economic decisions due to loss aversion: the price paid becomes a benchmark for the value, whereas the price paid should be irrelevant. This is considered non-rational behavior (as rationality is defined by classical economics). Economic experiments have shown that the sunk cost fallacy and loss aversion are common; hence economic rationality — as assumed by much of economics — is limited. This has enormous implications for finance, economics, and securities markets in particular. Daniel Kahneman won the Nobel Prize in Economics in part for his extensive work in this area with his collaborator, Amos Tversky.

Still, an Ivy has some value, though what the value is, no one knows for sure.

3. Assuming the person wants to continue at Ivy U, what to do? Well, here are my frugal tips. Do not change your major! In fact, try to graduate in 3 years. It would be more cost-effective to take a few courses at Local State U than to work in the summer. You need to make sure your college will accept these credits BEFOREHAND. Colleges are often reluctant to accept transfer credits.

4. DO NOT do Study Abroad. With Study Abroad, you pay your school's tuition and fees. Hence, my son spent a year in France. He paid the state tuition, fees, room, and board. Guess what? These were covered by his scholarship! The other people in the program paid between $10,000 and $50,000 a year--for the same program. You can do your year abroad AFTER college, paying the program costs out of pocket. These are--based on my son's investigations in France--less than half the cost of private US college tuition. room, and board.

Can anyone think of anything else?


Duchesse said...

1. Another strategy: One of my investment banker friends says where you go to grad school is what really counts. So do your undergrad at State U and spend the bucks on a prestigious grad school.

2. Investment: is $200K so scary as a career investment? For religious studies, perhaps, but for med school it seems like a good bet.

3. Parent's income: Some parents make that donut income and offer none of it to pay for college. We have these people in the family. Their children went to very good but not elite universities on merit scholarships and by working part time jobs.

Funny about Money said...

My ex- did the opposite: went to Stanford for a B.A. in political science and then to Colorado for law school. Got an offer from one of the best firms in the Southwest before he even had the JD in hand.

On the other hand, he didn't have designs on a New York City firm; he apparently visualized himself living in Denver. So his plan made sense.

His parents were poor. I don't know if he had financial aid, but do know he wangled free housing by house-sitting for faculty on sabbatical and that he hashed in a sorority house to help pay his costs.

How does a kid avoid having the parents' income counted? Especially if you're a minor...I thought when you tried to get financial aid you had to detail family income.

Frugal Scholar said...

@Duchesse--Actually, academics is where prestige U pays off. It is far easier to get into a good grad school--in the humanities--coming from a private school. Of course, the job lists are down 50%...As for med school--you can get into med school from anywhere. One of my son's friends wasn't doing as well as he needed to at major state U and so went a tier down. His grades went up and he got in.

@Funny--Back in the old days--there were purely need based scholarships. I'm not sure when they started. I have a friend who is older than you are (and presumably ex) who had a scholarship, which she lost because she got a B in English! I think part of the huge rise in tuition goes to the kids who get the need scholarships. As for law school, same as med. You can get in from anywhere--my students get into LSU all the time.

Duchesse said...

re med school, I'm not talking about what school, my point is that borrowing usually makes sense.

Academics, based on your comment, differs from finance, where the grad school is more important than undergrad. But AAA for both (say, Harvard then LSE) is the literal gold standard.

Craig Harmelin said...

On study abroad, consider this: there are programs—usually university-based—where you pay equivalent tuition and the difference in cost is the cost of living and airfare. If students are just as prudent in selecting a university based on cost, they can select a study abroad destination based on cost and end up paying less than if they stayed home even after airfare.

Frugal Scholar said...

@Craig Harmelin--Good advice--the overseas programs are very reasonable compared to American costs. BUT--a warning--you need to make sure your school will give you credits. I read about a tudent at Columbia Univ who did a program at Oxford--Columbia refused to give him credit!

Logan Leger said...

I've been meaning to respond to this article for a while. I don't have any advice for the reader, but I would like to talk about my situation.

After high school, I had a lot of choices, including some big scholarships at some great schools. Unfortunately, my family also falls in that doughnut and couldn't afford to cover the remaining expenses. Moreover, my parents were adamant about not taking any loans and graduating debt free. This left me only one choice: state school, where nearly 100% of expenses were covered.

Now, I'm in the position of graduating in three years with an engineering degree from a school that has a national name, and debt free to boot. At first I was angry my parents wouldn't cosign a loan and felt trapped. Now, however, I realize how good of a decision it was. Not having any debt and having financial freedom really opens me up for a lot of opportunities.

This brings me to my final point. I was born an engineer, but I was born an entrepreneur first. Being at a state school opens my schedule up to pursue many ventures. Had I gone to a more prestigious school, I would never have had the time. And, after I graduate I won't have to work in the system because after three years of hard startup work, one of my startups will reach profitability, enough to sustain me because I have no debt.

I have a great degree I can use to make good money in my life. But because I ended up at the state school, I can pursue my dream.

Frugal Scholar said...

@Logan--Great statement! I'm going to steal this and use it for a post. I think more people need to read this.

Alyssa said...

Though the debt is daunting, as a senior in high school hoping to major in Anthro and Archaeo with an acceptance into Oxford (which will only give me a scholarship if I'm from a third world country) tucked under my belt, it seems worth it. However, struck by the thought of so much debt (with the current $ to pound exchange rate the tuition + room + board + extra expenses is about $43,000 (25000 pounds)) my parents forced me to apply to UIC. UIC does NOT have an archaeology program, only an anthropology one. Trying to explain to my parents (who did not go to college during the worst bubble for higher education in history) that debt may be my only viable option for succeeding in my major (compare UIC's lack of an Archaeo program to Oxford tons of onsite excavations and 6 world renowned museums) is near impossible.

For the average student, debt is horrendous. Humanities and Social Science majors on average do not make enough to cover for such costs, but ironically, theirs are the majors that are dependent on the school's resources the most. So when is it worth it? Pay the extra when you have a degree that pays off, but when you didn't really need to pay the extra? Working part time to pay off $130,000 (3 years at Oxford) doesn't frighten me as much as going to a school with a 54% graduation rate just to commit an act of "financial responsibility" does. Though the maxim "a good student does well anywhere" may be true, anyone who has seen a public high school juxtaposed against a magnet high school can attest that such "good students" are still limited by the opportunities within their environment, no matter how gifted they are.

Frugal Scholar said...

@Alyssa--Just wrote a post in response. Hope it helps.