I Just Looked Up the Cost of an Education At My Alma Mater

That was a very, very courageous decision. I am ashamed to say I didn't drop out when in a similar situation (I had less scholarship money, making her decision even harder than mine) and I could not resist the pressure from everyone (trusted mentors, friends, family members, the school itself, etc.) to just finish 1L. And then just see if you like your 1L summer. And then try OCI. And then by that point you're halfway through, so you might as well finish it.

And then all of a sudden you're 3 years older and have burned hundreds of thousands of dollars (even if not in tuition, in opportunity cost) and have no real skills.

I can understand why you hold the "inner scorecard" concept so close to heart now.

If I had a J.D. (or equivalent degree) in hand, I wouldn't ever claim that I have "no real skills." But I'm hearing you on the return on investment front, namely "Is this great degree worth it if I'm hundreds of thousands of dollars in debt and I have to compete with paralegals for my first job?"

But hey, looking backwards, you always see what you did wrong. Looking forward, you still have a bright future 🙂

Thanks for the comment. Yeah, the thing is it's not an absolutely terrible education to have - there are ways of thinking and things I've learned that I use everyday in my current non-lawyer job. So it's not that I learned nothing.

But three years of tuition and not working. When I needed the money and the work experience the most (since the earlier you are the more both money and work experience can compound for you beneficially).

I could have done so much with that time if I hadn't been stuck in school. The reason I went to law school in the first place was because of a set of anti-mental models. I thought in terms of set career paths and credentials - it was a mindset promoted by my elite high school and my elite college. And I did not have the independence of mind to question this consensus view. It was only in the aftermath of law school that I slipped out of a personal funk I was in and began to look at my decisions rationally. I learned so much about decision-making, life, investing, and many other things just by reading books, blogs and websites that were free. The magnitude of this learning to me personally was far more than what I learned from law school, which cost hundreds of thousands of dollars.

And the thing about American legal education is that you really do learn very little that is practical, at least in the core curriculum. You're reading appellate decisions, which is really not what most lawyers do at work. And it's not a magic skill you HAVE to go to law school for, really. You see Joshua doing case analysis on this blog, and honestly it's better than what most law school graduates can do. There's no mystical lobotomy you go through when you get a degree, even a law degree.

What are you doing now? You mentioned living in China in previous comments. I'm going to take a shot in the dark here: you're Chinese-American, and you're teaching English in a Chinese school.

Am I close?

Both close and far. I don't want to say too much (unlike Joshua I want to maintain some anonymity - maybe eventually something like the MMM level where you don't hide things but simply maintain a certain veil with regards to the exact details), but I currently work in a field that is somewhat tangentially related to law in general, but is nonetheless quite far form the practice of law.

I'd probably make more money (but amass less human capital) if I just taught English instead however.

I chose my undergrad this way. I very much wanted to attend the expensive "top tier" school that accepted me, but in the end I had to choose the full scholarship to University of Arkansas. I maintain it was the right choice.

It was the right choice assuming you would not have gotten an almost full amount of need-based aid from the top tier school.

You are correct. About 1/2 loans, which would have totaled around six figures by the end.

Excellent ideas. Google Peter Schiff.

I would settle for only 50% of a borrower's student loan balance being dischargeable in BK.

sorry but maybe go to school and get a in demand degree that has a great starting salary like engineers. thats what i did at a top 15 ranked engineer school and im not worried about my debt. go to college and work hard for 4-6 years stop getting arts and business degrees

I agree with that (I actually looked at the best paying college degrees and the worst paying college degrees a few years ago for exactly that reason).

Unfortunately, even engineers are being cheated out of their lifetime earnings by the bad policies in place as all college degrees follow the same laws of intrinsic value that determine the true worth of a stock or bond.

If lifetime earnings are equal, and the degree for structural engineering is 2x rather than 1.5x, especially with the cost frontloaded when money is more valuable, the engineer is now millions of dollars poorer than he or she would have been otherwise when you look at the opportunity cost of putting that money aside in either highly rated bonds or low-cost index funds over their subsequent career. The fact the engineering degree is still a good financial investment doesn't negate the reality that it is less attractive than it otherwise would have been in a truly free market.

