Are Ivy League Schools Worth the Price?

If your child received a scholarship to attend a state school and was also accepted to an Ivy League school, which one would you choose?

A mom posed this question to Washington Post columnist Michelle Singletary. Here is what Singletary had to say:

I think you stand your financial ground. You are right. She’s young and irresponsible and likely sees that Ivy League school much like she sees brand-name jeans. It’s a must have.

But that’s not true. You can live a great life and get a fulfilling job without going to a brand-name school. I just don’t get this thinking our culture has passed on to young folks that college is worth the cost at any price tag.

It’s not. And I have dozens and dozens of e-mails, letters and testimonies from broke college graduates who are struggling financially that prove otherwise.

I wouldn’t turn down a scholarship to a good school. In fact, I didn’t. I got a full scholarship to my state school, the University of Maryland at College Park. Initially I didn’t want to go. My preference was to go out of state, but my grandmother would have none of that. Big Mama was right. I received a great education and ended up working at the Post alongside colleagues from Ivy League schools, and my path to the paper wasn’t any harder than theirs.

Stick to your word and if she wants to borrow the amount of money it takes to get through an Ivy League school without a scholarship or grant, let her be hardheaded and spend decades trying to pay off that debt. Let her take the hit and experience the consequences of her decision. As Big Mama used to say: “A hard head will make for a soft behind.”

LOL! I love that last line. Do you agree?

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College Students: “Where is Our Bailout?”

A CNN production assistant wrote a first-person essay that raised a good question: Why isn’t the federal government helping students ease the pressure from student loans?

In this case, Samantha Hillstrom, who is two years out of school, is swimming in $115,000 in student loans and was told by the bank she has 12 years to pay it off. The bank has given her no lowered interest rate, no consolidation and no breathing room, forcing her to pay $1,200 a month for the loans.

Here is my question: why aren’t student loans receiving the same attention, same care and forgiveness as every other loan in America? I have to say that I am lucky to have a job right now and was especially lucky to get a job right out of college. Can you imagine what kind of pressure and stress the 2009 graduates are feeling in this time of uncertainty? Veterans of the workforce can’t find work right now. What about the recent college grads with no work experience and tens of thousands of dollars of unforgivable debt underneath them?

There is a grain of hope that will come when the Income-Based Repayment Plan, part of the College Cost Reduction and Access Act of 2007, will take effect on July 1. The program will cap off borrower’s monthly payments at 10% of their gross income for 25 years with the rest of the debt being forgiven. However, that only applies to federal loans (which is only one of my four loans).

According to the Federal Education Department, in 2009, the amount of outstanding federal student loans is $544 billion, up $42 billion from last year. Where is our bailout? Where are our options? The default rate on student loans this year is already at 6.9%. That’s a 13% increase from last year.

Recently, Rev. Jesse Jackson started a campaign called “Reduce the Rate“ urging the Obama administration to reduce the interest rates of student loans to 1%….the same amount of interest the banks are getting.

Jackson’s plan proposes the following…

• Reduce the interest rate on all student loans to 1%.
• If banks can borrow at 1% or less, then so should our students.
• Extend the grace period before loan repayment begins from 6 months to 18 months for students who graduate.
• In these tough economic times, it takes a college graduate an average of 6 months to 1 year to find a job. The rules should reflect this reality.
• End the penalties assessed to schools for student loan defaults.
• Schools should not be held accountable for students who don’t pay back their loans.
• Increase Pell Grants to cover the average yearly cost of a public
• 4 year institution instead of the amounts in the current stimulus package–$5,350 starting July 1 and $5,550 in 2010-2011

As some readers pointed out, Hillstrom could have gone to community college or saved before attending a private school in New York City. She could have chosen a higher-paying field and lived within her means.

But there are many working class kids who had to take out loans even for state schools. Where is their bailout? Also, I feel for college graduates this year. What are they to do?

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Monday Morning Open Thread

As has often been noted here and elsewhere, no one and nothing is immune from the economic fallout. Not even private schools and colleges. I was fascinated by this New York Times story about the Conserve School in Wisconsin. The Conserve School is entirely funded by an endowment from a trust that draws its financial basis from the Central Steel and Wire Company, a Chicago steel company.

Stefan Anderson, the headmaster, told them that the trustees were essentially shutting down the prep school because of the dismal economic climate. Its four-year program would be converted to a single semester of study focused on nature and the environment.

“We thought we would hear they were cutting financial aid,“ recalled Erty Seidel, a senior on the wooded campus, which is filled with wildlife and sprawls across 1,200 acres in Land O’ Lakes.

