A Financial Icepick
February 24, 2010 § 3 Comments
I’m going to make an argument and it’s not going to be popular, but it’s going to be harshly real, if not a tad cynical and just a bit sad.
If you have to take out large student loans for school, don’t go. It’s not worth it and probably never will be.
There. I said it. Whew. I feel better.
Really? Don’t go? Isn’t it at least worth it for some people?
OK, for some the debt is worth it: Those folks for whom a grad degree can truly vault them into another earning bracket or those who seek professional degrees for which there is no other path (i.e. doctors, lawyers, rocket scientists). But for everyone else, if your debt is going to be larger than $20,000, my advice is to seriously debate what you’re losing before taking the plunge.
I speak from experience. I have a Masters Degree in Design and now, 20 months after graduation, the reality is there’s a financial icepick in my ear that I can feel all the time and if I move in the wrong direction, it could kill me.
That’s a little dramatic, don’t you think? How much did you borrow?
My two years of living expenses, tuition, books, and all that good stuff totaled $75,596.00. But, due to circumstances beyond my control, I was unable to find work and start paying them back for one year. One year after graduation, my debt had ballooned to $83,754.40.
Yes, before I even made one payment, I had an extra $8,000+ to pay. To boot, I have one of the highest interest rates for student loans in the recent past of 6.8%. This rate is completely and utterly non-negotiable besides some on-time payment incentives after 36 months.
My viewpoint on the cost of higher education is not new, but relatively undiscussed and undebated. After all, it’s not exactly fashionable to diss or bemoan your education. Don’t get me wrong, none of this makes me feel good. At all. But, this discussion needs to be had.
Thomas Benton, an Associate Professor of English at Hope College, recently wrote fairly adamantly about not going to grad school for the Humanities [ part 1 | part 2 ] in The Chronicle of Higher Education. (It’s worth a read. Really. Go read it.) His general point is that grad school outside of certain fields is not only not worth it, universities are perpetuating the problem. According to Mr. Benton, what happens to many students is they end up with a staggering amount of debt, have no real future in their field (including academia), and end up unemployable because they have a graduate degree with little work experience.
I’m going to take a slightly different tack than Mr. Benton: Numbers. Raw, heartless, unsentimental, emotionless numbers. Here goes.
The first arm of the math:
I keep an Excel spreadsheet of how much money I’ve paid on my loans, including the interest and principal amounts. The skinny is that, in the past 8 months, I’ve paid my lenders $5,700.87, of which only $1419.98 went to the principal. For those keeping score, that means I’ve paid interest of $4280.89. This brings my loan from the initial starting point of $83,574.40 down to a not-so-svelte $82,154.56. To say this is disheartening is an understatement.
(In case you’re wondering, student loan balances are not fixed. Like credit cards, the loans capitalize, meaning the balance is constantly rising until I pay something. Kinda like running up a muddy hillside in the rain.)
Yeah, but people with graduate degrees tend to make more money over the course of their lives.
This is true on the surface—and certainly true for those with professional degrees. For others, not so much. These are the lifetime earning figures from the government for each degree level.
- High School Degree – $1.2 mil
- Bachelors Degree – $2.1 mil
- Masters Degree – $2.5 mil
As I have a Masters Degree, according to these numbers, I can reasonably expect to make $400,000 more over the course of my lifetime than those with a Bachelors. Sounds great, right? Not really.
If I pay back my loan on the 30-year plan they offer, my payment is about $564.00 a month. With that payment plan, my initial loan and payments will end up totaling nearly $200,000 (about $115,000 in interest over the course of the payback plan + the $83,754 starting point). Keeping in mind that my initial loan was for $75,596, this means my education’s real cost is 165% higher than my tuition and living expenses.
Immediately, I’m already down to a net lifetime earning potential of $200,000, which isn’t bad. But taken over the course of 30 years (assuming that’s my earning horizon), it’s only about $6,666 more a year. That doesn’t even include all the mess with taxes, of which only $2500 in interest is tax deductible. See the problem here? If you’ve taken on a lot of debt and find yourself underemployed or in a field that doesn’t pay much money, you’re in for a long ride with barely an end in sight.
That’s kinda crazy.
Yeah, it is.
So do you regret going to grad school?
For the experience? No. For how much I grew and learned? No. For the great people I met? No. For my long-term financial health? Yes. I’m kinda freaking out.
The second arm of the math:
My student loan’s real value? Somewhere in the neighborhood of $665,000.
Huh? How’s that?
It’s being a little cheeky, but consider: The money that I pay each month is money lost that I could be investing for 30 years. So, let’s say that instead of paying $564 a month to my student loans for 30 years, I invested it. And let’s say, for posterity’s sake, that I received a modest return equal to that of my student loan interest rate of 6.8%. If that’s the case (which 6.8% is not a hard number to hit), then that $564 dollars a month over 30 years would’ve compounded to a nice sum of $665,266.38. Don’t believe it? Try this compound interest calculator.
Mathematically, if you never went to grad school (taking away $400,000 in lifetime earnings) and add the $665,000 you made investing, you’d actually be up $265,000 overall in lifetime earnings having only a Bachelors degree. So, how ’bout that: Getting a Masters could potentially cost you a fairly significant amount of money.
But Jeff, you have the pursuit of education. The life of the mind. It’s a beautiful thing. It’s hard to put a price on that.
And you’d be right. Education is a wonderful thing. I love my education. Obtaining a grad degree is, to this point in my life, my most proud achievement. It’s certainly a nice cushion for the fall I’ve taken financially so far.
But, the real cost of a pricey education is not just the money, it’s something else: Freedom. If you wanted to take a year and go sell trinkets on the beach in Mexico, you can’t. That’s over. You won’t make enough money to pay your loans as they mount mercilessly. Or let’s say you don’t like your field after a few years and you want to try something else. What are you going to do if you need to take a steep pay cut? You’re likely stuck.
Worse, if you default on your loans, there is hardly any way out of being responsible for them. There is essentially no bankruptcy protection for student loans (a fact I didn’t know before school). And if you do default, the lenders have the right to go after your loan co-signers for the money (in my case, my parents and brother). Fun, right?
Jeff, it really feels like you’re complaining awfully hard about a choice you made and should’ve been smarter about. It’s hard to feel sorry for you.
To an extent, I am complaining, but I don’t expect sympathy. Heck, even thinking about any regret about grad school only brings me a dark sadness I can hardly deal with. But I will deal—I made my bed, I’ll sleep in it.
So what’s your point?
For some, perhaps many, it may be a better choice to find something you like to do, find a job in your chosen field, and then just work your way up. You won’t have the degree, but you won’t have the debt and you’ll make money along the way.
Then, only after you’ve exhausted every option in your working life, if you absolutely can’t get to where you want to go without earning a certain degree, then and only then should you consider taking out loans to go to school. There’s a lot to be said for going that route.
And not enough people are saying it.