90% of College Graduates Have Less Than $40,000 In Student Loans?

studentdebt

The NY Times Economix blog had a provocative post a few days ago about student loan debt, pointing out a government study that showed that 90% of bachelor degree holders had less than $40,000 in student loans shortly after graduating.

The chart below, using data taken from the Beginning Postsecondary Students Longitudinal Study (BPS) by the Department of Education, shows the percentage of beginning undergraduate students who, six years later, had accumulated more than the indicated levels of debt. One bar is for college entrants, and the second is for the ones who actually received a bachelor degree in that timeframe.

  • In a follow-up, the author clarifies that the study includes both federal loans and private loans via student survey.
  • The study does exclude PLUS loans (Parent loans). About 15% of bachelor’s degree recipients have parents who took out PLUS loans.
  • The chart does not include loan debt from graduate school.
  • The chart does not include credit card debt incurred during school. According to a 2009 survey by Sallie Mae, the average student leaves college with $4,100 in credit card debt.
  • The chart does not include other debt (home equity loan) taken on to pay for education.
  • Debt amounts may grow over time as interest accumulates.

Only 10% with more than $40k in student loans? Only 1% with more than $75k? That’s still a lot of money, but somehow seems less than I would have imagined. I could have easily left school with more than $40k in loans, and that was a decade ago.

I feel like something is missing. Perhaps part of it is the exclusions I listed above. Perhaps I’m thinking about how fast student loan debt is growing overall. In 2010, there became more student loan debt outstanding than credit card debt for the first time. Via Fastweb:

Supply and Demand: Technical vs. Humanities College Majors

Students That Are Not Graduating With Degrees That Pay Chart

Alex Tabarrok of Marginal Revolution writes that College Has Been Oversold:

Education is the key to the future: You’ve heard it a million times, and it’s not wrong. Educated people have higher wages and lower unemployment rates, and better educated countries grow faster and innovate more than other countries. But going to college is not enough. You also have to study the right subjects. And American students are not studying the fields with the greatest economic potential.

He shares the chart below comparing the number of graduates in various fields in 1984 vs 2009. Amazingly, compared with 25 years ago, there has been no increase in the number of students graduating in science, engineering, and math. Meanwhile, the number of students graduating in visual and performing arts, psychology, and communication and journalism has doubled.

This is a touchy subject. Just because you have a humanities degree does not mean you won’t find a meaningful career or financial security. The problem is the upfront price tag: can you really justify spending $100,000+ without a clear path to earning that money back?

From a supply and demand standpoint, the chart may help explain why college graduates are having a hard time finding jobs. For example over the last 25 years, I doubt the demand for psychology majors has doubled, and I really doubt the demand for engineering majors has stayed constant.

CollegeInvest Smart Choice 529 College Savings Plan: $50 Opening Bonus

CollegeInvest $50 Bonus Banner

Here’s another 529 bonus that’s pretty easy to grab. (See Ohio 529 $50 bonus.) The FDIC-insured version of the CollegeInvest College Savings plan is currently offering a $50 bonus if you deposit $50 of your own money and set up automatic transfers. There is no minimum balance, and the terms only require a $1 monthly transfer for 6 consecutive months. Effectively, double your $50 to $100 in 6 months.

This is one of the several 529 plan options for Colorado, and you do get a state tax deduction for your 529 contributions if you’re a Colorado resident (subject to recapture if you don’t use it for a qualified expense). One that caught my eye was the stable value version that is paying a 2.84% rate for 2011.

Plan Review. This bank version itself is pretty bare, and is intended for people who want to invest very conservatively in FDIC-insured accounts. There are only two options: (1) a 1-year CD paying 0.30% APY, and (2) a savings account paying 0.05% APY on balances up to $20,000. Even if it’s tax-deferred… yuck. If you are currently in college or have a really short timeframe, then you could just grab this bonus and take a qualified withdrawal soon afterward. Otherwise…

Take advantage of plan rollovers. I’ve opened a lot of 529 plans for the bonuses over the years, and I enjoy trying out each new service. Some have surprisingly good online interfaces (Ohio), while others are shockingly bad (Oregon circa 2007). But the good thing is, it’s pretty easy to roll over funds from one 529 to another existing plan. You usually just have to fill out a rollover form.

