If you haven’t heard, there’s a student loan crisis. Some $1.1 trillion in student loans is owed in the U.S., with an average loan debt of $27,253 as of the end of 2012 according to FICO. Surely things have gotten worse since. What’s more concerning is that 11.5% of student loan debt is more than 90 days past due or is in default.
Take a look at the red line in the chart below. There are more people delinquent on their student loans than on their credit card payments. The Health Care And Education Reconciliation Act under the Obama administration might be able to alleviate some of the pressure. On the other hand, there’s always moral hazard to deal with with debt forgiveness plans.
So what is the solution to the student loan problem that is preventing the younger generation from buying their own homes, and forgoing saving for retirement in their 20s and even in their 30s? Cheaper education that provides a higher return, of course!
THE PRIVATE SCHOOL VS. PUBLIC SCHOOL DEBATE
For the first 13 years of my life I went to private school overseas until I came to the US for high school, college, and graduate school, all of which were public institutions. Given I went to both private and public school for an almost equivalent amount of time, I’d like to share some thoughts on why I think the easiest solution to the student loan crisis is to either go to public school or only go to a private school that gives a scholarship equivalent to the tuition cost of a public school.
According to the College Board, the average cost of tuition and fees for the 2013–2014 school year was $30,094 at private colleges, $8,893 for state residents at public colleges, and $22,203 for out-of-state residents attending public universities. Given the median household income is roughly $51,000, paying $30,094 a year without financial assistance is an enormous gamble. The only way for many families to “afford” such tuition is to get into debt.
I first want to discuss several myths about private school vs. public school.
Myth #1: Private schools provide better job opportunities. Although some companies have specific target schools for recruitment, one company can’t hire everybody from Harvard, just like how Harvard doesn’t admit everybody from Andover or Exeter prep schools. Once you get into an elite private college, the distribution curve happens again where most return to average. It can be argued that it is therefore harder to get a job out of an elite private college, just like it’s harder to graduate valedictorian from a magnet school vs. non-magnet school.
I’m looking around the marketing room and I have colleagues from Princeton, Brown, Holy Cross, UC Santa Barbara, University of Michigan, and The College of William & Mary. The distribution is 50/50 and we all ended up in the same place, although titles, incomes, and ages are slightly different. Look around your office and observe the mix of public and private school attendees. I’m sure there’s a good mixture as well with similar incomes and titles.
Myth #2: You make more money graduating from private school. There is no such thing as paying a starting analyst in any department more money just because they went to private school over public school. In fact, that would be illegal and discriminatory. Some private school attendees might have a leg up at certain firms, but the same can be said for some public school attendees who apply to companies whose employees come predominantly from public schools.
According to a survey that came out in July 2014 by the Department of Education’s National Center for Education Statistics, College grads from private four-year schools earned about the same as those from public four-year schools, about $50,000 a year. Of the 16% of students who took home degrees in science, technology, engineering or math, they were paid around $65,000 a year. The findings are based on a survey of 17,110 students conducted in 2012, about four years after the students obtained their bachelor’s degrees.
Myth #3: You have a stronger alumni network going to private school. Getting a job and moving up the ladder often has to do with who you know. According to the National Center For Education Statistics (nces.ed.gov), in 2013 nearly 7.5 million students went to public 2-year institutions, and 0.5 million attended private 2-year colleges. Roughly 8.2 million students went to public 4-year institutions, and about 5.6 million attended private 4-year institutions. In other words, 50% more people went to public 4-year institutions.
Two-thirds of the CEOs of Silicon Valley’s 150 largest public companies earned their undergraduate degrees in the United States at taxpayer-funded public universities, state colleges and regional schools, according to a Mercury News survey in 2007.
STUDY SOMETHING IN HIGH DEMAND
It’s reasonable to argue that the less tuition students pay, the less debt students will have. In a world where education is fast becoming free thanks to the internet and pioneers like the Khan Academy, MIT Online, and MOOC, it seems backwards to pay rapidly inflating tuition prices.
