We have talked before about not wasting money on educational fluff. I want to comment on this some more especially from a cost standpoint. Let’s say you have decided on a career path that has good job prospects in say engineering, computer science, finance, accounting, nursing, or other field with jobs. How do you decide on a school? Great question.
Make sure to also think about the ROI, the return on your investment
Before you spend $80K per year at some fancy private university think very hard about what you get for your money. When Sallie Mae or the bank sends you that $1300 per month loan bill for the next ten years you need to be able to pay it and your living expenses too. Or you will be living with roomates and eating the cheapest crap food possible for a long time while riding the bus to work? Remember schools are very good at marketing themselves to you. Think of them as salesmen selling you a car. Treat it as such and be objective. Take the emotion out of the decision and be super logical like Mr. Spock.
Dreams schools may not be so dreamy
You may have a dream school but that dream can quickly become a nightmare if you cannot afford it or even worse have to drop out if you cannot afford it any longer. Imagine paying top dollar for two years only to be forced to transfer to a cheaper school, less prestigious. Now you have tons of debt and nothing big to show for it. Dreams are just dreams. This is reality baby and reality bites. Don’t get suckered by slick marketing and impossible dreams. Life is not a Hollywood movie where things always work out.
If you come from a middle class or lower class family basically forget about fancy private universities, especially those in big cities. Why? Sky high tuition and high cost of living. That’s the worst case for high costs. Let’s look say New York University for example. This is a very good school but the cost of attendance is on the order of $53,000 per tuition plus you are in the high cost of living area of New York City. So plan on another $20,000 per year in housing cost plus say another $10,000 in living expenses meaning food, healthcare, books, transit passes and fees. Now we are at $83,000 per year total cost of attendance. Times four years is $332,000. Is this a good value for an undergrad degree? Probably not unless your parents are rich. If your father is a billionaire go where you want. If you are middle class forget it at full price or even half price.
Ok I am picking on NYU but they are notoriously expensive due to NYC location and reportedly stingy with financial aid except for the uber smart. There are plenty of other very similar expensive private schools in expensive locations just like it in New York City, Boston, Los Angeles and Washington DC. You know who they are. These are schools for rich kids and uber smart middle class kids to bring up their test scores for the rankings in US News. These are not places for normal middle class kids. I am not talking Ivies like Harvard or Yale although they are also super expensive however their ROI may be better.
But I got financial aid!
Yeah really? So let’s say you get $10,000 off tuition in year one. What makes you think you will get that every year? That is the hook in year one to get you to sign up! There is no guarantee you get such aid in years 2,3 and 4. Now your cost is $73K in year 1 and $83K in the rest of the years. You won’t want to transfer even if your aid is cut and usually that is what happens. The schools know that and count on it so they can lure the next sucker! If you are uber smart and get a free ride take it! But most won’t, especially at a top school.
But my parents saved for college!
Chances are they saved $10K to $50K in reality. Maybe it’s $100K if you are really lucky. Mine saved nothing. But it won’t be $332K! You and your parents will need to borrow money and that is the problem.
Student borrowing will crimp your style for years to come. Loans need to be paid back and it takes a long time!
- Students can only borrow about $5500 per year at undergrad level in govenment loans in the USA
- Grad students can borrow more. It used to be about $18,500 per year.
- Again when you are looking at a cost of $83,000 per year that’s nothing.
- The rest will come from higher cost private loans that need to be cosigned by your parents
- Plus when you graduate you are not going to be making $150K per year. No try like $30K to $65K for undergrad if you can find a job at all. So it will be hard to contribute more than $500 per month to student loans.
Parental borrowing is even worse
A lot of schools will ask parents to cosign your additional private loans. That means if you don’t or can’t pay your parents are on the hook. Talk about ruining your relationship with your parents. No pressure at the holiday dinner table or if you end up living at home post graduation. “Did you get a job yet? Why can’t you get a higher paying job? Take the first offer you get boy! Have you married a rich spouse yet?” You don’t want them mortgaging their house again or going deeply in debt so you can pursue some silly teenage dream. If they don’t save enough for retirement they will be broke and come live with you later. Nobody wants that. Keep in mind that median house price is $320K in the USA and it takes people 30 years to pay that off. Doh! That’s the kind of money we are talking about.
I plan to do work study!
Ok so let’ say you work 20 hours per week at $8 per hour. That gives you $8320 before taxes. That won’t make a dent in that $80,000 annual bill. But Uncle Billy was able work his way through school! Those days are long gone buddy. Maybe 40 to 45 years ago that was feasible but certainly not now due to sky high tuition.
Ok so what can middle class kids and parents do?
- Try to save some money for a college fund. Even if it $20K to $50K that can take you far at state universities. Many states have tax advantaged savings plans.
- Be willing to take federal student loans to the tune of $20K and private loans to say $15K in total $35K. So that is about $8500 per year.
