Tuesday, June 13, 2006

The Pitfalls of Student Debt: Invest For The Future, At Prime + 2.75%

I was $60,000 in debt when I graduated in 2005, but thanks to savings and a little elbow grease, I've paid off about $12,000 so far. Don't applaud me yet--I'm about to go another $36,000 in debt, and that's just for the next year's tuition. I write rather candidly about my grad student poverty, ignoring for once my general distaste towards talking about money. I figure, better for future law and graduate students to realize that it won't be themed dinner parties and lattes all the time now rather than later. It sucks being poor. But you get used to it, only because you have to. I grew up poor, and although I now enjoy air conditioning and satellite TV and brand-name snack foods when I live with my parents, when I'm on my own it's lentils and rice. Seriously. I like Indian food, and so I learned how to make daal. I also learned how to make most pasta dishes, simple Vietnamese/Chinese food, and how to bake everything from scones to cake. I learned to cook by necessity--my budget allows me to eat two meals out a month (preferably under $10, but I'll splurge and go $20) at most, so I have to cook the rest of the time. It turns out, I'm a pretty good cook, and an even better baker. I eat a lot of sandwiches and generic cereal when I'm pressed for time and can't cook. I learned to cut out my latte habit and buy boxes of tea bags by the hundred from Little India (the BEST). I don't take expensive vacations, choosing instead (and I am a city girl) to go hiking and camping where you pay at most $20/week for a piece of ground and set up a borrowed tent for free. There are ways to make the impoverished grad student life enjoyable. In fact, you can make it an issue of moral imperative--rather than go into further debt, you choose the quasi-ascetic life, like an urban Siddhartha. Keep saying that, and maybe you and others will believe it.

I was a scholarship kid in college, so I didn't have to work as much and graduated debt-free--but I did my fair share of work, as a day care worker and university grader for lower division classes. Nowadays, I try not to work during the school year so that I can focus on school--a "luxury" I have come to view as a necessity if I want to do well and finish on time. It's a peculiar thing, to choose debt over income--but it makes economic sense to me, and I have expectations of living comfortably later even if I have to subsist on cereal now.

But it's not like the grad student life is entirely ascetic. You just have to make choices about what is most important to you to budget around. I do budget for certain luxuries--my monthly academic book fix, subscriptions to The New Yorker, The New Republic, and Harper's, at least three student tickets to performing arts events per semester, maybe one movie a month, some charities--but I learned, the hard way, to be frugal in all things except the nourishment of the mind (and even then, I wait for the paperback, depend on libraries and stand in line for an hour to get the cheap student seats). But it's just something you have to learn in grad school, the way you didn't in college when your parents were a little more generous about helping you out. I learned to stop shopping only when I realized that I couldn't move all of my shoes and clothes from my parent's house to my new graduate efficiency studio. I learned to embroider, bead and knit instead of buying those expensive "I could do this myself" kind of garments at Anthropologie. It's amazing how long it took me to stop buying everything I wanted, just because it's on sale, or just because I had a bad day--and i amazes me how most of my classmates never learned this. I think I could have been more popular in law school if I had taken up every invitation to go eat out at a Zagat rated restaurant, go shopping at Loehman's, go to a trendy bar and spend $15 per drink, or heaven forbid spend $100 for shooting lessons--apparently a fun thing some law school classmates like to do. But there are some things you just have to give up, however willingly.

I think I did all of this because I knew I wouldn't be making lots of money when I graduated. I knew I wanted to get an LLM and JSD, which would mean lots more debt. I knew that I couldn't afford to take out more than what was needed for tuition and living expenses. Knowing ex ante the burden of your educational debt can limit the choices you are able to make when you graduate--and knowing what you want to do when you graduate can affect how you view and use your educational debt. For me, it was always an investment that would take at least five years after graduation to pay off. That kind of made me reconsider going to Paris for Spring break. For my public interest friends, it meant deciding whether to work in a firm for a few years before going back to their public interest intent, or taking a second job at Starbucks.