Given the Department of Education reports that public school and private school students make roughly the same $50,000 a year upon graduation, the clear variable to receiving a higher income and lowering debt is selecting a major that is in high demand. Take a look at the top earning majors according to Payscale.com.
I don’t know how many people want to be petro engineers, but if a high return on your education is important, then studying engineering, mathematics, computer science, and physics is the way to go. You can see an excellent 129 majors list from Payscale here with Child & Family Studies ranking dead last with a starting median pay of $30,300.
GIVE HIGH SCHOOLERS AND COLLEGE STUDENTS INSIGHTS NOW
If your family is wealthy enough to send you to Yale for $42,000 a year, then definitely go. How can you turn down a world class education from one of the most elite universities in the world? But if you are smart enough to get into Yale, but somehow don’t receive enough financial aid, you are probably smart enough to get a scholarship from a great public university like Berkeley, UCLA, UCSD, William & Mary, UVA, Virginia Tech, Georgia Tech, Wisconsin, Michigan, and CUNY.
The reason why I went to William & Mary for $2,800 a year was because my sister was already attending Smith College, a private liberal arts school that cost $25,000/year in tuition in the early 90s. My parents were squarely middle class as government employees and I felt guilty.
Below were all the questions and fears that ran through my head:
“What if I graduate from private school and have to live at home with my parents because I can’t find a job?”
“What if I graduate from private school and end up back at McDonald’s?”
“What if I graduate from private school and end up getting the same job with the same pay as my public school friends?”
“What if I bleed my parents to the point they have to work many more years to afford retirement?”
“What if I drop out of private school halfway through, thereby wasting all that time and money?”
I asked myself these questions over and over again during my junior year in high school. My parents weren’t rich as State Department employees, nor was I smart enough to get large amounts of scholarship money from private schools. I felt extra pressure to make the right choice because we simply didn’t have a large financial cushion.
In the end I decided there was no way I was going to attend a private school for $25,000 a year in tuition back in the 1990s if it wasn’t a “top 10 school.” All subjects are taught off the same text books anyway. Because I also feared failure, I knew that worst case, I would graduate unemployed and get my old $4.25/hour job back at McDonald’s to pay back the $2,800 a year in W&M tuition (4 months working 40 hours a week). It would take 3 years at $4.25 an hour to pay back one years’ worth of tuition at a private school.
A PERSONAL DECISION ISN’T GOOD ENOUGH
I’ve spoken to a lot of high school students about their decision to attend college since I’m a tutor and teach tennis to several high schoolers. Most of them tell me, “It’s all about the right fit.” I think this is a cumulus answer with a high probability of damaging one’s finances. None of the high schoolers ever discuss tuition costs and therefore, a return on investment.
Parents, on the other hand, are much more cognizant about costs because they are usually the ones paying, or have already gone through the college experience. But somehow there continues to be a disconnect between child and parent when it comes to selecting the best college to attend.
There has to be a clear family conversation about the costs and benefits of going to XYZ school not just whether the culture feels right. You don’t want to have a scenario where you or your disillusioned child graduates from college with massive amounts of student debt, angry because nobody told them any better.
Getting a great job, or even any job after college is no longer a given, even from a top school. Roughly 17% of recent college grads are underemployed according to the Economic Policy Institute.
Run multiple post graduation scenarios and highlight exactly how long it will take to pay back all the tuition at the current minimum wage. I’m confident that once we do the math, better decisions will result.
Readers, did you go to a private college or a public college? Would you change your route if you could do it again? Do you think students are fully aware of the cost of tuition? What if we made all students either pay 100% for their tuition, or sign a promissory note to pay back all the tuition within 10 years? Why do you think tuition prices are skyrocketing when information is becoming free? Is tuition that inelastic, even though all the data shows that income for public versus private university graduates is similar?
Photo: Penn State graduation, Flickr creative commons.