Ohio CollegeAdvantage 529 Promotion Code: $25 New Account Bonus

Updated… The Ohio CollegeAdvantage Direct 529 college savings plan is now offering a $25 bonus contribution if you open a new account and invest at least $500 of your own money. A guaranteed 50% return-on-investment! The promotion code is PLAN. Offer ends June 1, 2012. The $25 bonus will be applied on or about June 15, 2012 as long as the account is still open with the original $500 initial contribution. You can easily set up an automatic contribution of as little as $25 every month. I’ve had mine going for over two years now, and I barely notice it anymore.

How is good is the Ohio plan relative to other state plans? Well, you should always check if your own state plan has special incentives. Mine doesn’t, and I hold my 529 assets in the Ohio plan. Another good one is Utah, although most plans with Vanguard investments are going to be well below-average in costs. I like Ohio because they offer low-cost conservative investments for college, including high-yield CDs and inflation-indexed bonds. (As of early 2012, TIPS and CDs are at record-low yields, so I am shifting a small percentage in to equities.) I should have bought more of that 10-year CD at 5% APY.

Expired Promotional Codes
KIDS
PLAN (for $50 expired 11/18/2011)

Reading: Calorie Labels Fail, Family Income Growth is Deceiving, Law School Economics

Here’s some articles that caught my eye this week:

Calorie counts don’t change most people’s dining-out habits – Washington Post
Apparently, telling people the amount of calories on menu items doesn’t change their eating habits, cheap or not. Now, I know that I personally do find it helpful, because many times I’m eating out primarily to hang out with friends and the food is not the goal. But in general, we must fight our human nature:

Experts say that for most diners, the issue is not about having information but about lacking self-control. Behavioral economists have for years zeroed in on a logical hiccup: We are unable to balance short-term gains with long-term costs. Many humans are simply really, really impatient. With eating out, the gains are immediate (yummy giant burrito!) and the costs are delayed (staggering bills for heart disease!).

Overtime, Not Wage Increases, Drive Income Growth – WSJ

Working families’ incomes have grown in recent decades. But the gains came mostly because they worked longer hours than because of wage increases, according to new research by the Brookings Institution‘s Hamilton Project. [...] Among two-parent families, median earnings did rise by an inflation-adjusted 23% from 1975 to 2009. But the parents’ combined hours worked increased by 26% during the same period–accounting for most of the income gains.

The median income for two-parent families rose to $70,000 in 2009, for working 3,500 hours a year on average, compared with working about 2,800 hours in 1975 to earn $56,600 (in 2009 dollars). Hmm.

Law School Economics: Ka-Ching! and Reactions – NYT
Law schools have the power to raise prices and increase enrollments without any decrease in demand… even as the job market worsens for lawyers. Result: Law school tuition rises 4x faster than even overall college tuition costs, which are already skyrocketing. Are law schools abusing this pricing power?

Certified Financial Planner (CFP) Education on the Cheap

Theory and Practice Book

Over the long weekend, a few conversations rekindled my curiosity about gaining a Certified Financial Planner (CFP) designation. Now, I really don’t want to be a financial planner. I’m quite happy with my current career right now. I primarily want the CFP knowledge to help me manage my own finances, but to be honest I might be willing to pay a little extra to put the initials after my name.

According to the CFP website, the three main steps are (1) the education requirement, (2) passing the exam, and (3) the 3-year experience requirement. The education requirement can be fulfilled by a $2,000 online course that takes 6-8 weeks, or can be skipped if you are a CFA, CPA, ChFC, or CLU already. The exam costs $595 to take. The 3-year experience requirement is the most difficult for me, as I won’t have time to rack up 6,000 hours of “experience in the financial planning process” unless writing this blog counts. Annual renewal fees are $325 a year.

What if I just want the education at the lowest cost? There are several online CFP Board-Registered programs each with their own curriculum, but they tend to share the same six overall course topics. Both Boston University and UCLA Extension make their textbook lists public. 6 courses times 6 textbooks times ~$110 a textbook = $660. But we all know that publishers like to simply do some light housekeeping and pop out a new edition every other year to force students to pay up. The older edition usually at least 95% the same, but at a fraction of the new price. I took the BU textbook list and went comparison shopping:

Introduction to Financial Planning
Personal Financial Planning Theory and Practice, Dalton
6th edition (2009) costs $125 new at Amazon
5th edition (2008) costs $30 used at Half.com

Risk Management and Insurance
Introduction to Risk Management and Insurance, Dorfman
9th edition (2007) costs $157 new at Amazon
8th edition (2004) costs $2.50 used at Half.com

Investments
Investments: An Introduction, Mayo
10th edition (2010) costs $183 new from AbeBooks
9th edition (2007) costs $7 used from Half.com

Tax Planning
Prentice Hall’s Federal Taxation 2012: Individuals, Pearson
2012 edition costs $155 new from Amazon
2011 edition is $55 used from Half.com

(I can see the benefit of having the most up-to-date tax book, but it’s not like I’m going to buy the latest version of this book every year. I’d just try to keep up with any changes.)

