The true cost of financing education

[Greebo]

This came up in the Dave Ramsey expanded baby steps forum, and since not everyone reads it, and because it is, in my opinion, extremely profound, I thought it would be a good idea to give this its own topic.

Many people justify borrowing money to get an education by telling themselves (or others) that by financing it, they can get their degree faster, and thus get a "head start" on life, because they can get out in the work force that much more quickly.

Now never mind that 58% of would be college graduates in the United States of America drop out w/o a degree. I just wanted to focus on the cost of financing an education vs. paying cash.

So I made up two students. They both go to the same school. They graduated at the same time from High School. Both of them will pay $20,000 per year (10k/semester) for their education. Both will graduate at the completion of 8 full semesters.

Student 1 finances his entire education. He borrows $10,000 per semester. He makes no payments on his education while he is in school. He studies hard, gets good grades, and does graduate in 4 years. Each year he's in school, his loans accumulate interest. He has a stafford loan at 6.8% interest.

When he graduates, his total education debt on his $80,000 degree is $103,727.51. His payments, a 10 year standard repayment plan, start, and for 10 years, he pays $1,193.70 a month, every month. When all is said and done, and his loan is paid off, he has paid a grand total interest amount of $63,243.95 - that's interest while in school, and interest while out of school. Net cost of his education: $166,971.46

Student 2, however, does not want to go into debt. She takes 2 jobs after high school and works 60 hours a week, saving every penny she can while still living at home. It takes her the summer, the first school year, and another summer to save up enough cash for her first year in school. She never makes more than minimum wage. When in school, she attends classes full time, and works 20 hours a week. After her first year is up, she goes back to the 60 hour week schedule at her two jobs. Alternating with 2 semesters on, 2 semesters off (sometimes 3 when you factor in summer), She graduates after 7 years, having paid for her education in cash. She ends the 7 years with $6,288 left in her bank account.

She enters her career 3 years later than Student 1, but she ends up doing so financially ahead by over $170,000 when you factor in all the interest that Student 1 will pay. Of course, Student 1 *can* catch up somewhat, by paying extra on his student loan over time, but Student 1, every month, has a $1,193.70 payment to make, minimum. By the time Student 1 pays off his loans (assuming he pays the minimum) and takes 10 years, student 2 has had SEVEN years to save $1,193.70 a month, putting $100,270.80 in the bank.

The moral of the story is cold, hard, and unforgivably clear.
It does NOT pay to finance one's education.

[stinkbug]

I have to totally agree with this. It took dh 9 years to get a 6 year degree (Pharmacy) but in the end he only had one loan @ 5,000 that he took his last year because he was so burned out. He paid it off within two years of graduating. He worked 2 or 3 jobs....and moved back home his last year. His income has tripled since he started in the job force in '92. Most everyone in his profession that we know had about 100+K in loans.

[Dancing Lotus]

Greebo , thank you.

Most of you know my husband is 31 and in Collage while working full time.
We have a mortgage and two children so he has to work. He has been at it for 3 years now and has 3 to 4 more to go. He does get various forms of grants and scholarships but it's still not enough. Every semester they change things around on him and cut his funding more and more. We still have to pay for a lot of things. At times it seams impossible and he can see the odds stacking against him. This semester is going to very bad as we will have to pay more then ever. I nearly wanted to cry and beg him to give it up.

We have considered giving in and taking a student loan that would allow him to quit working. By doing so he could get done in half the time. I want this H*!! to be over with but if he keeps at it , it will be over when he
gets his diploma. If we get loans the H*!! will go on for yrs afterward.
Thank you for reassuring me that we are doing the right thing.

[elphie]

In the scenario you present you are absolutely correct. However, life isn't always so neat and tidy. What if one's parents aren't willing to continue supporting said child for seven years? What if one is unable to find 2 jobs and work the number of hours proposed? Some degrees require that you finish within 5 years, credits older than that expire because the field changes so quickly that they are now outdated so this wouldn't really work for someone going into those fields.

I'm not saying I disagree you; your scenerio is the ideal. I just think it is simplistic to think that it will work for everyone. That doesn't mean I am condoning starting a life hundreds of thousands of dollars in debt. There are other other alternatives that may include borrowing up front (if for some reason there is no alternative other than simply not going to school).

School can be done for far less than $20,000 a year. I barely spent $20,000 for my entire 4 year degree (although I did live at home and used the computers in the lab instead of buying my own). I applied for scholarships and PELL grants every year. I never got enough to pay my full tuition but enough that I never borrowed more than $2000 a semester. I had subsidized loans and worked full time (35 + hours per week) while going to school full time. By the time I graduated I had saved enough to pay back the loans before they ever drew interest.

Another alternative- I have a friend who earned as much in the first year of her new career as her accumulated debt (which was also subsidized and therefore hadn't drawn interest). She kept the part time job she'd had during school in addition to her new full time job, kept the same standard of living and applied all of her first year's salary to paying off the debt.

For my own kids we are saving now but have other plans. There is a university near us, I am a SAHM right now and when they go to school I plan to try to get a job on campus- my salary will cover expenses and as an employee of the university my kids would get a discount on tuition. Of course we'll expect them to work and contribute as well. There is another school near us that is completely free but students must work on campus- they don't hire groundskeepers, kitchen staff, etc. It is all done by students. Its not an easy school to get into but we will definately try (as an added bonus this school just happens to LOVE homeschoolers).

Anyway, not trying to hijack your thread, I do agree with you- I just thought a few other alternatives to your scenario might be helpful to some people.

[kita]

There are also other things besides what you have mentioned in the "simple" examples you gave...
Pell grants
Scholarships
Community College
and perhaps the difficulty of going in and out of a "lock step" program like RN or physical therapy etc. or med school when if came to that..