Greta Dohl, a student from Iron River, Mich., in her third year at the school, broke down and cried. “I was absolutely heartbroken,“ she said of the closing.

Now students and parents are banding together and challenging the action, contending the school’s underlying financial condition does not look so dire. In fact, the school’s endowment would be the envy of many a prep school. With $181 million and 143 students, it has the equivalent of more than $1 million a student.

In a lawsuit filed in State Circuit Court in Wisconsin, the parents argue that the trustees are acting in their own interests — as officials of a separate, profit-making steel company — and want them removed from oversight of the school.

The situation raises several interesting questions– only some of which are investigated in this article. Firstly, there would seem to be a serious conflict of interest  - the trustees of the endowment are also officials in the Central Steel and Wire Company. The endowment could gain an enormous amount of cash by selling the company shares – enough money to keep the school running, plus find less risky investments for the future stability of the endowment (like converting it into bullion and burying the gold on the school’s grounds). But selling the shares will, naturally, send the price of the shares plummeting, which is something no company official wants. So what’s good for the company is bad for the endowment and vice versa. Clearly, someone wasn’t doing fiduciary due diligence when this structure was put in place, and the students may be the ones who ultimately suffer.

But the other, larger point is the fact that this is what happens when schools are forced to rely on private sources of income to work – the money flows well in good times, but in bad times, it dries up and there is no legal obligation for continued funding. I am sure the Conserve School won’t be the only institution facing this problem over the next few years, and of course, it’s students that suffer, not shareholders.

Secondly, the Times also ran this doozy about colleges wondering how many students it should accept, and how many students that do decide to go to their schools in March will be able to show up in September.

[S]ome colleges are trying new methods to gauge which applicants are serious about attending: Wake Forest, in North Carolina, is using Webcam interviews, while other colleges say they are scrutinizing essays more closely. And they are making more vigorous appeals to try to convince parents and students who will be offered admission in April that theirs is the campus to choose. But mostly, they are guessing: Will pinched finances keep students closer to home? Will those who applied in December be feeling too poor to accept in May — or show up in August?

Colleges have been in the catbird seat for the past decade or so. As the number of high school students swelled, applications rose, allowing colleges to be more selective. And families benefiting from a flush stock market seemed willing to pay whatever tuition colleges charged.

But all that has changed. For students, the uncertainty could be good news: colleges will admit more students, offer more generous financial aid,and, in some cases, send acceptance letters a few weeks earlier. Then again, it could prolong the agony: some institutions say they will rely more on their waiting lists. But there is no question, admissions officers say, that this year is more of a students’ market.

It’s like a damned if you do, damned if you don’t scenario for students – the pressure to achieve the perfect package to stand out in ever-increasing pools of applicants may be somewhat assuaged, but you trade that stress for wondering if your parents/family can afford for you to go to your dream school. Again, the story raises some interesting points, but fails to answer the larger question – is the funding of tertiary education fundamentally screwed up? Two weeks ago, Eliot Spitzer, in his recently launched column in Slate postulated yes (and gosh, it feels strange to be in agreement with Spitzer about something…) His solution? Continue to fund education through loans, but peg the repayment to a percentage of post-college salary for a fixed period of time.

[T.here may be a "third way" that eliminates the educational financing problem. Milton Friedman first proposed the following idea, and James Tobin then refined and tried to effectuate it. If two Nobel laureates of decidedly differing worldviews agree, it must be worth at least a quick look. It is, moreover, successful and commonplace in Europe and Australia.

Marketed under the decidedly unappealing name of “income-contingent loans”—how about we call them “smart loans” instead?—the concept is simple: Instead of paying upfront or taking loans with repayment schedules unrelated to income, students would accept an obligation to pay a fixed percentage of their income for a specified period of time, regardless of the income level achieved. Suppose a university charged $40,000 a year in annual tuition. A standard 20-year loan in the amount of $160,000 (40,000 times four) would produce an immediate postgraduate debt obligation of $1,228.50 per month, or $14,742 per year, not sustainable at a salary of $25,000 or anything close to it. Under a smart loan program, the student could pay about 11 percent of his income, with an initial payback of $243 per month, or $2,916 per year, which is feasible at a job paying $25,000. If, after five years, the student’s salary jumped to $100,000, payments would jump accordingly and move up over time as income increases. After 20 years, assuming ordinary income increase, the loan would be paid off.

