We are at the stage now where the entire debt origination structure of college and graduate education is beginning to roll over because the costs of debt are making it a poor financial investment.
I think that college is still a good deal, but it's rapidly moving toward a bad deal.
Give it a few years.
I played around with Harvard's college costs calculator. It was pretty scary.
Here's one scenario: You live in an expensive state (NJ), have $100,000 in annual income, 5 kids, $20K in savings, and $300,000 equity in your house. Harvard estimates you should pay $23,600, with $3,000 from a student job at Harvard. That's $20,600. Take off $1,600 in summer job money, and $19,000 is left. Throw in plane fare to Boston and you're looking at about
$20,000. If you have no equity, the estimate goes down to $12,600. So that means they expect you to pull a fair bit out of your house.
How realistic is this? I made these assumptions:
- You pay 12% Federal tax; FICA is 7.65%
- State tax is 12.2%
- You pay $2,000 a month for your house
- You pay 2.5% property tax on a house worth $400,000
- You spend $1,200 a month for food
- You spend another $1,000 a month for miscellaneous expenses like insurance for your two cars and your house, utilities, home consumables (cleaning supplies, pet food, etc.), clothing, phone bills, TV, gas for the cars etc.
At this point, what's left is way below $20,600 ($7,750), and you haven't paid for health insurance, medical expenses, and all that other stuff that comes up constantly, like sick pets, the oven died, my car needs new brakes, etc. etc. Let's just hope your roof and your cars have a lot of life left in them.
So Little Johnny will be taking out something like $20,000 in loans for year one, which, given the way costs increase every year, puts him well on the way to six-figure-debt when he's done. Unless you turn your house into an ATM and/or use all your savings to get through one year. If you try to pay back the lost equity in a year...well, you can't, so at least you'll have less equity (or no savings) next year when they do the calculation. Though your expenses and home equity debt will go up every year.
And if you have two kids in college, they only take $5,000 off their estimate. Hmm. That arithmetic doesn't work for me.
So the choice is for your kids to end up deep in debt or for you to end up with little or no home equity as you approach retirement. Great!
Sorry, that's broken. Our whole educational model is broken. College is a certification borderline-racket rather than a means to create thoughtful citizens who contribute to the nation, student loans are a
multibillion dollar business, and you can't even discharge your debt if you die.
But everyone should go to college!
/rant