True, however, the comparison would have to be made with that same person having the front-loaded cash to begin with. In other words the opportunity(if loans are the only option) of having the front loaded cash is limited to only one outcome -Invest in education. (the more interesting question is if your parents said, hey, we have 250k sitting for you. You can either invest it or go to university....then maybe that english lit degree isn't looking so spiffy)

That's a great question (upfront investment). Mary C. Daly, the senior vice president and associate director of research in the Economic Research Department of the Federal Reserve Bank of San Francisco, sought to answer it in a report she published. It's the report that caused me to look up my alma mater's cost in the first place, prompting this post.

I've been meaning to write about it but haven't gotten around to the finished version. She determined that looking at the cash outlay, the opportunity cost of lost wages, and a discount rate that included both inflation and a real return as measured by the average AAA bond yields (6.67%) from 1990 through 2011, the intrinsic value of the average undergraduate degree in the United States was $830,800. I do have a slight quibble with her model in that she makes an assumption tuition doesn't rise during the four years of enrollment, which I think defies historical precedent so years 2, 3, and 4 are slightly, albeit tolerably, understated without having too much of an effect on the end results.

Although she doesn't address it, if you were to use the average return on equities as a discount rate, instead, you're better off investing rather than going to college if you'd be happy with the career path (personal fulfillment is also important).

This is unfair to people who are, by any measure, in the top 10% of students. If they can not do vastly better than breaking even by completing an engineering degree, we have really knocked the legs out from the ladder of upward mobility by merit.

Up in Canada we had the bankruptcy protection available on government student loans up until about 1999. I knew a couple of people who basically made a cost benefit analysis and decided to declare bankruptcy upon graduation and just rebuild their credit from scratch.. You really need, as Joshua mentioned, the bankruptcy protection and lack of government loans enacted together otherwise you end up with the wrong mix of incentives.

Law students and doctors in USA used to do this in the 80s. That is why the bankruptcy laws were changed. The plan Obama was talking about at one time seemed at least reasonable. I think it was allowing for bankruptcy after a certain time or payments based solely on income. The vast majority of people can pay back the loans, they just chose to start families, buy houses, go on vacations, etc. instead. It's hard for an 18 year-old to see several decades into the future though. 90% of the undergrad students at the apts I manage live a more expensive lifestyle then me.

Not to interject - sorry if I am - I'm amazed at the living standards now considered normal for young people, even when I was in school. A very large percentage of total student loan debt taken is due not to tuition and books, but room and board. I've never written about it but I do think, if Congress were going to refuse to fix the system, one small tweak could lessen the student loan issue: Make room and board ineligible for financing. Require students to pay cash for meals and rent so that the student loan bill reflected only their education and you'd see a lot less madness in the system.

My alma mater? Board alone, in a tiny air-conditioned double that you had to share with someone else for the nine month academic year, ran the equivalent of $1,040 per person, per month. People who never would have dreamed of paying that for comparable accommodations will think nothing of signing a promissory note to repay it in the future, with interest.

Take the University of Pennsylvania. Of the 2012 graduating class, 71% had debt upon leaving school. Of those 71%, the average balance was $27,223. That's almost exactly the amount that was spent on housing in the dorms over that same period.

(For what it is worth ... I'm of the strong conviction that bankruptcy laws shouldn't have been changed. Banks should have been forced to deal with the situation and adjust the price of their offerings rather than seek an extraordinary and largely historically unprecedented remedy that distorted the free market price of debt, wrecking havoc with the incentive system and growing both the financial and education industries far beyond what I consider safe based on most models (the financial sector is like the lubricant that keeps the economic engine going; vital, but if it gets to be too much relative to the other parts, bad things happen. You want most of your economic output to be dedicated to real improvements in the human condition, such as creating airplanes or computers, not making accounting debits and credits. Otherwise you run the risk of devolving into an aristocracy with stagnant living standards and a lot of societal unrest).

