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 on Undergraduate Debt
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 Student Loan 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 College Education
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!
Not everybody can get scholarships for college. My family made too much money and was in the upper middle class so despite my 4.02 or so GPA at an elite HS with AP classes, ~85 percentile SAT/ACT score (actually not that good but back then we didn’t prepare *as* much as the kids now), all-state varsity participant in sports, volunteering and the like, I got nothing. I applied for a LOT of scholarships but couldn’t get anything–and I didn’t have anything special going on since I wasn’t an underprivileged minority.
Tuition was 8,000/year when entering and about 11,000 when I ended. Working in the summers and a bit during the school year helped but couldn’t cover tuition and 10,000-12,000 yearly room and board, unfortunately.
For medical school, I literally know one person that got a full ride scholarship. But his circumstances are very special as he is an underrepresented minority that got an 85 percentile on his MCAT, same score as me. I got nothing, of course, like everybody else. But since I live like a hobo, I’m only graduating with about 200,000 of debt and actually plan to pay down my loans a bit in residency due to living expenses of roughly 10,000 a year. It would be less but the darn board tests are so expensive. 🙁
It is a shame that the college degree has become devalued over time. Pretty much anyone can get accepted into a college somewhere, and I have met people who attend some of these for-profit universities who can barely do basic math or write a coherent essay. These people do not belong in college, and it is unfortunate that companies exist who specifically prey on these individuals who may not know any better (Phoenix University, I’m looking at you). I think fixing this one problem would solve much of the student debt burden in the U.S.
Thank you again Jim for another top shelf article! You continually generate pragmatic and applicable posts.
Future students, read these posts carefully, re-re-read those numbers carefully. This is, in effect, a gentle warning against non-bankrupt-able student loan debt.
It’s not worth my time to describe the student loan hole I will be in until the year 2039 (64 years old).
I do OK job wise (not an MD) … I’m in the IBR … I’ve been living like a resident for 13 years … I will continue to live like a resident until my late 50’s … zero debt other than student loans … hesitant to get married strictly because of my loans … can not/will not/absolutely refuse to have children if I get married … refuse to spend money on ANYTHING outside of investing/saving/frugal living … maybe a tad extreme, yes.
Large federal student debt balances are emotional and inescapable.
You have been warned.
Correction on the new interest rates:
6.8% was the rate before the bill that was just passed and signed into law on August 9.
Now it will be 3.9% for undergrads this year. (indexed to 10 year Treasuries, w/ a cap @ 8.25%).
I agree that undergrad loans should be minimized, but small amounts are probably ok. I graduated w/ $12K in loans which was pretty easy to pay off once I started working.
WCI,
I have a question about PSLF, and a calculated gamble I would like to take. I am currently entering my second year of medical school. My living expenses are covered with out the use of a GRAD PLUS loan. I was wondering what you thought of me borrowing my GRAD PLUS loan to invest for the next 3 yrs (approx. 80K) and using the PSLF to repay the debt later. Also where would be a safe place to park the money in case the PSLF program goes away and I have to repay the money myself. Is this a smart financial move or a little too risky?
Also thanks for bringing all of this financial info together for us. I have spent my entire summer reading your blog. I really appreciate your efforts.
I was lucky – my parents paid for all of my education, so I graduated law school with a solid six figure salary at 25 and have been investing 70% of my income ever since. I feel 100% obligated to pass on this ‘luck’ to my son, but I don’t want to oversave. So, my question – what’s everyone out there saving per child for college? I thought I was doing great saving $1000/month, but maybe that amount is insufficient. Generally, I wouldn’t feel that my child is entitled to a free education, but since I had that, I do think he is now ‘entitled’ to the same thing.
