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I saw a pretty unusual scheme described in the article, Education as an Investment. Really. The plan is offered by Iempower (reads as "I empower" I suppose) at MyRichUncle.com In short, well-heeled investors pay the tuition of selected students in return for a share of future earnings.

Sounds pretty dicey to me. For one thing, I doubt if this kind of loan/investment would survive personal bankruptcy, so it's entirely possible that after college a student could wipe out his credit card debt and the college financing.

Also, like many kinds of insurance, "adverse selection" is likely. Students intending to become investment bankers or corporate lawyers might well avoid a program that would tax their high income. Students intending to be ministers, parochial school teachers, or stay-at-home parents might find it far more attractive.

By burningman on Friday, January 11, 2002 - 10:44 am: Edit

Hmmmm... I can't wait for the IPO to get a piece of this action.

By California Mom (Calmom) on Tuesday, January 15, 2002 - 06:05 pm: Edit

The MyRichUncle scheme is a rip-off, and here's why:
The supposed advantage to the student is that by paying a percentage of their income, they avoid tying themselves up with debt that they can't pay, or limiting their post-grad employment options to only those with salaries adequate to pay their loans.

However, while I was on the SallieMae site today, trying to figure out how to actually make a payment on my own parent (PLUS) loan, I found that there are a number of payment options, including:


Income-sensitive repayment

Income-sensitive repayment helps Federal Stafford, PLUS, and Federal
Consolidation Loan/SMART LOAN ® Account borrowers budget education
loan payments during financially challenging years by allowing them to
choose a monthly payment amount that is between 4% and 25% of their gross
monthly income with each payment covering at least monthly accruing interest.

Borrowers must reapply annually.

Partial or full prepayment is allowed at any time without penalty.

In other words, if the student is worried that they might not make enough money after graduation to meet the monthly payments, Sallie Mae has a plan. Only under the Sallie Mae plan, the total amount of payments are capped at what the student actually borrowed (plus interest).

Other plans offered courtesy of Sallie Mae are the Extended Repayment option [Payments too high? Pay off the loans over 25 years instead of 10]; and the Graduated Repayment option [Low interest-only payments for the firt 2-4 years, with a step-up in rate later on].

Sallie Mae also offers a few Deferment Options, where you don't have to make any payments at all, such as the Attending school at least halftime, or the ever-popular Unemployed and Experiencing economic hardship options.

So, basically students and parents can borrow whatever it takes to put the kid through school, secure in the knowledge that Sallie Mae has a flexible plan for them, and in the end they pay principle plus interest.

Or the student can sign up for the MyGreedyUncle.com plan -- which unlike Sallie Mae offers no particular guarantee that they will accept your application and give you desired funding -- and if you get the coveted investment banking job, you can find yourself paying 5 times the amount borrowed, based on the deal you've made to pay royalties on yourself. And if a new job offer or opportunity comes your way, MyGreedyUncle comes along for the ride.

So I think we'll just stick with our Uncle Sam and Aunt Sallie Mae -- it looks like they'll cut me and/or my son a break if we really need it.

By George Meany on Tuesday, January 15, 2002 - 08:45 pm: Edit

>>Pay off the loans over 25 years instead of 10<<

Isn't this a bit like paying the minimum on your big credit card bill every month? A 25-year term is a mortgage and even at reasonable interest rates would result in paying back your principal several times over. I'm afraid I can't buy the concept of a 25-year student loan.

By California Mom (Calmom) on Tuesday, January 15, 2002 - 09:53 pm: Edit

The loans are generally amortized over 10 years; the 25-year plan is an alternative for someone who has trouble keeping up payments. Obviously a student earning a good income would not choose this.

My point is that there is no need from the student end for the venture-capital approach. The reality is that the payments on student loans are set up in a way so as to afford a great deal of flexibility. Students who get well-paying jobs when they graduate will be able to pay the loans off quickly, minimizing the interest -- and students who run into difficulties will have an avenue to reduce or defer their payment obligation as needed.

The problem with the website scheme is that it penalizes the most successfully-employed students, who will find that with their higher incomes they end up paying off many times the amounts they have borrowed. Maybe there is an irony in that -- for once, a plan that ends up being harder on rich people than poor ones -- but I certainly wouldn't want to see my own son signing up for something like that.

By Dadster on Wednesday, January 16, 2002 - 05:13 pm: Edit

Yikes! 25-year loans! I can visualize grandparents still paying off college loans. Maybe AARP will offer a "college loan refinancing annuity" or something for retirees still working on their loans!

