From Under The Cherry Tree | The Great Student Loan Debate – What is the American Dream (School)?The Great Student Loan Debate – What is the American Dream (School)? | From Under The Cherry Tree

A number of years ago (during the Bush era, in fact) a bill was passed that attempted to stimulate the economy by making it easier for more people to afford college.  It did this by lowering the already subsidized interest rate from 6.8% to 3.4% for student loans taken out between 2007 and 2012, with the rate to increase back to 6.8% for the 2012-2013 school year.  Now, as the date for the rate increase approaches, there have been calls on Congress to extend the deadline and allow continued access to this “cheap” financing for education.  At this point though, it seems unlikely that this will occur – as Democrats and Republicans cannot agree on where the billions of dollars to fund this continued subsidy would come from.  At any rate, despite their loud protests to the contrary, the dollars and cents impact on total student debt will not be “huge” – for a typical student maxing out their federal student loans for 4 years ($23,000), this means an additional $38 per month in payments – or $4600 over the usual 10 year payment period.  This is a difference, to be sure, but a difference in payments from ~$225 to around ~$263 per month is unlikely to push anyone out of going to college.

No, it was another part of that second article that got me thinking.  From the CNN.com link:

For high school senior Brittany Ketchup, the high cost of college coupled with higher interest rates could mean the difference between her dream school and a more affordable in-state option.

“I’ve worked so hard to get in to Howard, but I may have to stay in state for college and probably attend the University of Georgia or Spellman instead,” she said. “I don’t want money to be the deciding factor but I have to be realistic.”

What this got me thinking about was this: what exactly is the American Dream?  Is it the ability to go to whatever you school you want regardless of price?  Or the ability to have anything you wanted, any time no matter your circumstance?  No, certainly not.  The American Dream is about opportunity, yes – but it’s about the opportunity to better yourself, to get to home ownership, a car, 2.2 children and a family pet no matter your start.  It never said anything about that house being a mansion (Mc or otherwise) and that car being a Bentley.  Or about the “bettering yourself” being the right to an executive job making seven figures.  And it certainly doesn’t mean that everyone gets to go to Harvard.  Or Howard, for that matter.

There are two points I’d like to consider here:

  • Is the expensive dream school really the “right” school in the first place?
  • Why is college a different animal than a house or car?

As to the first, we need to step back for a second and examine what going to college is supposed to be all about in the first place – getting an education.  Yes, it’s great that many schools offer a great “quality of life” and have fun things such as rec centers with tremendous climbing walls and yoga classes and whatnot, as well as clubs for every desire and 24-hour food service.  But when it comes right down to it, people go to college to learn, get a degree and improve their earning potential – thus achieve both the theoretical (bettering yourself) and materialistic (house, car, etc) parts of the American Dream.  So shouldn’t the dream school be the one that provides the best education and improves your earning potential the most given your career goals?  The answer would seem to be a clear “YES” – but yet we still see people making quite baffling decisions.  Take Ms. Ketchup for instance.  Howard is a fine school, to be sure, but in the latest US News rankings it’s almost 50 positions BELOW the University of Georgia!  UGA offers more programs, has more alumni in position to help a new graduate and is cheaper to boot.  It’s true that sometimes the “right” school will be the more expensive one (if the more expensive school offers a highly ranked program in your field, or is the only choice in your field, or is in the geographical location you want to be), but often it’s not.  (I will note that the article provides no information on why she has chosen Howard – perhaps for her major it makes sense – but for most majors and certainly if she wants to live in Georgia, UGA would be the better choice.)

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As to the second point, when we go to buy other large purchases – a car or a house – we think of practical matters.  Namely, for a car, what am I using it for, how much can I afford and what do I like in the car.  For a house, one might consider the location (neighborhood, school, proximity to work), how much I can afford, size and what do I like.  Yes, the “likes” are always in there but so is the “afford”.  A couple with 3 children, a house in the suburbs and middle class incomes may dream of a Ferrari but will end up with Honda minivan instead.  And there’s nothing wrong with buying the affordable, usable option!  For some reason though, when it comes to choosing a college, this same logic does not apply.  A student from a middle class family who has no idea of what they would like to do with their lives will still be pushed to go to the school that is the best “fit” (for an 18 year old this too often means the most fun).  Things like affordability and usefulness are considered only secondarily- which is a shame.

College is an investment in you, not just something to be consumed in the moment.  Young people are going into debt for an experience that certain colleges are selling and not considering the return on their investment.  Perhaps the best example of that is another recent article, where a recent Harvard Business School graduate discusses his debt burden (which was substantial – in the low six figures – but not unusual for a professional school student).  From the article:

“Student loans are a strange animal,” he reasoned. “Unlike a payment towards a car loan or a mortgage, a student loan payment doesn’t go towards something that is benefitting me in a direct way.”
This is patently ridiculous!  Student loan payments go towards an education, which should be benefiting you in a very direct way – through your job and earning potential.  This same man, earlier in the article even admits:
Joe Mihalic, then 26, was able to land a job with Dell in Austin, Texas, at twice as much as the $52,000 a year he made before earning his MBA.

Earning an extra $52,000 PER YEAR sounds like it is benefiting him in a direct way.  But he doesn’t associate those things – and other people don’t as well.  If you could invest $100,000 once and earn an extra $52,000 per year for the next 39 years you would and should jump at that chance!  Conversely, if you want to be a teacher in say Pennsylvania and expect to be able to get a job making the state average starting salary ($35,000 per year) would you go to the state school that charges ~$8,500 per year or the private school charging ~$24,500 per year (these schools are in actual competition with each other).  Over 4 years, that’s an additional investment of ~$64,000…for a near $0 return.  Would anyone make that investment?

There are other, unintended, consequences as well.  The lower student loan interest rates and the “everyone must go to college” line of thinking has pushed up the cost of college for everyone.  Whereas previously many young men and women would be happy to “”better themselves” by learning a trade, now they are pushed to borrow money and go to college.  That has a number of impacts.  Primarily, for the young person, that dumps them into a job market that may not make them happy or fulfilled and loads them with school debt.  Second, it pushes more people into college – creating higher demand which naturally raises prices – increasing the debt that they and everyone else must take on to get a degree.  And as an added side effect, it floods job markets for those with undergraduate degrees – and actually has created a dearth of skilled tradesman and semi-skilled factory workers, pushing more of those jobs overseas.

So something to ponder then – does a lower student interest rate (and so more people going to college) actually help spread the American Dream?  Or does it ultimately hurt it…by trying to re-define it?

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