Student Loans are Only a Small Part of Financing College
The brethren have generally given only tepid approval to the Saints for borrowing more than a modest amount to fund education.[i]Conventional wisdom suggests that education is so important that it is wise to borrow whatever it takes to complete your education. Here’s the case for brethren’s caution.
College Is Expensive But It Doesn’t Have To Be
One justification for borrowing to pay for school is that there is no alternative because a college education is so expensive. It is, in fact, terribly expensive to attend many private colleges and even some public universities in America. The tuition alone at some schools for four year will top $200,000 over the next four years.
But the idea that you must pay that much to get a quality education is simply incorrect.
Let’s begin with the obvious solution for many Latter-day Saint families: BYU. Tuition at Brigham Young University is less than 20% of the cost of tuition at Harvard and many other similarly priced universities. The quality of the education at any of BYU’s campuses is outstanding and a student will never have to apologize for earning a degree there. Top graduate schools and employers around the country are filled with BYU alumni.
For those families with household incomes below $150,000 per year, Harvard (and a few other elite schools) offer discounts—not loans—that make it possible for such families to afford the cost of sending their kids to Harvard. In fact, for 2012, a family with a household income below $60,000 per year can send a student to Harvard absolutely free. Harvard even picks up the room and board. Of course, your kids still have to be admitted.[ii]
Finally, at the other end of the spectrum, it is important to note that many community colleges around the country offer such affordable tuition that a student who is eligible for the $2,500American Opportunity Tax Credit (and the vast majority are) may be able to cover the entire cost of a community college education—or at least the tuition.[iii]
Every year, thousands of students who would be better served by their local community college enroll at much more expensive, less-reputable for-profit schools that offer flexible scheduling and plenty of help filling out student loan applications. Often, such students graduate with near worthless degrees and mountains of debt. Such programs are really the most expensive because the return on the investment of time and money is so low.
The bottom line is that while it is outrageously expensive to attend some elite (and some not-so-elite) colleges in America, there are affordable options available for everyone. No one will die from attending BYU instead of Stanford.
Getting An Education Is Like Starting A Business
Your education is different than your home. We’ve heard the brethren caution us not to borrow too much even to buy a home and they have discouraged virtually every other form of debt. It is important to understand the difference between financing a home and financing your education.
While both your education and your home are expected to go up in value, you can’t sell your education if you decide not to use it. Let’s say you are weighing the option of borrowing $150,000 to go to law school. What happens if you decide upon graduation that you really would prefer to pursue your music career and hope to land a job playing the cello in a symphony making $40,000 per year instead of the $90,000 per year you hoped to earn as a lawyer.
Your debt would make that option impossible because you can’t simply decide to sell your law degree to someone else who might like it better than her MBA and wants to trade up. That is the key difference between student debt and a mortgage. The asset that supports it is non-transferable. When you buy a home on the beach and decide you’d prefer a home in the mountains, you can just sell it and pay off the loan (generally—though we shouldn’t take that for granted).
A better analogy for student debt is business debt. With a business loan, the bank is very skeptical and reluctant to lend (they should be for student loans but for reasons we’ll discuss below they aren’t). Among other things, they will want to see you invest much of your own money in the business before they will lend you any. The money you invest in a business that is your own money is often called “equity.”
You’ll want to use “equity” to finance your education as much as possible. Equity doesn’t have to be paid back. Your savings are the most obvious source of equity. You may also be able to pay for some part of your college expenses by working a part time job.
Scholarships and grants are also a form of equity financing for college. These don’t have to repaid. At almost every school in the country there are scholarships set up by alumni to help a variety of uniquely positioned students, like kids who attended a particular junior high school, or with an unusual musical interest, or family heritage. Often, these sorts of scholarships can be given to anyone the school chooses if no targeted person applies. That means, however, that regardless of how unremarkable your student may be academically, if she happens to fit the profile of the scholarship and is the only applicant, she’ll likely be awarded the scholarship.
And, as discussed above, a few of the most elite schools in the country now offer free education to students from low income families—if they can get admitted. According to Harvard, 20% of students attend for free under this program. Tax credits discussed above are also a form of equity financing that doesn’t need to be repaid.
So student loans should be used only to fill the gaps in financing education; if your student has chosen an affordable school, and you’ve used your savings, scholarships, tax credits and the like to fund the bulk of the educational expenses, it is prudent to use small amounts of debt to fill in the financing gaps so that your children don’t miss out in an economy that demands quality higher education.
Student Loans Are Forever
Unlike most other loans in America, student loans can’t be discharged in bankruptcy. This means that if you don’t pay—and many people struggle to pay on time—fees and interest continue to mount and the balance of your student loans will continue to grow.
Many students graduate with a student loan balance that resembles their parents’ home mortgage. Can you imagine starting your career with $200,000 or more in debt and no tangible assets? Such a person would be an obvious candidate for bankruptcy, but federal laws specifically prevent most student loans from being discharged in bankruptcy[iv].
The argument for excluding student loans from bankruptcy protection is that absent such a provision, the students could simply borrow $200,000 for school and declare bankruptcy at graduation. In such a world, no one would make student loans. Hence the law.
No one should ever take on a debt with an eye to avoiding repayment through bankruptcy, but no one should ever borrow any money without understanding all of the repercussions of their choice.