By Mark Y on Wednesday, January 16, 2002 - 07:05 pm: Edit

Well, that's how it is for people with loans, Dadster...if you have a crushing $80,000 debt for a bachelor's degree, and the most you can make is $40,000 after graduation, a load of $1,000 a month for 10 years would not be feasible in some cases (although the Wellesley girl does that). Paying something like $600 a month over 25 years would be more realistic, although that is still tremendous and ridiculous. It's amazing how things changed in a generation...baby boomers got stoned in college, while their kids, Gen-Y, get loaned.

By Dadster on Friday, January 18, 2002 - 12:33 pm: Edit

Mark, where do you think this is going to end up? I think you are making the point that loans are approaching the level of irrationality. The reason awareness isn't as high yet is that most of the peoople with the big loan totals haven't "hit the wall" financially, at least not yet. Also, the really big loan totals affect a relatively small part of the total new grad population.

I have to imagine that we'll be seeing press stories in the future of a new bankruptcy outbreak among young grads, as art and music majors find it completely impossible to pay off a $60K loan. (That's just one example... think of the poor art history majors who don't detour into investment banking!)

Will colleges start reducing tuition? Expand middle-class financial aid with fewer loans? This really looks like a train wreck in the making if things continue as is.

By California Mom (Calmom) on Friday, January 18, 2002 - 03:56 pm: Edit

Mark & Dadster,
I think that one skill that young people need to learn for life in today's world is debt management. It was different in my parents' day - they never were in debt for anything other than the home mortgage; my mom "taught" me that I should pay off my credit cards in full every month and was very insistent on the importance of staying out of debt. They are the depression generation, and there is wisdom in their words -- but it didn't work in the world I grew up in.

I put "taught" in quotes because the lesson didn't stick.

I hit the streets after college in the middle of a recessionary + inflationary economy that never really seemed to end. I mean, mine was the generation of graduates in the 1970's who came out of school to find no jobs. But what we did have was a credit-based economy. We could have what we wanted, on a pay-later basis.

I have spent my entire adult life in debt. I've always thought of it as a bad thing, yet it what was enabled me to survive as a self-employed person in the no-jobs world - without credit I wouldn't have had the capital to get started. It's what enabled me to keep going and support my kids the first year after my marriage broke up, when income plunged precipitously. (The second year, I put away all the credit cards, and didn't touch them again). And it's what is enabling me to send my son to college.

In the context of running a business, debt is simply part of the picture. But the key is in knowing how to manage the debt -- you use debt to leverage limited income into increased buying power, but the debt-to-income ratio needs to be kept under control. As long as it is at a certain level, it does not become a problem - just one of the expenses of doing business.

In any case, I'm not arguing in favor of kids going into debt, but I have come to the realization that debt and debt management are a permanent part of my life and also will likely be part of my kids life -- and rather than look at it fearfully it is important to recognize that borrowing can be used to our benefit, but that it is very important, early on, to be in control. For example, to know which kind of things are worth borrowing for, and which aren't. To understand the big difference between a loan that is 2 points above prime, and a loan that is charging 26% annual interest (as some credit cards now do).

I would like to see college tuitions reduced, and less borrowing. But I also want the benefit of what my borrowed dollars can buy now - in this case, college for my 18-year-old son. My personal "plan" at the end of all of this college financing is to sell my house. (When the kids are grown, I won't need a house built for a family - I can live in an apartment built for an adult).

For that reason, I'm willing to borrow as long as I am also building equity in my home. Although the PLUS loan is unsecured, in my *mind* it is like a second mortgage and I wouldn't dream of borrowing in excess of the available home equity.

Please keep in mind that art and music majors don't graduate from college with a narrow career focus. They end up with jobs all over the place. Maybe they are teaching, or are fortunate to work in a job that at least draws on their interests -- but they are not limited to making money based on what they majored in. My present career has absolutely nothing whatsoever to do with what I was educated to do, except for one thing: I learned how to think and explore for myself, and somewhere along the line I also learned how to recognize a good opportunity when it was sitting right in front of me.

Anyway - just my thoughts.

Back to the main topic of this thread - the MyGreedyUncle.com scheme -- I think that is precisely the thing we want our kids to know to avoid, as savvy borrowers. It's got the classic, "too-good-to-be-true" come-on, without a clear answer to the "what's this going to cost me in the end." The better approach is to take advantage of the current borrowing plans that guarantee continued low rates of interest, plus long-term flexibility -- it's just a matter of reading the fine print and understanding what it means.

