Debt By Design?
|September 11, 2007||Posted by Roshawn Watson under Uncategorized||
By: Roshawn Watson
Is the deck stacked so heavily against today’s youth that obtaining the elusive “middle-class life” impractical for many without taking on a decent amount of risk (including debt)? I am an optimist, so I was biased when I began reading Anya Kamenetz’s groundbreaking book Generation Debt. Despite some of the overt political overtones, I found the book particularly insightful regarding the plight of young people today.
Being in a “meritocracy,” I naively thought that youth were in crappy financial situations because many of us are financially inept. Sorry, I was not in a forgiving mood. My thoughts simply echoed a predominant image of youth depicted in the media: irresponsible, mall-loving, and club-hopping kids who prioritize fun over their financial futures. Even in the current issue of Kiplinger’s Personal Finance, a mother is complaining about her daughter who is a college freshman who spends her earnings on $100 jeans and partying with her friends every night of the week (September, 2007 issue). I personally know people like this: individuals who fit this “adultescent” category. Note that adultescent is a term used by Anya in her book to describe kid-like behaviors of adults. I figured that if youth did not want debt and were not from a family of means, they should just suck it up, work their ways through school, and sacrifice the first few years. It would all work out in the end. After all, it is the path countless others have taken.
However, my indignant attitude was challenged once I began to read some evidence to the contrary. Here is one of the many points made by Anya. With college prices soaring compared to incomes, a four-year bachelor’s is becoming more out of reach for many people’s budgets… without some debt. For example, according to Kiplinger’s Personal Finance, the price of tuition and fees at some four-year public institutions have increased by 35% since 2001 (February 2007 issue). Meeting these financial demands can be extremely difficult for parents unless their incomes also increased significantly or they have a substantial liquid net worth. Simply having students work while in school is not a panaceas either. The truth is that inflation-adjusted student wages are significantly reduced compared to their parents’ wages at the same age.
Some Suggestions Please
- To keep college costs down, consider financial guru Dave Ramsey’s advice: try good public schools. Students can get a very good education for a reasonable price by simply avoiding the private school price tag. For example, public school costs an average of $12,796 annually (tuition, fees, room, and board), but private school costs an average of $30,367 per annum (Kiplinger’s, Febuary 2007). As a multimillionaire with nearly 200 employees, Dave could afford to send his children practically anywhere; still he and his wife opted to send their children to public universities. (Note that one of their children is not yet in college). Some may wonder if he is just being cheap, but I disagree. According to recent research (1999) by Alan Kruegar (Princeton Univ.) and Stacy Berg Dale (Mellon Foundation) compared students who entered Ivy League or similar schools in 1976 to students who entered much less prestigious colleges the same year. Initially, it appeared that the school did make a difference. For example, by 1995, the Yale graduates earned 30% more than graduates of Tulane. However, the authors decided to adjust for the fact that the students who attended Yale were better to begin with. Accordingly, they then looked at students who were accepted at prestigious universities but opted to go with less expensive and less selective schools. Once this critical adjustment was made, the students from both types of institutions had the SAME INCOME. Thus, the student, not the school, made the difference in the student’s success. Where we go to school is not as big of a deal as some of us make it out to be. Don’t have campaign taste on a beer pocketbook.
- Start investing early. By contributing regularly to your ESA or 529 plans (if applicable), you can stash away thousands. It is worth it and can give your child a head start.
- If you decide to borrow money as a student, please do not borrow more than half of your anticipated annual salary. This will keep your payments down, so that you can quickly pay the debt off. The one big potential problem with this advice is if you do not graduate, you can get into a pickle. This is especially a problem if you borrow a lot of money in anticipation of a big salary. I personally know people who are completely strapped because they didn’t graduate and have huge student loan debt. Debt equals risk, so be very careful and avoid it whenever possible.
Copyright 2007, Roshawn Watson, Pharm.D. All Rights Reserved.
Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.