I save a total of about $13k/year for my 4 kids in my state’s educ savings plan. It likely won’t be enough for undergrad and graduate school for them. I probably save an excessive amount for retirement (about $300k/yr), so I could put more toward their education, but I don’t want it to be a completely free ride for them. I think we often do things as our parents do. My parents could have easily paid for everything for me and my siblings, however, they elected to pay for either room/board OR tuition for me and my siblings during undergrad. If you had a scholarship, then you’d get room/board paid, if not then the tuition. For graduate school, they loaned me whatever I needed, but it was a loan, 0% interest, no defined pay back period. I appreciated the significant help they gave me, but I also appreciated the responsibility they required of me to pay them back for medical school. I ended up borrowing around $120k, but have since paid it back. Obviously, the 0% interest rate was very helpful. Knowing their generosity with the loan, I was very eager to pay it back as soon as I could.
1000K a month is going to be plenty. The simple fact is that you are not “obligated” to save for you child’s education. You do so out of love. However are you saving for Harvard or State U?
My theory has always been you save as best you can for State U and if they get into a better school then hopefully you can help them out and if not then they better take loans or get scholarships.
I can only afford to Save $100 a month for each of my children. But even that savings level will likely cover 2-3 years at a state school in 15 years. I hope to increase that when I am debt free.
70%? What are you living on? Maybe 70% net. At any rate, I think you’re saving PLENTY if you’re saving 70% of your income. $1000 per month x 12 months x 18 years growing at 8% a year comes out to $480K. That should completely pay for a pretty nice education. I’m probably saving 1/3 of that per kid.
70% net and spouse works as well. Saving aggressively so I can stay home with kid or work part time. But the cost of his education is a big deterrent right now.
My first post here so I will apologize in advance for the somewhat ranting tone of the next part of this:
I’m all in on the goal to minimize debt for college education. Which is part of why my undergrad degree took 7 years to complete with a grand total of $2,000 in debt because I worked hard and paid my way all the way through on my own (well not quite– my parents covered tuition ONLY for the first 2 years and I did live at my parents house and commute to school my final year so that I could afford to go full time and finish it up). I also hold a Masters in one of those not-cost-effective liberal arts degrees from a very prestigious (and expensive) private grad school which brought my total student loan debt to $14,000 (long since retired).
Yet I never complain about what that education cost me– even though my career is in a completely unrelated field– because the education did give me two vital skills– the ability to research deeply and then think critically about any subject in which I care to have an interest. As a result I have the most important economic skill possible– the ability to react creatively to whatever situation (economic or otherwise) situation I find myself in. It is precisely this skill which most college kids fail to learn in the current system. As a result they spend a fortune to qualify for a job they will hate and then console themselves with the “I deserve this conspicuous consumption gadget because its the reward for my misery at work”.
Of course this thinking carries over into what investing they do. Because they do not have the ability to think outside their training (because they have been trained not educated) they follow the advice of either whatever “adviser” they bump into or they follow the crowd as it stampedes over one fiscal cliff after another.
If one would like to bemoan the “devaluation” of the college degree this is the spot to center on. Auto mechanic is a good and valid career and job training program but when community colleges call that an “education” they both mock true education and short-change their students.
Our societal desire to transform a college degree into a job training certificate has impoverished us all. A lot of what I read here at WCI (other than the investment advice which is excellent) stems from some version of this– we have trained even our professionals (in this case physicians) in the methods of their “job” and have left them with the inability to think outside those specialties.
I “retired” the first time at 37, got bored went back to “work” (haven’t had a conventional “job” in over 30 years)lost a fortune and am in the process of rebuilding. So I’ve been broke and I’ve been wealthy and in good times and bad the fun of thinking for a living has got me through.
Pseudo,
The answer to your question is, “it depends”. Mostly it depends on the interest rate you can get on the investment portion of this plan. If you can beat the almost 7% rate on the PLUS loan on a consistent basis its a great plan. The trick is to find an investment like that that is not too risky (loss of principal dramatically changes the scenario here) AND doesn’t take so much management time that it distracts you from your residency duties and hurt you there.