By burningman on Friday, January 18, 2002 - 04:58 pm: Edit

Great post, Calmom. One key thing you are doing is using parental PLUS loans. These actually make more sense than student loans (to the extent that loans make sense). The parent, theoretically, is in his/her peak earning years and could, perhaps, retire the loans fairly quickly compared to a new grad in a non-lucrative field (who would perhaps struggle to be self-supporting even without loans, at least for a while).

The scary part of the PLUS and other parent loans is their possible impact on retirement savings. Except for teachers and the like, personal assets will be the primary source of retirement income for most of us. Lots of people end up postponing savings during their childrearing years, but hope to have a childless decade or two to accumulate some cash. If they end up with loan burdens for five or ten years after the last kid finishes college, they'll be getting precariously close to the age when some people might like to retire.

I think the MyGreedyUncle thing is kind of goofy too... maybe if a student knew he had a terminal illness, or was planning on spending the next couple of decades as a volunteer in Africa...

By California Mom (Calmom) on Friday, January 18, 2002 - 06:24 pm: Edit

I'd like to add that my son is taking Stafford loans as well -- but certainly no additional loans. His college financial aid policy is to increase the Stafford loan to $3500 the second year, but after that to keep it at that level rather than reduce grants in the 3rd & 4th years to require the student to take the full loan allotment of $5500 in those years. So basically, even though my son is at an expensive private college, he is likely to emerge with less debt than many of his peers attending public universities.

Actually, I think that moderate debt is a good thing for a graduating senior - especially a liberal arts major -- because it does provide some incentive to get serious and find a real job. I've seen too many kids just drift while they try to "find themselves" -- at least having financial obligations will tend to encourage the student to find a day job while pursuing their dreams of artistic fame and glory.

For the same reason, I feel much more comfortable with my son having to hold a work-study job. I just think that the kids who are working through school tend to be just a little bit more serious.
My own observation is that the kids I went to college with who worked and took out loans ended up doing fine. Many of the others did as well, but the drifters who didn't generally came from family backgrounds where their parents had done everything for them. Debt may not be a good thing in and of itself, but a sense of obligation and responsibility is.

By R Storm (Anonrs) on Saturday, January 19, 2002 - 04:13 am: Edit

CalMom -- I always enjoy reading your posts; they are always so well thought out and written.

Even with his merit scholarship, grants, and our contribution (no PLUS loans for us, luckily -- retirement is going to be dicey enough for us, as is) our son has taken out Stafford Loans. Like you, I feel it gives him more of a feeling of personal investment and ownership of his time at college. It looks like his total loans will cap at around $12,000, which is not unreasonable -- I literally cringed when a friend told me that her son averages $17,000 in loans EACH YEAR! (This year abroad in Germany has been a real savings to our son, too -- tuition, room & board for $20,000 compared to the $32,000+ for a year at his US LAC. His LAC applied his annual merit scholarship to the study abroad program even though his foreign program is administered by a different US college, so this year abroad is only $8,000, not including incidentals). As a social activist type of person, our son hopes to be selected for the Teach for America program upon graduation. If he does a two year stint, he will be receiving close to $10,000 in student loan waivers in addition to receiving some sort of salary. But, thankfully, if TFA does not come to pass, he will not be facing a life-time of horrendous debt starting three months after graduation!

To earn money, our son works full time during the summer (house painting -- hard labor but very good wages) and then takes a campus job with minimal hours to pay for extras during the school year.

My husband told me that he heard on the news that the average college senior has two credit cards and approximately $4,000 in credit card debt IN ADDITION to their loans! Our son chooses NOT to be average -- he doesn't have nor does he wish to have a credit card. (I tried to talk him into getting one for emergency use while he was abroad).

By amd on Saturday, January 19, 2002 - 10:36 am: Edit

Calmom,

Like RStorm, I also appreciate the thoughtful stuff you have posted above.

amd

By Mark Y on Saturday, January 19, 2002 - 11:35 am: Edit

R Storm, regarding your friend whose son borrows $17,000 a year, I have several questions. First of all, is this parent expecting the child to pay off $68,000 or perhaps $800+ a month for ten years on an entry-level salary, or will he be helped out? Second of all, why did the parent agree to let the child go to such a school if the only way that was possible was for the son to get into such deep debt? I am very curious to find out the parents' point of view regarding debt of this magnitude.