[kita]

Although I do know of at least one school whose pre-med program has a few extra classes so you can become a licensed respitory (sp) therapist and do what while in med school.

[Greebo]

In the scenario you present you are absolutely correct. However, life isn't always so neat and tidy. What if one's parents aren't willing to continue supporting said child for seven years?

One's parent's didn't. One's parents supported child 2 until she raised the $20,000 necessary to attend the first year. Just as child 1's loans covered room and board, child 2 lived w/ a room mate starting that semester and thence forth. Of course, that cost *would* diminish the amount carried from year to year when not in school, but even so, that might add a year total (dirt cheap shared housing student lifestyle and all that).

What if one is unable to find 2 jobs and work the number of hours proposed?

Then it takes longer. 40 hour/wk minimum wage work, however, is not all *that* hard to find.

Some degrees require that you finish within 5 years, credits older than that expire because the field changes so quickly that they are now outdated so this wouldn't really work for someone going into those fields.

True. Save first, save more, then go consecutively.

I'm not saying I disagree you; your scenerio is the ideal. I just think it is simplistic to think that it will work for everyone.

Of course it's simplistic. It's a single example that covers something on the order of 80% of college students. The 80/20 rule always applies, but by and large, quite a LOT of people *could*, if they so chose, pay cash for their education.

School can be done for far less than $20,000 a year.

Absolutely - and *should* be done for less, IMNSHO. Very very few places care *where* the degree came from, after all.

Anyway, not trying to hijack your thread, I do agree with you- I just thought a few other alternatives to your scenario might be helpful to some people.

Absolutely - like I said - this is just one example.

[Palooka]

There are also other things besides what you have mentioned in the "simple" examples you gave...
Pell grants
Scholarships
Community College
and perhaps the difficulty of going in and out of a "lock step" program like RN or physical therapy etc. or med school when if came to that..

Exactly, and I think Pel grants are a wonderful thing to help educate people, or some could be lucky and have their parents pay their college fee's like my husbands parents did for him.

When I went to a trade school that is obviously less expensive, I saved and payed cash for half the tuition and my parents payed the other half. (I was lucky that my parents did that for me)

I also think some degrees it would be hard to even work part time because of all the studies, but I guess it would all depend on the individual.

Overall getting a college degree to better yourself is just so darn expensive not matter how one can spin it.

[joyofsix]

My 17 yo dd has already figured out that the $7000 she will need for her first year of college will take 24 weeks at $7.25/hr so she will work full time for 6 months and jump into college mid semester. She will then continue part time work. If she runs out of $$ she will lay out/take online classes and work. She's number 3 in a class of 600 so I'm hoping for some scholarship $$ but if not she's got a plan. We've preached no debt her whole life.

[MomToTwoBoys]

Your example is perfect for reasoning behind saving up for education at a young age, as well. There's not enough people out there who consider that stating savings at around age 6 or 7 for their child will do them a whole lot more good than taking out loans to help them pay for college.

Our plan as of now is to take half of the slush fund cash and put that into various education savings plans for DS5. We have another year or two before we start saving, but by the time he's old enough to work then he won't have to stretch himself as far as he would if he solely worked and used that money for school.

I want my child to be able to focus more on school work and less on making enough money to continue that education after high school. Besides, we're not exactly sure how much school will cost in another ten years so we're not looking for a concrete goal as of right now.

[frugalwarrior]

I regret to this day that I didn't finance my degree. I worked 3 jobs to get an associates degree which took 3 years. At that point I was too burned out to continue. If the prize is too far down the line it can kill the whole thing. I went back to complete. I got pregnant. Went back 2 years later. Pregnant. Didn't have the money-house,kids,DH accident. Now DD goes to college. 2 years DS goes to college. Won't have the money. There is a time for things or should I say time limit. Timing is different between women and men. In a textbook world your right and so is DAVE. But in RL not so much IMHO. Who is going to hire a 50 year old new graduate over a younger person who can do it for less w/ no encumbrances. I cannot pick up like some 20 year old might.

[MaryCarney]

I just graduated from Excelsior College Friday and this is my second degree (first was in nursing 29 years ago) Never borrowed a dime, just worked my A** off seven days a week. It didn't kill me.
Managed to get the first two kids through college debt-free as well. Here's our family rules about higher education

1. You must major in something you can get a job in if you want mom and dad to pay (none of this art history crap)
2. You earn your own spending money
3. You attend class every day
4. You carry a full-time course load
5. If it's a four year degree, you finish in four years, tow year degree, likewise
6. IF you choose to live at home and do community college and / or distence learning, you also get a servicable car

Two oldest are an RN and an FAA A&P mechanic. Two youngest are looking at law enforcement (DD) and Respiratory Therapy (DS)

[Palooka]

Student loan debt is not a bad thing especially when one can get an education and better themselves for the future. I rather one use student loans for the sole purpose they are for and pay them back slowly and easily than live off the gov't in their adult years because they didn't have the funds at that moment to pay.

[Palooka]

Greebo, so you wanted to start a new thread about this, because someone in the UK deals with this sorta thing way different than the US and you thought DR had a grip on how the the UK pays for college education?

So therefore, in the DR thread/forum was not enough exposure for you? I got it.

[frugalwarrior]

Marycarney,your answer kinda bugged me.It's kinda harsh. That was the whole point that not everyone is the same. DR preaches tract answers. My DD has depression. She shouldn't go to full time school and pressure herself w/ full time work. Some people do learn faster. Some people learn slower. Some people aren't tough. What's good for the goose isn't always good for the gander. Borrowing money for education doesn't mean putting your feet up in an easy chair.