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An Educated Choice

Greg Spears

WHEN I WAS YOUNG and unschooled about money, I borrowed thousands of dollars to attend Northwestern University. As I recall, tuition was around $12,000 a year in 1980, and I had only $3,000 to my name. How could I pay?

The dean sent me a letter explaining that the college would lend me the money for my master’s degree in journalism. It would also extend me a work-study job, which would help pay for my spartan off-campus room.

I jumped at the offer and started the four-semester program. Each term, I would walk across campus to sign my name on a couple of long loan sheets. Did I understand what I was doing? Vaguely. What I mostly comprehended was that an exciting year at university seemed practically free to me.

Fortunately, after graduation, I could afford to repay my loans on the paltry income I earned as a cub newspaper reporter. Unwittingly, I had obeyed this rule of thumb: Don’t borrow more than you’ll earn in one year in your chosen field. In my case, I borrowed around $9,000 and earned $13,000 in my first year at The Bradenton Herald.

The great thing about college loans is also the worst thing about them: You don’t have to be financially qualified to borrow money. The federal government guaranteed repayment of my loans, so no attempt was made to determine if I was financially qualified to repay the sum involved.

Please let’s avoid a political discussion about college debt forgiveness, pro or con. What I want to focus on here is what an attractive trap the guaranteed student loan has become, especially as college costs have escalated. It’s easier to borrow more than you can afford, and there are too few adults warnings kids about this easy money.

It may fall upon parents to ask if their children are getting over their heads in debt. I’d start with the rule of thumb I just mentioned: Don’t borrow more for college than you could earn from one year’s work in your future career. It’s an arbitrary standard that contains a kernel of truth: cost and value should balance.

One obstacle to following the rule is obtaining the necessary cost and income data. College costs are opaque. Recently, I looked up how much students borrowed and subsequently earned, on average, at hundreds of colleges using a calculator published by The Wall Street Journal. The Journal’s information is hidden behind a paywall, but you might get free access at your local library. The Journal breaks down data collected by the Department of Education by college, degree and major. Can’t get access to the Journal’s calculator? You might instead look at the Department of Education’s College Scorecard.

From my research, many majors at many colleges appear to easily pass the test. Students in accounting, biotechnology, business, computer science and engineering all borrow less than they typically earn in their subsequent careers, no matter which school they attend.

The Journal’s research highlighted a darker trend: Master’s programs at some prestigious universities can land their students in far more debt than they can afford. For instance, students who earned a master’s degree in social work at the University of Southern California typically borrowed $112,000 for jobs that paid $52,078.

Why not pursue the same degree at a place like Bryn Mawr College, a highly regarded women’s college outside Philadelphia, where the median student borrowed $45,250 and later earned $48,579 a year? Bryn Mawr’s social work master’s program is coed. Findings like this suggest that students can follow their passions without sinking into debt—if they’re wise about which school they attend.

Here’s a second example: Students who earned a master’s degree in journalism at Northwestern University had a median debt load of $54,936 in 2015-16, and median pay of $41,565 two years later. Because their debt was higher than their subsequent annual income, my old school doesn’t pass the rule of thumb.

But some 400 miles away, at the University of Missouri at Columbia, the median journalism grad student borrowed $21,000 and earned $50,543 two years later. Missouri passed the debt-to-income test handily. I’ve taken courses at Missouri and Northwestern, and found both excellent. All else being equal, Missouri would be the better school for a student to attend.

You’ll notice I chose lower-paying fields—journalism and social work—for my examples. Students don’t have to give up on the liberal arts if that’s what excites them. But they do need to be choosy about which college they attend. Some well-known schools cost too much, while many other well-regarded schools outside of big cities are far more affordable.

Are there downsides to this approach? Yes, several. First, it embraces the notion that borrowing for college is normal, as long as you don’t go too deeply into debt. Arguably, the right amount to borrow is zero, if possible.

Second, students may not know their major when they enroll in college. It’s also routine to start with one major and wind up with another. Still, if you’re a parent, talking through the debt-to-earnings ratio with your teenager might spark a worthwhile discussion about the economic prospects of different schools and majors.

Third, this rule of thumb seems not to work for some high-paying professions, like dentistry and medicine. Doctors’ early earnings are dwarfed by the size of the debt they take on, yet they may do fine over a long career. On the other hand, some medical graduates do find themselves squeezed by debt, even though they enjoy strong six-figure incomes.

Finally, this data-driven approach does take the romance out of a traditional method of college selection—falling in love. A tree-lined quadrangle might be a trap for the unwary student if the school is too expensive. My advice: Run debt-to-income comparisons before scheduling visits so your child doesn’t fall in love with the name-brand college that costs more than the child can reasonably afford.

Do parents have an obligation to pay part or all of their children’s college costs? Offer your thoughts in HumbleDollar’s Voices section.

Greg Spears is HumbleDollar’s deputy editor. Earlier in his career, he worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger’s Personal Finance magazine. After leaving journalism, Greg spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. He currently teaches behavioral economics at St. Joseph’s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. Greg is also a Certified Financial Planner certificate holder. Check out his earlier articles.

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