You want more proof that educational debt is no joke, and that you should not finance your vacations or Nordstrom habit with credit cards (with their horrible interest rates of 15-20%) or money from your private educational loans (with their horrible interest rates of prime + 2-3%)? You want proof that planning a career in the public interest will require some hard financial choices? You want proof that we really do need a Second Bill of Rights for economic security for lower income people and those choosing lower paying (but greater good serving) jobs to ensure the betterment of our nation? Well then, read this article from the NY Times, "Forgive Us Our Student Debt":

In an era when an increasing number of students borrow heavily to finance their educations, are those with less debt, or no debt at all, more likely to stay in school longer? Will they choose a different career path upon graduation? Will they marry earlier, buy a house sooner or save more for retirement? In short, will they live different lives?

Most of the questions researchers ask about the links between college borrowing and behavior focus on what happens when students from low-income backgrounds are faced with high tuition and inadequate financial aid. In academic circles, this is called the "work-loan burden": the amount of money students have to come up with out of their own pockets to be able to attend school. Faced with a high work-loan burden, do they work for another year before attending college? Or do they go to a cheaper, two-year school instead of a more expensive four-year one? Should they study part time and work part time? For low-income high-school seniors, it's conceivable that virtually every decision made about college is influenced by their willingness to borrow. According to one recent estimate, 200,000 qualified students every year put off college for financial reasons.

"I think the key issue is that these students' aversion to debt is a rational choice," Nicole Barry, deputy director of the federal Advisory Committee on Student Financial Assistance, says. "If work-loan is a high percentage of their family income, then it makes sense that they would be averse to taking on such high levels of debt."

"By reducing their financial barriers," Shelton says, "you're allowing students to take on leadership roles on college campuses and spend more time focused on academics. Otherwise they would have been burdened with work or making lesser college choices." "The people who don't have to worry about debt, like the Gates cohort," he says, "are making life choices that are more contingent with their interest rather than to the market." Put simply, among low-income high-achievers, those who don't have to take out loans often make different life choices from those of their counterparts who borrow.

That's because loan forgiveness can't necessarily change how students think about debt and careers right after graduation. Perhaps the best research on this subject comes from the experience of several hundred recent New York University School of Law graduates. The pay disparities between public- and private-sector law jobs have widened over the past two decades to the point that law-firm jobs can pay three to five times what graduates earn in the public realm. Many elite law schools, and many bar associations and public interest law groups, have responded to the disparity with various pay incentives — mainly, debt-forgiveness programs that try to ensure that highly qualified lawyers will continue to take jobs as public defenders and in law enforcement. But from 1998 to 2001, N.Y.U. Law tried something called the Innovative Financial Aid Study. Of the participants who received aid, some students received loans (meaning they would graduate with large debts) and some received grants of two-thirds tuition (meaning they would graduate with smaller debts). This randomized arrangement came with conditions, however: students who received loans could have them forgiven if they took jobs in the public sector; students who received grants would see them converted into loans (and large debts) if they did not enter the public sector. N.Y.U. is tracking these students' job choices for 10 years.

For all of them, of course, the choice was the same: low debt if they took jobs in the public sector versus high debt if they went into the private sector. But the psychological difference between completing school with low debt (thanks to tuition grants) or high debts (albeit with a promise of loan forgiveness) proved significant. When Erica Field, an assistant professor of economics at Harvard, analyzed the early survey data, she concluded that grant recipients had a strikingly higher rate (between 36 and 45 percent) of first-job placement in public sector jobs than those who had received loans instead. "I think what my results suggest is that people are debt averse and there's a psychic cost to debt," Field says. "If you can reduce the amount of time that they're in debt, people will value this. You can influence their behavior."

The problem, and it's a big one, is not only that college can't be made free for everyone. It is also getting more expensive every year. N.Y.U.'s immense resources enabled it to explore the effects of big scholarships on schooling; only a handful of other institutions in the world can do that. To Jim Shelton at the Gates Foundation, the expense of the Millennium Scholarship Program (even with its $1 billion endowment) is such that he's certain the college-financing problem will never be resolved through private or philanthropic funds. Government must lend a hand. "The reality is that if we really want to address this issue, it will have to be at a public policy level," he says.