And Dadster, regarding your post from yesterday, no, I do not think that most of the students who have taken out such large loans have "hit the wall" financially yet. These students only graduated in the last couple of years, and many, many more are still in the pipeline, and the media is still using a relatively low $10,000 as the average debt for a bachelor's degree (although recently I have seen more of the $19,000 figure, which is much more realistic). I think that the media is still unaware of the gravity, but I feel that in a couple of years, there will be more talk about this outside the universities itself. Now whether or not Congress does anything is another story...I personally do not think that anything major will be done for the next few years...it took a lot of pulling teeth to get the Pell Grant up from $3,750 to $4,000 this year.

By California Mom (Calmom) on Saturday, January 19, 2002 - 04:40 pm: Edit

I think I read somewhere that a good rule of thumb for borrowing is that total amount of debt should be less than a year's income - or in the case of a student, the anticipated income. Since even an entry level position should pay at least $20,000 annually, I think it is fairly safe for a student to borrow that much, whatever their major, as long as they are willing to work.

I think the mistake may be that students at elite colleges may assume that they will be getting jobs paying far more upon graduation, in the $60,000+ range. In a recessionary economy, that is unlikely.

I personally like to keep my own debt total to less than the value of my assets (such as home equity or retirement). I guess it's my business sense -- I want to have a financial statement for myself that shows a positive net worth, even if it is a low number.

As to credit cards - my son has two, each with a $500 limit. These are paid off in full whenever used. I honestly think they are necessary for potential emergencies; also, they enable my son to do online ordering - sometimes books at Amazon are cheaper than the college bookstore.

When I tried to book my son's flight home over winter break, United Airlines insisted that the passenger needed to present the credit card used to charge the ticket in order to board -- obviously that ruled out using my card. That was frustrating to me, but at least easily resolved by using my son's credit card.

I do think kids can get in big trouble with credit cards - adults too! -- so it's hard to draw the line at using the card for convenience and safety, without being tempted to go on a shopping spree.

By Mark Y on Saturday, January 19, 2002 - 05:18 pm: Edit

That's an excellent rule of thumb, Calmom, and it's used often by experts. Another is that one should not pay more than 10 percent of their gross monthly income on loan debt repayment. I personally think that unless they are majoring in engineering or computer science or business, $20,000 is about as far as one should go...maybe $25,000 without credit card debt. Even then, it will be extremely tough to pay off, especially during the early years. Maybe after a few years and a few raises, the salary will be enough to "comfortably" pay them off.

I read that the starting salary for someone who goes to the Univ. of Pennsylvania...an Ivy League School, is about $39,000. If an "average" person has a loan debt of exactly $39,000, which would be in tune with your rule, they would have to pay nearly $500 a month, or $6,000 a year for loans. This will require about $8,000 or $9,000 a year pre-tax, leaving them with $30,000 to live on. That might be OK, although it should be noted that these jobs will likely be in New York or some other big city, where the cost of living is very high. And there will be a lot more pressure to spend money, since they have to buy nice clothes, etc.

By R Storm (Anonrs) on Saturday, January 19, 2002 - 08:11 pm: Edit

Mark Y, re friend with son racking up $17,000 per year in loans. As far as I understand, these are HIS (son's) obligations. (Friend said to me, "I feel sorry for the kid but it's what he wants to do.") Student had much cheaper options for school and his parents tried to persuade him to go that route, but had his heart set on this school. He did not go into this blind -- his parents were very upfront with what they could afford to contribute while he was in college and that after he was out he would need to pay back loans on his own (Mom also went back to finaid office 2-3 times to plead his case and he did receive more grant money). As to the parents, they own a small business -- full of ups and downs -- and she's a school secretary. They have three kids, each two years apart and all have gone to parochial school k-12. Second one is due to graduate this year -- and wants to do the same thing as his brother at the same school! Parents have pledged to kids to contribute the amount of annual hs tuition for each college year -- 4 years for each kid (about $6200 annually each); but that's the limit they feel they can do (we're talking $18,600 annually for two more years, minimum; then down to $12,400 for a few years; dropping to $6200 for one child for a few years). With the expense of thirteen years of parochial school education plus four years of college for each kid, parents have not been able to put away much for themselves -- so the kids know that their parents will need to focus on their underfunded retirement needs. Friend's older son, now a college soph, is a business major -- so as several stated above, I think he thinks his "good salary" (for the job he doesn't yet have) will make everything possible.