"Take the University of Pennsylvania. Of the 2012 graduating class, 71% had debt upon leaving school. Of those 71%, the average balance was $27,223. That's almost exactly the amount that was spent on housing in the dorms over that same period. I've run the numbers for quite a few schools and the results seem comparable. I don't think it's an accident."

An interesting thought comes to mind; a comparison could be made here, between McDonald's being a real estate business masquerading as a restaurant, and a University perhaps masquerading as an educational facility while collecting large amounts of rent... paid with interest.

Universities and colleges are getting into the real estate business in a big way. Couple that with requiring full time students to live on campus as freshman and sometimes sophomores and there's another revenue stream. The requirement is for adjustment to college life and safety reasons of course.

I was chiefly referring to those upperclassman who now move off campus. While having to properly sort their recyclables (a whole 'nother story) I learn about all the fancy new computers, clothes, microwaves, kitchen/bath goods, furniture, t.v.s etc. they now have to buy to "fill up" their apartment. Make do or do without was what I practiced when young.

Although your argument seems rational, the morals of students are tested when they graduate if you have a loan which can be wiped out via bankruptcy and no assets the student basically has nothing to lose. Why would a bank ever lend to a person with no assets? Then you end up with higher education only available to the wealthy. Just want your opinion on that.
Are you ever going to campaign and try to be a politician? it seems like it would be a great role for you, however, I don't know how popular your policies would be because most people dont want to read and learn.
Thanks,
Graham

I think supply and demand would bring the price of education down quite a bit without the easy student loan money flowing in. It's getting to the point where students who don't have parental financing have to take on a substantial student loan to attend University because the prices have gone up so quickly. Then when they graduate they are competing against more people for jobs then ever (a double whammy). If the loans go away then the tuition prices come down and people can go back to saving up for tuition and maybe getting a small loan to bridge them to graduation. I imagine if the US government enacts laws to allow discharging current student loans in bankruptcy there will be a period of very high loan impairments as people throw off the yokes and restart their credit.

Colleges charge too much. If people stopped going to them they would have to bring the price back down to prices that actually make sense.

Poorer people could then pay for them with part time jobs or savings, which actually would be a great lesson in money management and responsibility in itself.

Others have touched on the supply and demand resolution that would occur if the easy money were removed from the system, so I won't go into that despite its importance.

Instead, as someone who believes in 1.) personal responsibility, and 2.) free markets, I would like you to consider that your position is not only economically bad for the country as a whole, but morally bad for the individual parties in a debt arrangement.

1. The moral argument you are suggesting could be equally applied to any and all non-secured debt, of which there is a long history in the United States. Credit card debt is non-secured. If someone buys a trip to Bali and later defaults, the company can't take it back. Medical debt is non-secured. If you don't pay your heart transplant bills to your health insurance company, they aren't going to come rip your new heart out of your chest. Utility bills are a type of non-secured debt. If you don't pay your power bill for two months, the electric company can't make you return the kilowatts you used.

People generally try to avoid declaring bankruptcy on these debts, sometimes even going to the point of irrationality because they consider it a failure, tapping protected shelters such as 401(k) plans and IRAs. This is such a core component of human nature that debt forgiveness has a place in nearly every major recorded philosophical, legal, and religious tradition that thrived throughout the ages. Ancient Israel, which produced the forerunner of modern Christianity that ultimately formed part of the basis of laws in the west, required total forgiveness of debts, regardless of ability to repay, every 7 years to give those who had gotten in over their heads a fresh start.

Why is student loan debt any different? What makes it special that, following Sallie Mae getting its lobbyists to change the rules a few years ago, which was nearly unprecedented, that makes you convinced this was a good thing despite twisting the incentives of schools and banks to sign up anyone who is still breathing for a mispriced product that could destroy them as neither the bank nor the college will likely have to suffer the full effects of a bad decision as they would in a purely free market system? What makes student loan debt so holy that the laws of protection going back throughout most societies and most religious traditions should somehow not apply to it, and it alone?