FWIW, DH, being Australian, went to university here. He paid off his uni fees within 10 years of graduating. Spitzer neglects to mention a few salient details about how the US system differs from the Australian system: firstly, all but a few universities in Australia are public institutions – ie, funded by taxpayer money. Fees are capped and vary by degree, presumably to reflect the technical differences/costs therein; an English degree (a four year program) might cost something like $40,000, while a medical degree (a five year program) might cost $100,000. There is rationing of places based on your final year examination results. And finally, the school fees that you pay post-graduation are paid directly to the government; there is no loan institution intermediary. Interest is strictly capped at the cash rate plus a certain percentage – it is not a form of profit-maximizing.

In any event, MTs of teenagers, how are these issues impacting on you? What else is going on in your world?

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Pay As You Go?

Daniel Gross over at Newsweek echoed my thoughts in his recent article, “Get Ready for the ‘Pain of Paying.’”

As he pointed out, some of the credit crunch is due to people having borrowed many times more money than they actually earned. To be fair, I would put myself in that category in the ’90s, when as a college student, I borrowed student loans and ran up tens of thousands of dollars in credit card debt to pay for living expenses and the occasional “once-in-a-lifetime” splurge (electronics, clothes, trips, etc..)

Also, when in this country are consumers not encouraged to use a credit card? It does seem like no one carries cash anymore (until now). You can’t go shopping without having the sales clerk push another credit card on you.

As Gross pointed out, paying for things with cash is considered quaint for our generation — and now we are feeling the pain as there is no more money left to borrow.

The most revolutionary notion in commerce today is one of the oldest. If you want to buy something, you may actually have to pay for it. We are quickly reverting from a borrow-and-buy model to the old school cash-and-carry model our grandparents and great grandparents knew. It may seem passing strange now, but paying hard currency for goods and services has been part of our consuming DNA pretty much from the beginning of time. Sure, medieval alehouses and mead halls may have allowed customers to run up a tab, and the Olesons extended store credit to Ma and Pa Ingalls in “Little House on the Prairie.” But widespread consumer credit is really a 20th-century phenomenon. It got started in the 1920s, when expensive consumer durables like cars and refrigerators were first produced in mass quantities. It wasn’t until Bank of America began carpet-bombing California with credit-card applications in the 1960s that the debt wave started in earnest.

In the decades since, consumer credit became so pervasive that paying cash became passé. Want a new $32,530 Dodge Ram Crew pickup? Take a lease. Sick of your old house? Get a 100 percent mortgage and trade up. Face-lift? Round-the-world cruise? New PC? A $300 sushi dinner? Whip out that plastic. It was this behavior—the endless willingness of lenders to lend and borrowers to borrow—that kept the consumer economy humming uninterrupted from the early 1990s, straight through the brief recession of 2001, until the credit meltdown of 2007.

But many of those who extended credit recklessly are now acting like a single twentysomething who, after having a few bad affairs, takes a vow of celibacy. Students are returning to campus this fall to find that lenders have graduated. Retailers who freely extended credit to any customer with a pulse are deploying bean counters armed with sophisticated software to sniff out potential liabilities. When higher rates and fees don’t deter their borrowers, credit-card companies resort to slashing credit lines. “We predicted there would be some degree of spillover from mortgage meltdown,” says Curtis Arnold, founder of CardRatings.com. “But the credit line reductions by big credit-card companies in the last six months has been fairly unprecedented.”

But will this alter Americans’ spending habits? From Gross:

The availability of credit also changes the calculus people make about what they can afford. Blowing $6,000 on a week in Tuscany might be tough to swing if you have to pay for it all next month. Convince yourself it’s a once-in-a-lifetime experience that you can pay for over three years, and it becomes a bargain. With credit, Saturday night means dinner and a movie. When you pay cash and have a fixed budget, it’s dinner or a movie.

The tightening of credit is forcing more people to confront these uncomfortable choices. In the second quarter, credit giant Mastercard reported that the gross dollar volume (GDV) of credit charges processed in the U.S. rose just 0.7 percent from 2007, while the GDV of debit charges rose 15.8 percent. The retailer Target said that in the second quarter, for the first time in memory, the percentage of sales charged to credit cards fell, while the proportion of purchases made with debit cards rose. That’s partially by design, since the company has undertaken an “aggressive reduction of credit lines and significant tightening of all aspects of our underwriting.” (Translation: No Credit for You!!) Target’s same-store sales fell 0.4 percent in the second quarter.

What do you think? Has the current credit crunch forced you to cut up your credit cards? Alter your buying habits? Discuss away!

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