If you can meet those goals you don’t need to worry about the PSLF as a method of repayment. The PLUS loan has a pretty long repayment schedule, just keep your principal in the investment fund turning over at a higher rate than the PlUS interest rate and you can repay the loan from the investment fund and bank the difference in the rates.
It is good that you worked for your degree but you really should have finished it in the normal 4 years. You lost three years of income and you probably would have made, what, 40,000 a year? So you lost out on 120,000 gross or so of money to save money on, what, 10 thousand dollars in tuition.
In medicine, the debt sucks (tuition is 30-40,000 at a lot of med schools) but each year that we delay work as an attending we lose about 120,000-150,000 NET income. And each year tuition increases greatly outpace inflation so we should just try to finish ASAP.
I think there is some truth to what Mark Reynolds is saying. This is a blog about finances, so it makes sense to talk about everything in terms of dollars and cents, but obviously the process of an education is much more than that, and you cannot put a price tag on learning to think independently.
Great article! I graduated from college without any debt. I went to a state school (UC Berkeley). Back then, the tuition was $2000-$4000 a semester. It kept on rising every year. I was fortunate enough to get Cal Grant which covered all the tuition and didn’t have to pay it back. My parents paid for all the room and board. But that meant I had to live with my sisters for 4 years (we all went to the same school). I also did Work-Study during college because it paid pretty well, $12-15 per hour. That was even better than the minimum wage for present day. I appreciated the fact that my parents allowed me to graduate college without any debt. So I have been contributing $1000 a month to the state 529 plan. It is projected that a 4 year UC school will cost $160k to $200k to finish by the time my daughter will enter college, but I am on track to save that much.
For medical school, I graduated with about $80k in student loan debt. Again, it was a state school. I wish I had borrowed more though, because the interest rate was only 2.875%. And after residency, I found a position in central California and qualified for the NHSC (National Health Service Corp, nhsc.hrsa.gov) Loan repayment program. Basically you have to be in primary care and work in a rural area or under-served community and the federal government will pay back your student loan. It was $25k for the first 2 years and $35k for the next 2 years. The amount may have increased since then. My student loan disappeared after 3 years of working! Therefore, I highly recommend people who are in primary care to look into this program if they are interested in working in the under-served community. After all, we are paying a lot of taxes, might as well get something back in return.
A lot of theose college estimators aren’t really that accurate. They have two main problems.
1) They tend to show tuition on a logrithmic inflation rate when in fact they tend to rise more on a linear rate.
2) They include Room & Board estimates at the same inflationary rates when most colleges Room & Board rates actually rise pretty close to the level of inflation
For instance, if you look at just Tuition at UC California from 1992 to 2012 (20 years). The tuition tripled. If you assume the same rate of rise then you could expect a child born this year to have a tuition about 3 times the current rate or about 36K a year. I find that highly unlikely. Personal salaries haven’t kept up to this and colleges may very well price themselves out of business at the current rate of rise. Also if you look at the data the “rate of rise” for tuition in California jumped astronomically in 09, 10, and 11. All coinciding with California’s budget problems. If you take out those three years then we are talking about a doubling of the tuition rather than a tripling. Huge difference.
Just food for thought.
Much of the discussion of the cost of undergraduate education focuses on the inevitable progression of tuition costs. The university environment, unlike the private sector, but very much like the government sector,continues to be immune from the competitive economic forces experienced in the private world.Now you may say that this is great, that it is an “academic sanctuary”, but the fact is that university staff, from faculty down to the janitors,are economically insulated,primarily still have unbelievable defined benefit pensions (long gone in the real world, except for public sector unions),have incredible job security, and all salary and benefit increases continue to be passed on either to the taxpayer or in the form of tuition hikes. Add to that the mass subsidization of tuition as “full ride” grants for minorities (Asians are exempted at UCBerkley from minority status,as they would otherwise take all the affirmative action slots due to their high scores),and you have a high tuition shift onto other less “unique” students.In addition, we have the academic tenure system, which protects embedded faculty and creates a “slave class” of perpetual foreign grad students working on their Phds while they crank out publications for their bosses, yet are never free to compete for those academic professorships.In summary, do not borrow money for college.If you must go to a top school to then go to medical school, don’t complain about the debt, go and work at a NHSC location and maybe loans will be paid off.And one thing, don’t marry someone and then borrow to pay off their education. I have seen too much of that among colleagues.