2. I think there is considerable evidence that one of the reasons the United States economy has been so vibrant, and resulted in so much innovation, is that we were very different in our treatment of debtors than our European counterparts. We were far less tolerable to things like debtor prisons, which continued to operate in Western Europe up through the middle of the 1800's, and some of our greatest entrepreneurs only went on to change the country, and the world, after 2, 3,or sometimes even 5 or more bankruptcies.

Abraham Lincoln was allowed to modify his debts in 1833 when he declared bankruptcy following a business failure. The court gave him until 1850 to repay the balances under favorable terms. Had he not been able to seek such protection, he never could have become President of the United States.

Walt Disney lost everything in Kansas City in 1920 and had to have his debts wiped out after his first business failed. He went back years later and repaid the money even though he wasn't obligated to do so under law. If he hadn't been able to walk away, he never could have gotten on the train to California to start his second business, which now produces immeasurable entertainment, employment, and tax revenue for not just our civilization, but the entire world.

Henry Ford drove two companies into bankruptcy before he finally brought the automobile to the masses with his third enterprise. All of history from 1903 to present would be different if he had been saddled with his old debts for life.

Mark Twain was wiped out after investing in Paige Compositor. If he had been forced to go get a job in a coal mine instead of being able to seek the protection of the courts, he couldn't have continued to produce some of the most important American writings in this country's history.

Personal responsibility is not just limited to the borrower. The lender, whether institution or individual, also has to accept personal responsibility and the consequences of their decisions. The interest rate on a loan is set, in part, by the risk perception of the borrower. If the lender made a miscalculation, he, she, or it, should suffer the downside. As the old saying goes, capitalism without losses is like Christianity without hell. It doesn't work as the entire incentive system falls apart.

Otherwise, you get a situation where human capital becomes subjugated to the financial sector of an economy and begins to give up, far underutilizing the asset. Without a fresh start, most people buckle rather than rise to the occasion. They would put their head down, accept low-wage work, and throw in the towel on their life as it was pointless to even try. It is in the interest of everyone, for purely selfish reasons, to want a forgiveness mechanism for debts.

You ask:

Why would a bank ever lend to a person with no assets? Then you end up with higher education only available to the wealthy.

The debt market for student loans will almost certainly shrink and the cost go up to reflect the true risk inherent in the product. Why do you consider this a bad thing? The university system in this country worked just fine for the last 100 years up until the "reform" put in place recently that exempted private loans from most bankruptcy protection. Were the past century nothing more than a fluke?

It allows the free market to work. Those who are qualified but can't afford college might not be able to go to their first choice school but they will be able to find scholarships or merit based awards somewhere. Those who aren't qualified on academics, ability, or talent can save up cash and go to school later in life. In a decade or less, colleges would have to right-size their institutions, bringing costs down, if they want to survive. You'd see a lot of areas shuttered - things like "gender studies in 16th century Caribbean pirate culture" - but I don't see this as a bad thing. (Lots of esoteric topics are worthy of study. I'm reading a work at the moment looking at gender roles in certain occupations such as steel mills. But I can do that without spending obscene amounts of money on a piece of paper saying I completed the book.)

Also, I don't think the current system, which has resulted in a lot of people having degrees but still being less competent than a high school sophomore was 50 years ago, is a good development. It's been brought on by the availability of easy money which can be lent without consequence by banks, protected from the full ramifications of free market consequences. There are a lot of people going to college that have no business being in a college classroom.

Thanks for the responses. I do agree the cost would go down, and the best candidates would get still get in via scholarships and merit based awards... I'm just of the opinion that the pool of people who "make it into university" but are not the cream of the crop who are rewarded via those scholarships/merit awards will end up only being the well off because they can pay and others can't. However, if costs were to decrease enough (like Canadian rates where I went to school), these students would be able to pay for it via working.
As always, thanks for taking the time to respond!
Graham

Poor students in the US used to be able to afford college just by working summers and part-time in school.

You still can.

If you enroll in a community college in Virginia, you get guaranteed admission to UVA, Virginia tech or any other state school, though the more selective schools have curriculum requirements and GPA requirements.

The total cost of a degree excluding room and board works out to be under 30k. A coworker of mine did just that and his step son is doing the same. If you are going the state school route and lack scholarships, I see no reason not to do your first two years at a community college, or test out of as many classes as you can.

