College worth the debt?

I watched a really interesting Suze Orman show over the weekend. First let me say that I've never been a big Orman fan; in fact, this was only the third time I've watched her show. I don't necessarily think that her opinions or ideas are wrong, but I just can't stand her voice and overly-bubbly personality. Why does she need to call everyone her "boyfriend" or "girlfriend?"

OK, to the point. The topic of her show was student loans. Her first guests were a dad and his daughter (I forget her name, so for this post I am naming her Ashley.) The Dad had been putting money into a state account that would provide Ashley with 4-years of college if she attended a state school. Note: the family was from Virginia. However, Ashley had other plans of going to college at Drexel University, a private college in Philadelphia. The family had estimated they would need to take out $75,000 in loans in order for Ashley to attend Drexel. To make a long story short, Suze completely ripped poor Ashley apart and told her Dad if he really loved his daughter, he would not co-sign a loan and make her attend an in-state school. Ashley did the typical teenage "roll your eyes" and eventually ended up crying about how her life would be incomplete if she couldn't attend Drexel.

Poor Ashley. I mean, I've been there. I remember what the college search was like and I never had any intention of staying in-state. But I also was not naive about my financial situation. I asked my parents how much money I had for school, and ran the numbers to figure out what I could afford. There was a slight possibility I would need to take out a small amount in loans, but I was OK with that. I would have never been OK with a number like $75,000. I would have gladly stayed in-state if it was a matter of not being in debt or being in debt $75k.

So here's the question. How much student debt is worth it, if any? When is it OK to choose to take out loans to attend a school if you could go somewhere else with no debt? In my opinion, it comes down to a couple of factors -

1.) Your school options - Ashley lived in the state of Virginia where both University of Virginia (Top-10 best public schools in the nation) and Virginia Tech are very respectable schools. It wasn't like Ashley wanted to go to Stanford or MIT. Drexel is probably a less recognized and reputable school than her options in the state of Virginia. Bottom line is it's one thing if you're from Idaho or Wyoming where state academia isn't top-notch or if you have the opportunity to attend Harvard, Yale, or the like. Debt might be worth it in those scenarios.

2.) Your major - Ashley wanted to study "Communications" and when Suze asked what she ultimately wanted to do with that degree, Ashley didn't even know. Yet it was so important to her to attend Drexel because she said it had a solid communications program. Note to Ashley - You better have a pretty good idea what you want to do if you're about to shell out $75k. Suze then mentioned that the average starting salary for Communication grads was $25,000/year -- and with a $900 loan repayment per month, Ashley would be left with ~$600-800 for the rest of her expenses. If you are entering a field (engineering, computer science, medical, etc.) in which the average starting salary out of college is high enough that you can afford the loan repayment, then you might be OK.



BUT.......

I still do not recommend taking out student loans if they are going to be higher than $50,000 regardless of your desired major. Consider "Jim" - Jim is a 18 yr old high school senior. His parents are lower-middle class and have only been able to save $10,000 for Jim's college education. He has average grades and does not qualify for any scholarships. Jim has aspirations of being a mechanical engineer, but would need to take out $50,000 in loans to attend a state school.

Route #1:
Jim attends Iowa State University and takes out $50,000 loans at a 4.5% interest rate. Jim graduates in 4-years with a degree in Mechanical Engineering. Jim receives a job offer for $52,000/year at a respectable company. Jim has a monthly loan payment of $316.00/month and will make a total of 241 payments. It will take Jim 20 yrs to pay off his debt, and in the mean time he will have paid $26,000 in interest. After 5 years from graduating high-school Jim has -

401(k) - $4,300.00
Savings - $3,600.00
Debt - ($49,000.00)
Net - ($41,100.00)

This is not a horrible scenario, and Jim is very happy, but maybe he would be happier and better off if he chose....


Route #2:
Jim graduates from high school and gets a job as a mechanical draftsman for a local engineering firm. His starting rate is $15.50/hour which equates to $32,000/year. He participates in his company's 401(k) plan and saves an additional $250/month. He also invests his parent's $10,000 that they had saved for his college education. Jim receives normal raises every year, and after 5 years he is making $37,000/year. After these 5-years Jim has:

401(k) - $15,000.00
Savings - $17,000.00
Investments (the $10,000 from his parents) - $13,500.00
Net - $45,500.00

Jim now has $30,500 in savings + investments. He decides to start working part-time and go to school full-time now that he has enough money. Jim is able to pay for his education out of pocket and graduates 4-yrs later with no debt. He receives a job promotion to a Mechanical Engineer and is now making $53,000.00.





I realize these scenarios and not real-life. Not everyone can get a job at $15.50/hour and some companies do not offer 401(k)'s, etc. However, some companies do have tuition reimbursement and will fund at least one class per semester. The point of this blog is to show students that debt is not the "only option" - you do not have to attend college right after you graduate high school. Think about other possible alternatives/resources before sinking yourself in $50,000+ in debt.