This week, millions of students will return to campus for another year of college. What an exciting (and expensive!) time in life. The average 2014 graduate who took out loans owes $33,000; all together debtors nationwide owe more than $1 trillion. Recent reports have shown that graduates with college debt are sicker, sadder, and face financial troubles like delayed home ownership and even delayed marriage.
Even though borrowing for the sake of college is often called “good debt,” because it’s viewed as an investment in human capital, we still ought to apply one of the most fundamental financial principles to paying for college: Avoid debt if you can.
As a qualifier, not everyone can. Not all educational borrowing is misguided, and certainly there are situations where students have no better option. But for others, there are ways avoid to taking out tens of thousands of dollars in loans. Making financially responsible choices now is much easier than the road of repayment later.
Here are some practical tips on how to minimize college borrowing:
Choose a college based on value. The cost of a degree varies wildly from one campus to another. Some of this is a reflection of the quality of educational opportunities that are available to students, but some of the differences aren’t a reflection of true utility (the economic concept of usefulness). Do a careful cost-benefit analysis of college options to get the best bang-for-your-buck.
It’s valid to ask questions like: What’s the average class size? Who are the professors? What is the alumni network like? Will the prestige of this college open doors for me that other colleges couldn’t? And it’s also important for students to ask: What is all of this worth to my family and me? For some students, this means considering the lower-cost alternatives of online and/or community college courses.
Choose a degree based on value. Perhaps even more important, students should focus on using their opportunities on campus to prepare for a successful career.
Our generation has been spoon-fed the advice to “follow our dreams.” While this idealistic way of thinking is attractive and at times valuable, it’s also important for college students to realistically evaluate where their strengths, talents, and interests intersect with a market demand. There is high market demand for nursing majors, lower market demand for philosophy majors. This isn’t to crush anyone’s dreams, but earnings and job stability do a lot to improve quality of life, and students should consider these factors in the tradeoffs that different degrees offer.
Consider saving up for college before-the-fact. On average, earnings are higher for college graduates than those who have yet to enter college, which suggests that getting a degree should be students’ first priority. But earnings of zero – as unemployed college graduates have – are even worse than minimum wage (especially considering the student debt many of these graduates also have to shoulder). The Economic Policy Institute reports that 8.5 percent of college grads between the ages of 21 and 24 are currently jobless. High school graduates might consider living at home for an extra year or two and working in entry-level jobs to get some useful job experience and save up for college rather than taking out bigger loans.
Heading off to college at age 18 is culturally popular. Also culturally popular, but not nearly as cool, is moving back in with Mom and Dad after college. This is something to think about for high school graduates tempted by student loans.
Consider fast-tracking your degree. Three years of college is cheaper than four. It’s not true for everyone that “College is the best years of your life.” In fact, if you are really there for the purpose of getting an education (rather than goofing off and having fun), it probably won’t be the best years of your life. There’s a lot to be said for sharing fun times with dorm mates and joining campus clubs and activities, but if you are studying on borrowed money, time is of the essence.
Why not study harder, take on a few extra hours or summer sessions and get out to the real world a year ahead of your peers? This not only means a year of less borrowing, but an added year of earning. Perhaps for you (as for me), the gainful working years after college will be the best years of your life.
Vote for lawmakers who understand and value free-market student lending. One reason we have so much college debt in the United States is that in 2010, the federal government took over the (already flawed and subsidized) student lending industry and removed much of the market forces that kept college loans a reflection of the college market. This was a huge public policy mistake. Students and their families should be free to borrow – or not borrow – in a private, competitive college-lending marketplace.
Affording college is difficult for many American families. But rather than rush into an extremely costly purchase, families should treat college like any other good. Consumers should evaluate the value of different college institutions and the degrees they offer, and they’d do well to avoid as much debt as possible. In the end, even good debt is debt, and we’re generally better off without it.