Ace! NewsFlash
 

Paying for College Without Loans, Scholarships or Looting Your Parents’ Retirement

Q.

You’re entering your senior year at the University of Massachusetts, and the subtitle of your book suggests you paid your own way “without loans, scholarships, or mooching off’’ your mother and father. Roughly how much has your education cost, and how did you manage to pay for it?

A.

Tuition and fees and room and board at the University of Massachusetts, Amherst, run $20,545 per year for a Massachusetts resident (like me) — and less if you live off-campus with roommates (as I did during my junior year).

Most families qualify for a $2,500 tax credit on the first $4,000 in college expenses. So that $20,545 becomes $18,045. I worked multiple jobs throughout high school so I personally had about $35,000 in savings entering college because I was obsessive about it.

But even if I hadn’t had any savings: $18,045 per year means that you need to come up with $347 per week (assuming you received no financial aid or scholarships and lived on campus), which means that families that qualify for no financial aid can come up with $173.50 from the kid working and the same from mom and dad — which is doable, especially given the savings they’ll have because your kid isn’t at home taking long showers. You can use a monthly payment plan through the college so you don’t need to have this in savings going in. Many families get some financial aid or have some money in savings for college, so this debt-free plan is actually based on very conservative assumptions.

Q.

Based on the payment plan you sketch above — “$173.50/week from the student working and the same from mom and dad’’ — at what point does a student’s reliance on some financial help from a parent become “mooching”?

A.

It’s funny. The original title that I had included the phrase “or looting my parents’ retirement,” but we ended up shortening it to mooching.

When I say mooching, what I mean is this: Too many parents are making financial sacrifices for their kids’ educational costs that put them at great risk. According to FinAid.org, 13.5 percent of parents are using PLUS loans to pay for college, borrowing an average of $23,298 — and then there are many more parents who are taking out home equity loans or withdrawing money from retirement accounts or depleting their emergency funds.

Middle-aged parents of college students are — and there’s no nice way of saying this — simply too old to be accumulating consumer debt. I don’t think parents should ever use PLUS loans and frankly, it’s a product that I wish didn’t exist. So what I want parents to do is help their kids with college expenses by making short-term sacrifices — i.e. driving a car an extra year, selling stuff on eBay, or perhaps eating out less, as trite as that has become. I don’t want them looting retirement funds or taking out loans that will put them in grave danger if they lose jobs or see their assets decline in value.

Q.

What are some things that high school students — not just seniors, but sophomores and juniors, too — can be doing to put themselves in the best position to help pay for college?

A.

High school students are really well positioned to save a large percentage of their income: they usually have no dependents and very low overhead.

A high school student who works twenty hours per week (more during the summer, less during the school year) and saves $6 per hour of that throughout high school will have $24,960 in savings by the time he starts college. Working while in school can also be an exciting way to explore interests, just like any other extracurricular activity. For me, that meant working at a theater and selling books on eBay. For a student who’s interested in athletics, that might mean studying to become a personal trainer.

People worry that working during school will hurt academic performance. But a 1993 study published in The Journal of Student Financial Aid found that college students who were employed actually had a slightly higher average GPA (2.72) than those who weren’t working (2.69). I’m not saying that this is the easiest approach to paying for college. Obviously in the short-term, borrowing a lot of money involves less effort. But in light of the mounting evidence of the problems student loans so often cause in the lives of borrowers, it’s worth it.

Q.

What about those students (and their families) who feel they have no choice to but to borrow? Do you recommend some kinds of loans over others? And what is your general thinking on how much student-loan debt is too much?

A.

Families should exhaust all means of reducing costs before borrowing. That might mean skipping out on the first choice college and attending a state school or a community college. When borrowing, students should use only federal loans. Private loans should never be used for undergraduate education.

When it comes to borrowing, Mark Kantrowitz of FinAid.org, which is theresource for financial aid, recommends borrowing no more than your expected starting salary. So if your expected starting salary is $40,000, you should borrow no more than $10,000 per year for four years. 

The metrics behind that make sense in that default rates do jump quickly once you get past that level of debt. The problem, I think, is that if you can’t get a job or your starting salary is lower than you thought it would be, that starting salary you expected when you were 18 is meaningless. It’s like booking a vacation four years from now based on the weather today. Debt always adds risk, and unsecured debt that can’t be discharged in bankruptcy adds a ton of risk — and can force students to forgo things like grad school or taking an exciting but low-paying job that might lead to long-term opportunities.

Q.

You note that you attended UMass as an in-state resident. Is this a strategy — applying to and attending a public university in-state — that you believe will become even more popular in the current economy? Should more students be considering such a route?

A.

Tuition and fees for out-of-state undergrads at UMass are $23,628 versus $11,732 for in-state. Attending an in-state public institution is the easiest and most powerful way to reduce the cost of college, and I think it’s one that certainly should become more popular as families stare down depleted 529 plans and shrunken home equity.

Another good reason to start out at an affordable public institution is this: We’ve seen something of a devaluation of the bachelor’s degree in the job market: more than half of college grads under age 25 are working at jobs that don’t require a degree. What that means is that a larger percentage of grads will want or need to attend graduate school to achieve their career goals. We’re already starting to see that happen.

If you graduate from college debt-free, grad school is a lot easier. A 1998 Nellie Mae study found that 38 percent of student loan borrowers reported that their debt had prevented them from pursuing grad school. Also interesting is a 2004 piece in The Atlantic that reported that “61 percent of new students at Harvard Law School last year had received their bachelor’s degrees outside the Ivy League.”

NYT  August 16, 2010

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