Clear Talk on Student Debt with Ann C. Logue

Ann Logue is a freelance writer and a lecturer in finance at University of Illinois at Chicago. and consulting analyst who is fascinated by business and technology. She is the author of "Emerging Markets for Dummies" (Wiley 2011), “Socially Responsible Investing for Dummies” (Wiley 2009), “Day Trading for Dummies” (Wiley, 2007), and “Hedge Funds for Dummies” (Wiley, 2006). She holds a B.A. from Northwestern University, an M.B.A. from the University of Chicago, and the Chartered Financial Analyst designation.

Ann and I happen to be old friends from my Chicago days, and I know her as someone who can cut through the student loan “crisis” clutter so I’m better informed on the current state of college costs and how students are paying for them. It seemed like our chat might be worth sharing with others.

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John Warner: Here’s a broad, probably unanswerable question that I’m going to ask anyway, given today’s costs and the overall economic climate, is college, “worth it?”

Ann C. Logue: Yes, college is worth it, for most people who attend and graduate. College graduates have fared better in the recession than people with only a high-school diploma. We have a flexible, changing economy, and the standard American college education teaches people how to think and communicate so that they can change along with the world. And there is something to be said for "the life of the mind" and the enrichment that comes with education.

There are exceptions, though. There are people who are not finding a college education to be valuable, and that number may grow as the price of college (with tuition plus interest) grows.

 

JW: Are you worried about people losing access to college?

ACL: Yes, I am. The costs of college are rising, and budget cuts in K-12 mean that preparation levels may decline. Public universities are losing state subsidies, and they have been the most accessible parts of the higher education system. We have a political climate that says that all taxes and all government spending are bad, unless of course we're talking about Social Security, Medicare, or defense spending. This is changing the nature of public education. It would be nice to say that taxpayers should do more, but they won't do it, so the burden is on the institutions and the students.

 

JW: At your blog you’ve been writing a whole series of posts about paying for college, including one on “good debt” v. “bad debt.” What’s the difference?

ACL: That's a post I did with Laura Laing, who has a book and a blog called "Math for Grownups." (http://www.mathforgrownups.com/). We were discussing the payoff from borrowing for certain types of expeditures, such as student loans. To an economist, debt is good if it allows you to buy something now with future benefits that are greater than the cost of the debt. College debt is usually in this category, as is home mortgage debt. These debts don't pay off in all cases, though, and people need to understand that before they borrow too much money – or before they let their kids borrow too much.

 

JW: Do we have an overall student debt “crisis?”

ACL: There isn't an overall crisis, but there is a crisis in certain sectors and for certain people. I'd say that law students, medical students, and for-profit college students have the greatest issues right now. Law firms have cut way back on hiring in the recession, so that no longer looks like a stable, high-paying field. However, many people borrowed money for law school assuming that it was a good investment. Likewise, it is difficult to pay off medical student debt on a primary-care physician's salary, so few people go into primary care fields. If you have debt, better to be a cardiologist than a geriatrician! The default problems with too many for-profit colleges are leaving vulnerable students behind, and it is leading to higher interest rates for everyone else.

Law students didn't seem like a crisis category until this recession. If the economy continues to muddle along, more types of students may find themselves in tough situation.

 

JW: You also have some opinions on whether or not parents should pay for college.

ACL: Yes, I do. I think that an education is one of the greatest gifts that a parent can give a child, and it is an investment in your family's future. If you children go to college, your grandchildren will be better off if their parents divorce, for example. Education has a multigenerational payoff. I believe that parents should pay for it to the extent that they are able.

I sometimes hear parents say that their children will take classes more seriously if they pay for it themselves, but that is not a realistic line. The minimum wage has risen far more slowly than college tuition. A high-school graduate can't make enough to cover full-time tuition expenses. If you have the funds but will not spend them, then you are screwing your kid.

That being said, there are very few absolutes when it comes to families and children, and many families have very good reasons for not paying for college. On top of that, many colleges calculate an expected parental contribution that is unreasonably high for many families. Remember that returns on savings have been practically non-existent for a decade, wages have stagnated, and many families have dealt with unemployment. College savings, retirement savings, and earned income aren't what they once were, and your average family (if there is such a thing) has fewer resources than your average family 10 or 15 years ago.

 

JW: How about things we could do to make college more generally affordable for more people? Is it on colleges and universities to pick up the slack, or should we be looking elsewhere?

ACL: Well, as with all these complex problems, everyone has a little bit of blame, so it is easier to point fingers than to make changes. Here's what I think colleges can do. First, they need to work on four-year graduation. Advisors need tell students what they need to do to stay on track to graduate. Every extra semester costs money.

Second, colleges need to be up front with applicants and their families about their costs, about expected student loan payments, and about expected starting salaries for different majors. I see so many college websites with euphemisms like "Affording an Education" that make it seem like anyone can go to these schools, and I'm not sure that's the case.

Colleges need to be more accepting of AP and Early College credit. Most public universities will accept these, but not all private schools will, and that costs real people real money. I also think colleges can expand summer school programs. They have all these fixed-cost facilities that are unused for a quarter of the year, and they are all air-conditioned these days. This will help students graduate faster, which gets them into the work-force faster. Remember that every year in college not only costs tuition, it also costs wages.

And, honestly, some colleges need to merge or close. Many states expanded their university systems for political reasons in the 1960s and 1970s, so there are campuses that have lots of jobs for state employees but that don't necessarily do a good job of education. Chicago State University, for example, has a 24 percent graduation rate and has been the site of a few different scandals. There's no excuse for that. Meanwhile, there are many small private colleges that don't have enough of an endowment or alumni base to support operations or scholarships, and there are simply not enough families out there that can pay $40,000 or more in tuition. Boards of Trustees should not expect students to borrow a hundred thousand dollars each to keep these institutions going.

 

JW: I’m wondering if you have any comment on this recent report on the costs of colleges.

ACL: It's a fascinating list, and I hope it helps draw attention to the fact that financial aid packages are not created equally. But it also shows that prices are rising rapidly, especially in state-supported institutions. I suppose it's better to cut funding to universities than health care for poor children, but it's shame that governments have to make that choice.

The average percentage changes for every class of institution are so far above wage increases and investment returns that they are not sustainable, certainly not if we want college to be something that's open to anyone who can do the work.

 

JW: You’re a general advocate for greater financial literacy. What are the key things people should know that they don’t?

ACL: Oh, where to begin! We live the largest capitalist society in the history of the world, and what people don't know about money is frightening. The first is that when you borrow money to buy something, you end up paying more for it, whether it's an education or a round of beer at the bar. Pay off your credit cards! The way to screw your bank is to pay them off in full and on time.

Second, there is no magic investment. People need to diversify. Don't put all your money in tech stocks, or your house, or gold, or whatever. Have a mixture of investments. There are a lot of ways to optimize that mix, but naive diversification is much better than no diversification. Don't listen when someone tells you how much money he or she made in whatever investment, as he or she is probably lying.

As much as possible, live on less money than you make. That may be hard for people who are starting out, but if you are 40 and have a stable job and are using your credit cards to get by, you have a problem. Thrift is good! Suave really is as good as the name-brand shampoos! Every little bit of savings makes a difference.

Thanks for having me participate, John!