We are ecstatic about our older son's loan position (approx $12,000 cap) because not only is he a philosophy major but it is his intention to "work for the good of the people" and he does not expect to have a high-paying job -- ever. (Of course, he does not know how his idealistic plans may change when he has a family of his own to support).

As to credit cards, I BEGGED our son to get one for going abroad to have on hand in case of an emergency situation. But he is truly philosphically and morally opposed to them; he readily agrees and accepts that his position, at times, limits opportunities and has no problem living with these self-imposed limitations and/or missed opportunities (at this time).

By Mark Y on Saturday, January 19, 2002 - 08:56 pm: Edit

R Storm, I guess the parents did something, but not enough. Does this kid have any idea what it means to have nearly a thousand dollars of every month's paycheck going to pay these loans, with a simple bachelor's degree? Does he expect to be able to own a car, get married, or even live away from his parents' home? He will need to have a salary of about $40,000...well above the average for bachelor's recipients... just so that he can live on $20,000 pre tax after paying off these loans. Will his parents help him if he has trouble, which honestly is very likely? This kid is typical Generation Y...so sunny...thinks everything will be great in the end, but will find out on graduation day that surviving will be an economic struggle.

By R Storm (Anonrs) on Sunday, January 20, 2002 - 05:25 am: Edit

I don't think this kid is much different from many of the kids accumulating these huge loan debts during college -- quite a few seem to think that "things will work out." As to parents helping if it's sink or swim, I don't think they'd willingly let any one of their kids drown -- but I honestly don't think that they'll be in a position to throw much more than a temporary safety line for any one kid, let alone three, should they all decide to take a similar path.

By Mark Y on Sunday, January 20, 2002 - 02:11 pm: Edit

I assume this kid is going to an elite college...that means this kid must have brains. For anyone with half a brain, it is pretty simple to realize the gravity of $68,000 in debt. This is not for a house, a car, or anything like that. All he will get in the end is a diploma that may allow him to get into the door for a job in a cubicle. I seriously hope that there are good prospects for jobs in his hometown and that there is good public transportation, because there is almost no way that this kid could afford rent and/or a car. The fact that $1,000 of his monthly income will go for student loans will likely destroy him financially, as well as emotionally. Imagine being 24 and single, and instead of using $1,000 a month for fun, savings, etc., every penny of it has to go for paying off student loans. It is almost impossible to even fathom this.

The only thing that may help him is the fact that next year one of his younger siblings will enter college, which should reduce the EFC. What that may do is reduce the loans to about $10,000 or so. But still, that means a total debt of about $54,000, and I am not even capitalizing interest. With interest, that should be back up near $68,000, if not above that level.

By Mark Y on Sunday, January 20, 2002 - 02:48 pm: Edit

What also makes me want to scratch my head is the fact that the parents are willing to spend $6,200, which is more than the average family is willing to spend for tuition. He could have went to a state college that costs maybe $10,000 a year...maybe work a bit during the school year and full time during the summer, and then he would have the money needed for college, without having to take out a single loan. Yet like many of Gen-Y, he feels that going to an elite school is an entitlement, and that anything less would be worthless.

What also shocks me is how easy it is to get such large student loans. Lending institutions often give the average Joe with a good credit history a hard time letting them borrow $10,000, but if it's an 18 year old college kid with no credit history or anything, they don't even think twice before lending them $50,000 or $100,000. For some reason, they think it's a good risk because they feel that every college kid will earn six figures their first day of work. Don't forget...private "alternative" loans are not backed by the government...there is no guarantor.

By Dadster on Sunday, January 20, 2002 - 09:49 pm: Edit

You hit two big points, Mark. 1) Kids today expect everything to work out in the end; 2) Lending institutions throw money at these kids - not only can they get all the credit cards they want, but they can get tens of thousands of dollars in student loans (all with no assets and no income - see if your banker will do that for YOU!).

This combination creates the dangerous situation you have described. Our parents, who grew up during the Depression, didn't expect everything to turn out fine; instead, they assumed that something nasty might be lurking around the corner, and planned accordingly. Our generation was more optimistic, but still carried forward some of this cautious outlook. The current generation of college students lacks the financial caution gene...

Lenders seem to operate in herd mode. They'll pile money into an area, even when it is risky. Only when their excesses come home to roost and they start seeing loans go bad will they rein in the loan-pushers.