Just to comment on affordability relative to the minimum wage: this article looks at the number of hours worked at minimum wage are necessary to pay for 1 year of tuition at a public (not even private) university tuition.

Basically it has gone up from 182 hours (a part time summer job) in 1979 to 991 hours (full time job for half the year) in 2013. And these numbers don't even count the room and board.

If you haven't read the book Debt: The First 5000 Years by David Graeber I would highly recommend it. It has fascinating anthropological insights into the philosophy of debt and its impact on various societies.

I totally agree with # 3. There are a lot of schools out there which are not accredited yet charge ultra-premium prices for a degree that is basically worthless.

If congress would allow school loans to be unloaded in bankruptcy, under approved conditions, that would allow the market of lending to do its job and determine what schools get or don't get lending for students. No school would want to be seen as a lending risk, to
lenders or students. This would force schools to increase endowments, lower expenses, or increase the quality of the product and lower the need for delinquent loan payments. Schools would have to work harder with employers to make sure that the education product they sell has a useful shelf life. They may also tighten the enrollment standards of the students who want to be in that setting and have the ability to grow. It would not take long for the consumer (student) to figure out that the school they may apply to has high levels of bankruptcies due to student loans. The consumer of education then could choose to go to a school with better rankings. The school with high bankrupt students, would see a drop in enrollment and would have to work to improve the product/lower the cost/etc. Having the economics of supply/demand would be wonderful for tax payers and students.

I disagree with the root cause of the problem.

The main problem is administrators.

In a free market business if you keep adding more MBAs every year, you get Enron, and go bankrupt. But Universities are prevented from such bankruptcy by many factors (low student loan rates, State and Federal funding, alumni donations, ...). So Universities constantly add more MBAs every year, and downsize professors or replace them with part-time adjuncts.

This is a consequence of voters giving tax money to the "educational system" broadly. If government funding were either (a) cut, or (b) mandated to be spent only on instruction of students and scientific research (i.e. cap overhead), then the Enron business model would be much less popular. Since I work in a University, I much prefer (b).

Also while much of the blame rests on government market distortion, students really should be comparison shopping. For undergraduate I rejected a University that is tied for top place in my field because it was extremely pricey and I wanted to stay in my hometown. So I chose a University ranked around 100 in my field that I had also applied to, which has great teaching and inexpensive in-state tuition. Due to scholarships that didn't cost very much and I would make the same choice again every time (it's like Buffett buying GEICO at 1 P/E). Myself and multiple other good students at this low-ranked school studied hard and went on to top 10 schools for graduate studies, thereby avoiding hundreds of thousands of dollars of undergraduate debt for absolutely no loss in utility. If you insist to be at the top ranked school at all costs, then you will get all the costs.

http://www.washingtonmonthly.com/magazine/septemberoctober_2011/features/administrators_ate_my_tuition031641.php?page=all
http://online.wsj.com/news/articles/SB10001424127887323316804578161490716042814

Correction: Buffett bought Western Insurance at 1 P/E and GEICO at 8 P/E. Whatever...
http://www.businessinsider.com/warren-buffetts-1951-geico-recommendation-2014-4

Government guarantees are the issue. Stop the loans, college will become unaffordable, panic-stricken Administrative thieves will start to lose their pension guarantees as enrollment drops off a cliff and tuition costs will drop faster than Sandusky's pants at a cub scout meeting. Kids will then get a fair priced education. Sure it might take a year or two so go out and intern or start a business or learn something about life. That wont be wasted time. You can either do that or continue to get bent for many, many many more years.

I've got two kids in college now. Both are working to pay for it.

I just read this which may suggest that using the look-up cost on your alma-mater's brochure might not be accurate: http://www.nytimes.com/2014/07/29/upshot/how-the-government-exaggerates-the-cost-of-college.html?ref=business

Hi Joshua,

Great article! Being a resident of New York City, I'm curious to hear more from you on why you think rent control distorts the supply and demand for housing.

Thanks!
Harry