Retirement Planning and Employee Benefits
Retirement Planning and Employee Benefits for Financial Planners, Dalton
6th edition (2010) is $75 new from Amazon
5th edition (2008) is $18 used from Amazon Marketplace

Estate Planning
Fundamentals of Estate Planning, Fontaine
12th Edition (2010) is $67 used from AbeBooks. (Couldn’t find it new?)
11th Edition (2008) is $4.20 used from AbeBooks.

Adding up the used prices for these 6 books, the total comes to about $120 (plus shipping and taxes, used prices change regularly). This seems like a more economical way to achieve the knowledge for the DIY set. Chances are, you could even use them with an official course if you really wanted to.

I’d be willing to bet that I could read through these previous editions of textbooks and pass the CFP exam. It’s 10 hours long, but I read that it’s also all multiple-choice. I wish I could try. However, it appears that just to sit for the exam, I must pay for a $2,000 course that seems to primarily consist of some online videos. I can definitely see the benefit of videos for audio/visual learners though, as I’m sure the textbooks can be pretty dry stuff.

Questioning the Value of a College Degree

With the rising costs of college tuition coupled with high unemployment for new grads, it is becoming very fashionable to question the value of a college degree. At least, that’s what this long New York Magazine article (via TML) says. Most articles in the past have focused on the pay gap between a median bachelor degree holder and a high school graduate, which recently has increased to $21,900 a year.

Now, there are more articles about how a college degree is worthless. As part of their argument, if you assume a high school graduate goes out, gets a job, and starts earning their lower salary and investing money right away, that person’s nest egg will outpace a college graduate that eventually earns a higher income has to start later and pay off a ton of debt first. Given the head start and lack of debt, the high school graduate actually ends up with more money. This is fed even further with the notion of a college tuition bubble.

Is college worth it? My answer is the most common true answer. It depends! One way I started thinking about it was by going backwards in a way. Let’s look at some possible outcomes and how that may affect how you look at college tuition.

Outcome #1 – You won’t need a college degree.
There are several outcomes that won’t have needed a college degree. You could end up working in a skilled trade such as electrician, plumber, or carpenter that earns a healthy salary. If you add in some business acumen (no MBA required), you could own your own business and end up like the millionaires profiled in the popular book The Millionaire Next Door. You might prefer to be a outdoor adventure guide or flight attendant.

Outcome #2 – Any college degree will do.
There are many jobs out there that simply require some sort of undergraduate degree. It’s just a lazy screening process for applicants, but that’s reality. In this case, the best value would have come from getting your degree from any accredited university for the least amount of money. Perhaps this involves two years of community college and one year of intense upper division coursework at an in-state university (taking additional courses during the summer as possible) to graduate in a total of three years. It’s possible, and you could end up paying less than $10,000 even without any financial aid.

Outcome #3 – You’ll actually use the technical skills you learned.
Professions that come to mind are accountant, doctor, nurse practitioner, engineer, lawyer, professor, teacher. Here, it’s more likely that you’ll use the technical skills you learned in school. If you’re talking about a profession that requires a graduate degree like law or medicine, then the final school is the matters the most in terms of prestige. If you really take full advantage of your education, then your return on investment can be high. I know doctors with $250k of debt, but now they make $250k a year.

Playing The Odds

The fact is, nobody really knows ahead of time which outcome will actually happen. But you probably have an idea of the relative odds based on the child’s interests and motivation levels. I would say take into account all your options, and make a decision based on the individual and your financial situation.

The reason why many pushy parents want their kids to be either a doctor, lawyer, or engineer is that this increases the probabilities that the kid will get a decent job and support themselves. Sure, some engineers or lawyers don’t make that much, but how many of them are starving? Parents are playing the odds. I imagine if I really wanted to play the odds these days, I’d teach my kid a skilled trade (ASE certified mechanic? Electrician?) in high school, and then continue to push them towards college and a professional degree.

Ohio CollegeAdvantage 529: $25 Matching Contribution

The Ohio CollegeAdvantage 529 college savings plan is offering a $25 matching contribution if you open a new account and invest at least $25 of your own money. No promotion code required. Expires April 30, 2011. (Update: This offer is now expired.) A little kick to get started. Set up an automatic contribution of as little as $25 every month and you’ll barely notice it.