Depending on how long the current economic downturn lasts, both students and lenders may get a dose of reality...

By California Mom (Calmom) on Sunday, January 20, 2002 - 11:30 pm: Edit

Can the kids really get these big loans that easily? Or do they need their parents to cosign for them?

I'm surprised that things are so easy.

If the banks are giving these large loans but asking for a parent to cosign, it makes a lot more sense from the bank's perspective -- they have someone to go after if the kid defaults.

By Mark Y on Monday, January 21, 2002 - 10:21 am: Edit

It is very easy, Calmom...easier than you think. Some companies require people to be "credit worthy" before lending them money, but more and more companies allow "credit-ready" people, or people with no credit record. They may need a cosigner during their freshman year, but after that, they don't require one. And the interest rates are extremely high...maybe not now with the cuts from the Fed, but when the economy picks up again, they can be well into the double digits. And most of these loans can't be consolidated and there are few options for repayment; that is, you can't take the income sensitive route or the like that is possible with government loans. The son of R Storm's friend, for instance, would have been able to adjust his loan payment so it would have been more tolerable if he just had those loans. But if he borrows $17,000 a year, surely he must have private loans. Those options are likely not available, and he will have to stick to an oppressive repayment schedule.

By California Mom (Calmom) on Monday, January 21, 2002 - 06:02 pm: Edit

I'm sorry that parents allow their kids to sign onto loans like this. As I noted above, debt is not a bad thing per se - the key is to understand how to manage the debt, and part of that is recognizing and distinguishing a good deal from a bad one.

I think this is something that parents need to provide guidance with. Kids really don't know how to compare interest rates and they don't know what they are getting into. I do see kids who are taking on the sort of debt you speak of as heading down the road toward bankruptcy.

But I also see this borrowing as being an unfortunate result of the whole rankings and prestige racket. It leaves students thinking that somehow an elite college is necessary to their success in life, when the same student might be able to qualify for significant merit aid at a less prestigious private college as well as being able to choose from a number of state colleges.

The irony is that a student who graduates from an Ivy League with $80,000 of personal debt has a large economic strike against him. At that cost, the prestige degree is not a ticket to financial success, but instead a hindrance that will undermine his/her ability to make a good living. The student who graduates with $20,000 in debt, all in federally subsidized loans, has a manageable payment schedule and the ability to save and invest earnings from his/her first job, as well as to make career moves that will enhance his/her prospects over time. (For example, the student with the lower debt can also choose to take a lower-paying job with better prospects for advancement; or one that offers less in salary but better benefits, including potentially lucrative employee stock options; or to take time off from working to continue his/her education.) The student with the $80,000 of largely unsubsidized debt is simply stuck, possibly with the prospect of working many years at a job that the student may end up hating.

By R Storm (Anonrs) on Monday, January 21, 2002 - 08:14 pm: Edit

Just a note about the school my friend's son attends. It is NOT an Ivy and while it it highly-ranked in it's region by US News, I would say that many people in other parts of the country have never heard of it. So most people would not consider it "elite" let alone "prestigious," but it IS private and DOES have a very good reputation in academic circles. In personal terms, it is also very well-known for its sense of community. I don't think the kid was shopping the name; it's just a great, private school. Also, I don't think this school has very deep pockets or perhaps they like to give out more but smaller-amount merit scholarships -- I have another friend with a son at the same school and he did not receive significantly higher merit money (but his parents are able to make up the difference).

By Mark Y on Monday, January 21, 2002 - 08:16 pm: Edit

Exactly, Calmom...parents are partially to blame very often. They have to sit down with their kids and tell them the implications of extreme debt. They have to tell them that every month they would have to pay the equivalent of two rents...five new car payments...a hundred movie tickets for ten years just to pay for an education that gets your foot in the door for a job in the "cubes". And just because you went to a top Ivy doesn't mean you'll be successful. I know of a number of kids who went to top echelon schools who got into extreme debt and ended up working at mindless entry level office jobs. Of course, there are many parents (including my own) who explain loud and clear of the implications of severe debt, and thus avoid these problems. You definitely appear to be one of them, and I commend you for this.

