VALUE and DEBT

I think it is fair to say that much of what I have written so far is about the advantages and benefits of a college education.  I guess I cannot stray far from my roots as a business professor.  It seems I position the argument in a cost-benefit framework.   Frankly, as both a parent playing for two children in college and as someone intimately involved in the delivery of a college education, I am fine with the cost-benefit analysis approach.  A college education is expensive. 

I think about cost-benefit as I ponder these facts.  The number of Americans with at least a bachelor degree has exceeded 1/3 of the population as of 2016 according to the Census Bureau (Census 2015).  The mean income and median income of US households in 2015 was $75,558 and $53,889 respectively in 2015 (Census 2017). The average moderate total cost of a college education is $24,610 at an in-state public institution while a moderate budget at a private college averaged $49,320 according to a recent survey of the College Board (College Board 2016).  Meaning to me, households sending even one student to college are spending between half and all of their annual household income (or borrowing a lot) in hopes of a huge return.  Looking at this from a cost-benefit perspective seems appropriate.

I think also from my previous posts, it is clear that I strongly believe that the college education is transformational and in most cases the benefits for outweigh the costs.  However, there is that catch, ‘in most cases’.  Three little words, in most cases, but these words should raise questions. There are many but this post will focus on three questions. How many college students are not getting the ROI anticipated?  Is awareness of the student loan burden only the responsibility of the students and their families? Are there additional actions that colleges and universities can take to help students receive the positive ROI on their college experience?

In an earlier post, I commented on how too heavy of a debt burden from loans along with not enough future income creates a scenario of poor to non-existent financial returns (College Education ROI 2016).  What is not in that blog is the magnitude of this problem or the number of students facing this scenario. The number and percentages are staggering.  There are a few ways to look at this but let us use the following method.  By several estimates, the percentage of students that complete a 4-year program of study in 4 years is between 40 and 50 percent (New York Times 2014 and Department of Education).  The department of education reports goes on to estimate a rough average of 4.33 years or another semester to complete.  Now let’s couple that with the percentage of students receiving loans of 70% (the percentage is higher for private institutions and lower for public but we will use the average)(Federal Reserve 2016).  Therefore, at least 50% are taking longer than anticipated to complete their degrees and 70% of those are using loans.  Using the method from my earlier post, I am coming up with between 25 and 30 percent of college graduate are likely to have a negative financial ROI on their college investment. 

However, this post is not an indictment of the college system.  Certainly, several activities and policies of colleges and universities are counter-productive to students completing their program of study in four years.  Many other reports and posts exist outlining these issues.  However, we need more attention to student responsibility and the students’ choices.  As most will agree, college is a preparation for a career and life.  That should include the choice of incurring a substantial debt.   Many students are well aware of their debt burden.  They are also aware of how to calculate and anticipate the impact of borrowing.  Other students are demonstrably unable to make accurate assessments of the implications of their chosen debt burden (Forbes 2014).  Students should be personally responsible and learn.  However, colleges and universities are places of learnings so adding the processes below should help fulfill that mission while helping a significant portion of their constituency.  Both student and institution jointly must assume responsibility for education around student loan choices.

Here are three suggestions that might help students address their use of loans.  First, as step in the loan origination process the students must complete a version of the return on investment exercise based on their specific use of loans to finance their college education.  The exercise would need to be specific to their program of study.  This exercise is a good use of their research skills in learning the expected salaries of their chosen field.  The exercise introduces students to future cash flows and discounting those cash flows to present value.  The quantitative nature of the exercise is a good demonstration of their mathematics competency.  Second, the colleges and universities must take student loans to the bottom or near the bottom as a suggested form of education funding.  Under current processes, too often is a student loan the first funding option after college savings.  Third, the student loan approval process must take into account a realistic assessment of past academic performance and level of borrowing.  The current standard of 150% of adequate yearly progress is not appropriate in the case of student loans (just check out the ROI).  Nor does the current system adequately address the totality of debt burden in relation to future earnings.

The value of the college education and experience is fantastic.  Borrowing in the present to reap the rewards of the future is not illogical or inconsistent.  However, borrowing without personal responsibility and full information is a bad student choice.  The suggestions may actually help some students recognize that college is not the best option at this time. Colleges and universities must accept that not all students can afford to attend at this time.  The institutions must not try to create an artificial demand through contrived education financing.  A realistic financial approach seems a desirable outcome for some in relation to them burdening themselves with unsustainable debt.