I would also add that graduating residents are coming out with incredible amounts of debt, as mentioned in earlier posts. At our institution, we were going to hire an ophthalmologist completing his residency at a stellar academic center.He very much wanted to join us, but because of the $300k+ debt he had incurred in student loans, he is likely going to have to join a medical group promising him a much higher salary in exchange for being a very busy surgical worker bee. Bottom line, after all that education, he really does not have freedom of choice, he is boxed in by the loans.
All of which relates to the generally accepted cost of current medical education as an inevitability. I think it points to the total economic inefficiency of medical and residency education, as compared to,for example, law school or dental school.
The economic risk/reward in a medical education is now huge. And we cannot have the conceit that somehow we are responding to a “higher calling” than the dental or law student.If so, there is no doubt a code in the DSM manual for delusional thinking.
Considering the fact that private practice is now an oxymoron, that graduating physicians and their physician employers face reimbursement determination by large health corporations and the government,there must be a complete examination of how efficient our medical education is.Should students spend 12-15 years post high school to become physicians? Must they then become economic serfs until their 50’s as compared to equivalent peers in law or dentistry, or perhaps top MBA grads?
Something to think about, and no doubt this will provoke some interesting responses.
The advise of this article “go to inexpensive school, live cheaply, work to minimize cost” is not new and does make sense. But it makes sense only for those that graduated at least before 2004-2007 (days when in-state tuition was still low).
That advise today does not hold up because of:
[1] Tuition is rising very fast
-I started undergrad in 2003 with in-state tuition (state school) of $8,500.00/yr (currently 13-14 tuition is $17,300.00)
[2] State grants are not keeping up
-its a joke how much state grants are; they staid the same for seems like 20 years.
[3] Interest rates are very high
I can assume that posts made above were by those that graduated undergrad likely before 2007. Those good old days are long gone. Universities are money machines to their core.
Another issue is for high school students and their parents there is a “fog of elite school”. They still firmly believe that an expensive private school will make their kids rich. They send them there at $50-$60k/yr and plunder their retirement plans in the process.
Applying for college is a serious process, unfortunately most parents do not take it seriously and the high school seniors have too many things going on anyway and cannot put in perspective their decisions. Also, there are many excellent students that don’t get any aid/scholarships despite great academic performance simply because they are too “plain” for universities and don’t fit their secretive criteria for giving out merit aid.
So the OP makes a good point; but his plan is becoming harder and harder to accomplish for todays’ youth.
I also agree that current residents often take jobs purely out of financial incentive to pay off their debt. And university settings loose out on great talent simply because they pay lower salaries.
While I agree rising tuition makes it harder and harder each year, the principles discussed still hold. There are still many state universities whose tuition is a fraction of $17K.
Less an option for docs, but others (or poor docs) reading, or patients/ families you know should be aware: Harvard is not impossibly expensive for a poor family. It and some other private colleges have great rates for lower income families- Harvard will waive application fee and will charge 10% family income for all expenses if income is under $180K- and free <60K. So a real smart cookie who can get into Harvard could get a free ride to state, but if family not real well off a Harvard degree for well under $20K/year- worth considering. And if it's free- well a way better deal than State!
Also I think it's unfair given financial aid set up- rich parents, costs more- for kids whose rich parents won't help with college. IMHO we owe our kids the same chance/cost as if we were less well off. And I'm a Harvard alumna so I've been socking away (and will unretire if needed) money in case my kids want/get to go there. 1 kid opted for State on tuition scholarship, 1 to go (and then I'll be certain it's safe to retire).