- Be willing to work part-time during school 10-20 hours per week
- Spend all summer and winter break working full time to save money
- Look into scholarships. These are very hard to get but worth a shot even if it is $500. This is mostly a mirage though unless you are uber smart or a talented athlete at an NCAA school. Typically grant aid tends to be nominal in value so schools can say they give aid to 80% of students. But getting $1000 off a $80,000 annual bill isn’t going to help you much. This is the type of aid I got offered long ago via the FAFSA from such pricey schools. The expected out of pocket cost was more than my father’s after tax income. Think about that.
- Look into schools with in state tuition as top choices. Out of state state schools can still be cheaper than private universities in some cases. Shop around as if you are buying a car. $28K per year is less than $53K after all.
- Low cost locations are a good way to save money. Think college towns not big cities. Rent and cost of living is usually more reasonable and other things will be cheaper too as everything is geared towards broke students, not working people. Think places like Athens, GA; Ann Arbor, MI; State College, PA; Eugene, OR etc. You can move to a big city when you get a job and have an income. The key now is to minimize borrowing.
- If you have the ability to commutte to school and live at home for some of the years that will also save money. Yeah the experience won’t be the same but you could do so for a few years.
Big name State Universities are the Best ROI Deal
Big name flagship state universities are the best ROI deal in my personal view for middle class folks. They have solid academics, good reputations, large student body, many classes and majors and reasonable in state prices. The cost per credit hour is reasonable so there is less pressure and if do poorly in a class you can afford to retake it. Tution will run around $10K to $25K per year. If you end up being a fifth year senior due to major change it won’t kill you financially.
- Many are in college towns too to cut cost of living expenses. Think cheap rent, pizza, beer and transportation. Rent a room in an apartment for $600 per month. $5 pitchers of beer. $1 pizza slices. Walk to class.
- They have huge alumni networks and decent job placement.
- There is usually a lively atmosphere and sports team too
- Some good examples are…
Unversity of Michigan, University of Virginia, UCLA, Cal Berkeley, Texas Austin, Georgia Tech, Ohio State, Penn State, University of Illinois, Pittsburgh, University of Washington, Georgia, Florida, SUNY Binghamton, Purdue, Indiana, Oregon, North Carolina, Wisconsin, Rutgers etc.
You get the picture. There are lots of such schools in each state. In say Pennsylvania there are Penn State, Pitt and Temple. Some are very prestigious and will get you the same jobs as any expensive school at a much lower cost.
Community college is a good place to start if you or your parents are truly broke
But what if you can’t afford four years at a big state school? Well start at a community college and do really well. Then transfer for third and fourth years to a state university. Tuition is usally a few thousand per semeter and you can save money by living and eating at home. A part-time job can usually cover the cost of the classes.
But I am brilliant like Newton, Gates, Mozart, Einstein!
If so top colleges will be lining up to give you a free ride and you won’t have to pay a cent. The world is your oyster buddy. This is highly unlikely though unless you ace the SAT, ACT, SAT 2s and all your classes. If you get into a good school that gives you a full ride seriously consider that. Graduating with no debt is a dream come true.
Let’s look at some simple examples to bring this reality home.
College cost example #1: Frankie Finance
Frankie is going to college. He gets into a number of schools but decides to go to Big State U as the finance program is good and the price is reasonable at $15.5k per year. Big State U also has a low living costs as it is in a smaller college town at $12K per year
Total cost of attendance is $27.5K per year.
- Frankie works part time and summers to make $10K per year
- His father contributes $10K per year
- He borrows $7.5K per year
- His total debt upon graduation is $30K as he worked summers, paid in state tuition,worked a side job and lived frugally.
Frankie lands a good job post graduation and internship at a big name company as a result of on campus recuriting. His student loans are through the government at a rate of 5.5% over ten years. Frankie’s monthly loan payment is $325 per month over ten years. He has no problem paying this off. He pays it off early so he doesn’t have to make $39K in total payments, meaning $9K in interest. Instead he pays it off in five at $573 per month paying $4382 in interest. At the age of 27 Frankie is ready to shop for a house and do some travel with his new wife. Way to go Frankie.
College cost example #2: Uppity Urkel
Uppity Urkel has the same scores and grades as Frankie. He also plans to major in finance. Urkel goes on a college tour and falls in love with Big City U. They do a great job marketing how cool it would be to live in a big city. He is hooked. It is in the big city and is a private university ranked about the same as Big State U in US News and World Report. Urkel does not want to live in a smaller college town even though he is also admitted to State U. The programs are comparable in nature. Due to high cost of tuition and high cost of living Urkel graduates with $120K in student loans. Nothing in big city is cheap as it geared toward working people. There are no dollar pizza slices or five dollar pitchers around. Rent is $1300 per person in a shared apartment.
Total cost of attendance is $65K per year broken into $45K tuition and $20K cost of living. The school gives him a $10K per year discount on tuition bringing his total bill to to $55K per year.
- Urkel works part time and summers to make $10K
- His father contributes $10K per year.
- He borrows $30K per year
- His father borrows $5K per year, grumbling much about having to work more years before retirement
- His total debt upon graduation is $120K
- He feels a great deal of pressure to do well at school given the high cost and debt he is taking on. Urkel does not enjoy his experience, skipping many activities to study to ensure he does not fail out given the high cost and high risk.
