I saw an article this week that showed that at 514 colleges, the loan default rate has now exceeded the graduation rate. The default rate is now 13% on average across the country, and outstanding student loan is now nearly $1 Trillion. That doesn't quite compare to the amount of mortgage debt, at about $10 Trillion, but it is quite a bit more than the total credit card debt in this country ($800 Billion.) The article quotes Tim Ranzetta saying that colleges should post this warning:
“This education can be hazardous to your financial health. At this institution, you have a higher probability of defaulting on your student loan than you do of completing this program.”
I found it interesting that half of these defaults occur at “for-profit” colleges and another third occur at community colleges. I think there are some lessons there. First, your state school is probably your best deal and second, that this push for more people to go to college (those who used to not go to college now go to community colleges) may not be the best approach.
The Default Rate Is Even Worse Than You Think
If you read the actual study you see that they define a default as being 270 days behind. That seems awfully generous. If it was a mortgage in some states, you'd have been on the street for 6 months by the time you're 270 days late. It also only considers Stafford loans. ParentPlus, GradPlus, Perkins, and private loans don't count.
Dave Ramsey's Perspective
I was listening to Dave Ramsey's show tonight (incidentally he seems to have no idea how PSLF works for doctors) and he noted that he was seeing more and more student loan debt among his callers, especially those nearing 6 figures of debt. The callers tonight were two professionals with $90K in debt, $78K of which was student loans.
Student Loan Interest Rates Doubled
The Stafford interest rates for undergraduates just doubled from 3.4% to 6.8%. Medical students probably don't have much compassion, since they've been at 6.8% (or higher when you count the GradPlus loans) for some time. This increase in interest rates from basically free (when you take inflation into account) to doubling every 11 years or so, isn't going to help the default trend, especially when combined with increasing costs of education and stagnant salary growth. In real terms, the average US salary increased by less than 2% from 2000 to 2011.
Undergraduate Debt Can Last A Long Time For A Doctor
Imagine a $20K loan you take out at age 18. Let's say you matriculate to medical school at 24, graduate at 28, finish residency at 31, and finish fellowship at 34. At 6.8%, that loans is now $57K. Multiply that by 4, 5, or even 6 depending on how many years it takes to finish undergraduate school. Now imagine if the student was borrowing more each year, perhaps $30K, $40K, or even $50K. Just the tuition at Ivy League schools now averages about $40K. Now tack on medical school expenses. I've had advisors tell me that they've already seen student loan debts in the $600K-700K range. It's easy to see where that comes from. Take an expensive undergraduate education, add on an expensive medical school education, let compounding work it's magic for a few years, and voila….$700K. $700K at 7.5% spread (remember much of that will be GradPlus loans) over a 10 year payment plan requires a monthly payment of $6,450. I hope you like working very hard and living very cheaply. That is more than half the take home pay for many doctors.
Avoid Undergraduate Debt
It's really hard to avoid debt in medical school. The tuition is so high, most families can't afford to cover much of the cost. There are precious few scholarships, and the programs that trade time for money (military, public health, MD/PhD) are unattractive to the vast majority. There is little time to work during the year, and you really only get one very short summer off. Unless you are lucky enough to have a high-earning spouse, or fairly well-to-do parents, you're not going to get out of medical school these days with less than $100-200K in debt. Many medical students will easily be in the $300-400K range. There isn't a lot you can do about it. Choosing the cheapest school you can get in to is probably the most important thing.
But undergraduate debt is very different. There are still lots of ways to get through college with minimal, if any debt. Most students smart enough to eventually get into medical school can often get a full-ride scholarship somewhere. Undergraduate school is generally less time-consuming (I can't seem to remember a single night on call required for Organic Chemistry) so there is more time to work on the side. You have more time off in the summer to work. It's also easier to find an undergraduate school close to home, where your room and board can be minimized. Most parents also find it much easier to pay a couple of thousand a year toward your tuition than $20,000.
Most importantly, there is a huge variation in the tuition bill from one undergraduate school to another. Consider in-state tuition at my local flagship state university- $3500 a semester for 14 hours. It's not Harvard, but it's definitely not 1/5th of the education you get along with Harvard's $40K tuition and fees bill. The local community college is $3300…for the whole year. Again, it's going to be harder to get into medical school from the community college (perhaps transfer after 2 years) than from Harvard, but for 1/10th the price, it's probably a far better value, especially if your MCAT score is the same as the trust fund kid at Harvard.
I Did It, So Can You
I chose an inexpensive private school that offered me a full-tuition scholarship. I worked in the summers, and during school for at least 2 of the years. I lived very cheaply (amazing how little you can live on when you have 5 roommates and no car) and I studied (and played) hard. To be honest, I did have one tiny little $5K loan from my freshman year, but the terms were pretty fantastic…no interest for 17 years, which I paid off the month I left the military (when interest was about to start accruing). In after-inflation terms, I borrowed $5K and paid back $3K. You may not be able to get out of college with no debt at all, but if you want to have any kind of financial success in life, it's important that you don't ring up $50-100K or more of undergraduate student loan debt, and that's not even considering consumer debt like credit cards or car loans.
Planning For Your Kids
It's wonderful to be in a position to break the cycle of student loans. Many parents are still paying student loans when their kids start taking out their own student loans. By avoiding your own, you can save up for your childrens' educations more effectively, and hopefully help them to avoid starting out their lives way behind the 8 ball. Consider again those $6,450 payments our hypothetical doctor with the $700K debt will have to make. $6,450 a month put toward his 2 children's education for 18 years could blossom into $1.55 Million a piece. They could both go to Harvard for undergraduate and for medical school and still never have to save a penny for their own retirement.
Minimize your student loans. Live like a resident until they're gone. Save enough for your childrens' education that they can break the debt cycle and start life with at least a net worth of zero.
What do you think? Is it possible to get out of undergraduate school without debt? How much debt is okay to carry into medical school? How did you minimize your student loan burden? Comment below!