If your in-state plan doesn’t have good tax benefits, I would recommend looking plans with low-cost investment options such as the Utah and Ohio plans (really anyone that offers Vanguard investments). I like Ohio specifically because they offer good investments that suit my preference for very conservative investments for college, including high-yield CDs and inflation-indexed bonds.

Getting Married To Save Money On College Tuition?

After seeing my Grandparents and 529s article, a reader sent me a link to WhyPayTuition.com, which is a matchmaking site that promotes the idea of getting a “convenience” marriage solely for the purpose of reducing your tuition bill:

The easiest way to obtain free tuition is to get out from under your parents financial umbrella, and fall into the college’s low-income aid category. Most colleges offer free tuition, reduced tuition and reduced fees. [...]

The idea is to get married, remain married for the duration of your college years, then get a non-contested, no property divorce. The girl will keep her last name, you live separate lives, and no one will need to know you are married.

As long as both parties are US citizens, there appears to be nothing illegal about this. Certainly it seems a bit overboard, but so is giving any 18-year old with zero income the ability to take out $200,000 in loans. This NY Times article mentions several student-couples who have saved $50,000 or more by getting married and qualifying for in-state tuition:

Economically, in-state students have a huge advantage over non-Californians, for whom tuition costs an additional $22,000 a year (as of 2010-11). [...]

A few years ago, a student from the Midwest believed she could not afford the annual $30,000 in student fees (including $20,000 in out-of-state tuition), so she posted on Facebook that she was looking for a husband. [...] An out-of-state student whom she did not know responded to her post, and they married in 2007, the summer before her junior year. She graduated in 2009 and estimated that the marriage had saved her $50,000. The couple has divorced.

But being married has many potential pitfalls. This WalletPop article gets some opinions from a divorce lawyer:

“If you’re someone who is jumping through these hoops to save money going to college, at least be smart enough to get a prenuptial agreement,” he said.

Potential problems in not getting a prenuptual agreement, in addition to having to share earnings for life, include being responsible for the spouse’s debt and other issues that married couples face, such as inheritance if one person dies.

I know of people getting married for health insurance reasons, which outlines another societal problem. As the college tuition bubble also continues to grow, I expect more and more stories like this to pop up.

Grandparents + 529 College Savings Plans = Loophole?

There was a discussion on Bogleheads recently about giving money to grandparents so that could invest in a 529 college savings plan for their grandchildren. While it brought more light on what I think is a flawed financial aid system, it also presented a learning opportunity for me and any parent with college-bound kids.

The idea was that if a 529 plan is owned by someone other than the parent or child (e.g. aunt/uncle, grandparent), the plan will not be considered as an asset for financial aid purposes. It won’t be a parental asset, and it won’t be a student asset. This, in turn, will lower your “expected family contribution” and increase the possibility of receiving financial aid. Loophole! Note that this holds for the popular FAFSA, but not schools that use the CSS Profile, which requires you to list all 529 plans with the student as beneficiary.

However, there is a catch. If a qualified education benefit such as a 529 plan distribution is not reported as an asset on the FAFSA, then those distributions are reported as untaxed income to the beneficiary on the subsequent year’s FAFSA. (You must fill out a new one every year.) As a result, next year’s financial aid eligibility for the student can be significantly affected.

Still a loophole, just smaller. So what can you do? If a grandparent has money in a 529 plan for your child, they should delay taking a distribution until the student’s senior year in college, so next year’s financial aid picture won’t matter. (Assuming no graduate school or that you won’t need aid there.) According to Finaid.org, technically you can take the distribution any time after January 1st of the junior year in college.

Theoretically, the grandparents could fund a quarter of the undergraduate education this way, without the assets in their 529 plan ever counting against any financial aid eligibility. I never knew this, but it’s true unless future legislation changes it.

Sources: FinAid.org, The Guide to Federal Student Aid

Minimizing Your Personal Inflation Rate

Inflation. Deflation. Hyperinflation. It’s all people seem to talk about these days. I’m always reading that you should always consider your investment returns after inflation. But what is inflation? Most of the time, they are talking about the Consumer Price Index for Urban Consumers (CPI-U) published monthly by the Bureau of Labor Statistics. This is based on the price of a theoretical basket of goods. Here are the components of the CPI, made into a nice pie chart by dshort.com from this recent BLS CPI report.