He lands a job at the same firm as Frankie making the same money as he desperately needs to find a job asap to service his massive loan balance. Urkel’s student loans are also through the government at a rate of 5.5% over ten years. His loan payment is $1302 per month for the next ten years. The loan payments end up eating up much of his disposable income. Urkel can’t afford to go out and do things like Frankie. He drives a beat up old Camry and doesn’t save for retirement. Urkel can’t afford cable TV or travel. Urkel can’t really afford to go on dates either because who wants to go to McDonald’s for dollar menu or Old Country Buffet on a week night. He regrets his choice to attend Big City U. He also considers bankruptcy but his student loan cannot be discharged so he has to skimp, work hard and do side jobs on weekends to pay the bills like Uber Eats and Dominos pizza delivery. He must do well to save face and prove to his father it was the right choice. Eventually he recovers but it takes twelve years of hard living like a student. At age 34 he is debt free but has nothing saved for retirement, doesn’t have a house or nice car. He is basically broke and starting from zero.
The moral of the story is loans need to be paid back and it takes a long time.
It puts tremendous pressure on you. Take the emotion out of the decision and look at things objectively. Is one place really worth twice or three as much as the other? Probably not for an undergrad degree unless it is say Harvard. Remember you can always go to grad school too. If you have too much debt you may not be able to afford grad school or do the things you like in life like buying a house, raising a family, traveling and buying a car. All hope is not lost. You just need to evaluate cost benefit ratio carefully.
I took a road sort of similar to Frankie. I paid off $50K in student loans over six years. It was painful to say the least. I drove crappy cars, lived in boring, small suburban apartments and ate cheap food like a grad student. That was not a lot of fun. I was also admitted to similar rated private schools in big cities but the debt numbers were mind blowingly high. The ROI didn’t work for me. I was not willingly to incurr $120K in loans and I am glad I did not.
- Remember colleges are businesses that will sell you anything you want. Don’t have buyer’s remorse.
- Your success is not their problem once you have paid tution.
- They see you as nothing more than a cash cow to be milked for money at every opportunity.
- There is no refund if you don’t get a job or don’t graduate for whatever reason
- You are on the hook for those student loans not them. Those fat cats have departed with your money long ago. Buyer beware. If you don’t pay the debt collectors will call you all the time and garnish your wages.
- It takes a long time to pay off student loans. Do the math and you will see. Ten years in payments at age 18 is when you were 8 and likely still playing with legos. Think how long ago that was.
- If you miss student loan payments it’s really bad due to say unemployment. If your monthly loan payment is $325 per month you can go flip Big Macs or work at Target until you get a better paying job. No big deal. If the loan is $1300 per month that’s not going to work.
- Lower payments are a key way to limit financial risk. Spend less, borrow less and pay less. People get into big trouble and their balances spiral quickly out of control when they can’t make payments due to late fees, interest rate bump ups etc. That is why it is critical to limit the amount of loans.
- Plan on tuition and fees increasing each year by around four to six percent per year. If you can’t afford it now it will only get worse. Look at the trends on tuition over the last twenty years.
- Schools don’t make you smart. Smart people go to top schools. If those people went to lesser schools they would still get ahead as they are uber smart. The school is just branding.
- The textbooks and materials are virtually identical at most good universities. You cover the same concepts and get tested on the same topics.
- In my view it is unethical and parasitic for highly paid university administrators to make millions and saddle naive 18-22 year old kids with life changing debt of >$100K. I don’t agree with them making milions off broke students while they live the high life.
- Most people have no idea how much money $100K to $200K is to pay off with after tax dollars. Take out a financial calculator and get the monthly payment.
- The economic reality is many of these pricey schools are pricing themselves out of the market. They will have to reduce standards or shrink to stay up in the rankings. There are only so many rich people that can afford it.
- If you do want to go to an expensive school get the best deal possible in terms of discount, have a clear plan and ROI calculation. Know exactly what you want and how to get it. Realize you will suffer hard for many years to pay back those loans.
Here are some horor stories for you from the Internet to make you think.
Great article on NYU whoever wrote it. Kudos to that person. It seems credible given I experienced fee and tuition greediness myself taking a work related night class there. The registration fee alone was over $1000 per semester in addition to tuition at like $1200 per credit. I felt robbed and the prof was an adjunct, not even a real prof. It happens at other pricey schools too. Look at the schools where students graduate with the most debt. Avoid those places unless your parents are rich, you have a trust fund or you get a full ride.
https://www.theatlantic.com/national/archive/2013/08/the-expensive-romance-of-nyu/278904/
High college cost drivers: Buildings, marketing, administration, sports
https://www.newyorker.com/magazine/2019/09/09/student-debt-is-transforming-the-american-family
More horror stories
https://www.igrad.com/articles/financial-aid-student-loan-stories
https://www.cheatsheet.com/money-career/student-loan-horror-stories-important-lessons-teach.html/
Mr. Cash Hoarder 