However, common sense tells us that we do not all share the same inflation rate. A long-distance trucker will be much more sensitive to the price of gas than a couple living in Manhattan. A grandmother who has owned her home since 1940 and doesn’t plan on moving doesn’t notice if rents are rising 3% or 6% a year. The CPI could have very little correlation to your personal inflation rate.

In addition, it’s possible to manage our own personal inflation rates by changing our behavior or making some upfront investments. Let’s take a look at the largest components of the CPI.

Housing (42%)
This category includes the cost of rent (or owner’s equivalent cost) as well as utilities like gas and electricity. The most obvious way to deal with inflation is to own a house, either directly or via mortgage. With a 30-year fixed mortgage, your monthly payment is going to stay the same, and your total housing payment is only going to vary a bit as your insurance and property taxes go up. My neighbor used to have a mortgage of $300 a month.

As for utilities, a solution I plan to install is solar photovoltaic (PV)panels. In most states, you can sell back the electricity you generate with solar panels throughout the day, so that it cancels out your entire electricity bill. With a large enough system, you will never have a power bill again. Here is a helpful PDF consumer’s guide on solar systems from the Department of Energy.

The large upfront cost can be defrayed with federal and state tax credits, and the panels come with (about) a 25-year warranty. Other parts, like the inverter, come with a 10-year warranty. If you have the space you could also install a windmill, or contract electricity from other sources.

If you live in an especially hot/cold climate and much of your expense is cooling/heating, a very important area is insulation.

Transportation (17%)
This category includes the cost of vehicles, public transportation, and fuel. I plan on owning all my cars for at 10 years each, so even though it will catch up to me eventually, the annualized cost should remain reasonable. Avoiding the hit of depreciation during the early years, either buy buying used or holding for a long time, is important.

As for fuel, again I plan on using my solar panels to create electricity for my plug-in electric vehicle. Range is currently an issue, but as battery technology improves, I expect that it will be feasible for most households to own at least one electric vehicle.

Food & Beverages (15%)
This category includes food at home, dining out, and also alcohol. Why not grow some of your own food? We are starting to dabble in square-foot gardening, which involves planting small, efficient gardens that use minimal water, pesticides, and labor. Dining out is one of those expenses that is almost all for pleasure and convenience, so if it becomes hurtful then we’ll cut back. I’ve already been cutting back on the alcohol for waistline reasons.

Education & Communication (6%)
I’m not sure why these two are lumped together, but I really don’t see communication costs rising very much in the future. It would appear that data transfer is only going to get faster and cheaper. On the other hand, education costs continue to skyrocket. (Okay, now I see why they are together… sneaky) Even though this is only 6% of the CPI, if you have kids then tuition prices are likely a huge concern. If you don’t have kids (and are done with school), then you don’t care at all.

There are still some limited opportunities for prepaid college tuition out there, which are worth exploring if you accept the penalties for not following their restrictions. An example is the Florida Prepaid college plan.

Any other ideas for controlling your personal inflation rate?

Distribution of Law School Graduate Starting Salaries

During recessions, interest in graduate school rises as people lose their jobs or otherwise decide to go back to school for better prospects. Are you thinking about law school? I’ve thrown the idea around, as I think estate law would be a growth area. Well, check out these stats from the National Association for Law Placement (NALP) first.

The NALP found the national median starting salary for full-time law jobs for the Class of 2009 was $72,000 and the average was $93,454. After adjusting for the fact that many smaller law firms don’t report salary details (and also tend to pay less), it found the adjusted average salary to be $85,198. But you should also consider the distribution of the salaries as well, shown below.

Distribution of Reported Full-Time Salaries — Class of 2009

From this Law.com article:

That’s because salaries are clustered in two areas — a phenomenon known as the bimodal distribution curve. One cluster is in the $40,000 to $60,000 range and the other around $160,000. The lower range tends to include attorneys in public interest and government jobs, while the higher cluster includes associates at large law firms.

This means that after three years of law school and probably accumulating more student debt, lots of new grads are still far away from six-figure salaries. For the Class of 2009, 1 out of 4 are working temporary jobs. Going to law school primarily for the money can be a long road.

What about after the entry-level? This article quotes the Department of Labor as stating that the median lawyer makes $113,000 per year, and those in the 25th percentile make $76,000 per year. Certainly, many people still make solid livings as lawyers. I know a lot of other JDs that are doing things unrelated to law as well, and most of them are doing alright. However, I don’t know if they would have still gone to law school again if given a redo.