Yet, as I said all along, expecting to go to the top school no matter what the cost is the mindset of Generation Y. They expect everything to be on a silver platter, and are never satisfied unless they get the best. And I am pretty sure that some of these students are well aware of the debt they are accruing, yet are naive of the consequences. If you survey 100 high school seniors that if given a choice of going to an elite school and getting into $50,000 or more in debt or going to a state college and only winding up say, $10,000 in debt, I am sure that at least 40 would choose the former. R Storm's friend's son was one of them, and unfortunately, when Thanksgiving 2004 comes along, and he is six months past graduation, he is not exactly going to be in the mood for turkey and Grandma's pumpkin pie...

By Mark Y on Monday, January 21, 2002 - 08:26 pm: Edit

R Storm...just saw your message after my last post. That's pretty scary...going to a school that is NOT elite yet borrowing all that money. If I were to get into $70,000 in debt for a bachelor's, I'd make sure it's Harvard! Of course, I guess that is not unusual. In fact, the other week I posted a link to an article about an art school that I never heard of where the AVERAGE student graduates nearly $50,000 in debt for the baccalaureate. (Here it is: http://www.artsiteguide.com/accd/). I e-mailed the author, and he says that yes indeed, this is what is going on. An alum he spoke to with $40,000 debt (which is less than average) feels like a slave, and there are numerous kids who accrue well over $100,000 in loans at this school. And I have heard of public school grads who have $40,000 in debt.

By Dadster on Monday, January 21, 2002 - 11:05 pm: Edit

>>numerous kids who accrue well over $100,000 in loans at this school<<

Six figure loans for starving artists? Now there's a group that should consider signing on with the myrichuncle people... Talk about adverse selection...

By California Mom (Calmom) on Monday, January 21, 2002 - 11:39 pm: Edit

R Storm -- Like Mark Y, I simply assumed that a kid would only take on that sort of debt for an elite college. My own son is going to a LAC that probably is not in the "elite" class (it's arguable, because it is well-known in many circles, but at the same time not particularly well-ranked by US News) -- so I well appreciate the value of the private college over a public university. However, my son is at his college because, and only because, he was awarded a significant amount of financial aid. The college was his second choice; he turned down his first choice because they didn't offer him grant aid.

My son did apply to our state university - and he would have gone there if the money had not come through from private colleges. Going to Berkeley would have been a very different experience for my son than going to an LAC, and quite frankly I don't see the University as being a good "fit" for my son at all - so it probably would have been rough going for him. But not nearly as rough, in my opinion, as being saddled with debt beyond his means on the day he graduates.

As I said before, kids do not understand debt. It's not a matter of explaining it to them -- they understand it in theory, it is just the practical aspects of spending months and years earning a salary that goes largely to service past debt that they cannot possibly understand. You have to live through it to get a sense of what that means in your life.

But if the banks will give a kid money without a cosigner, I guess there is nothing a parent can do to prevent it, if the kid is dead set on taking out the loans.

By R Storm (Anonrs) on Tuesday, January 22, 2002 - 02:37 am: Edit

The substantial merit scholarship is the only reason that my son is at his private LAC, too. He understood from the beginning that merit money would be the only way that a small LAC would be doable, which is why he also applied for the Honors Program at our top State University (to make a big school smaller and better).

I'm hoping that our younger son will have as much luck when it's his turn -- but unfortunately, younger son will be at the top of the bell curve of the "baby boom echo" when he applies for a spot in the incoming (Fall '04) Freshman class. I think merit money will be harder to come by. It will be a "seller's market" (ie the colleges; why offer as many perks?) and/or the "buyer competition" will be even stiffer in terms of the sheer number of applicants, as well as, the quality of the applicants.

By Dadster on Wednesday, January 23, 2002 - 04:53 pm: Edit

Mark Y: That's pretty scary... going to a school that is NOT elite yet borrowing all that money. If I were to get into $70,000 in debt for a bachelor's, I'd make sure it's Harvard!

Good point, Mark - I suspect that many of us feel the same way. Go into debt for Princeton, say, but not a $30K+ college that doesn't make the top 20. I identify with this sentiment completely, but the left side of my brain points out that the diffence in earnings is likely to be quite small - even at the top few colleges. Although we tend to treat elite schools as a badge of honor likely to reap big rewards down the road, research seems to find that earnings differences are hard to prove (particularly if you compensate for the caliber of the incoming freshman). This isn't to say that there aren't differences in the educational experience or the campus environment, but that elite grads may not make much more money than had they gone to their State U. Hence, paying off that debt may not be easier...

By Mark Y on Thursday, January 24, 2002 - 08:59 pm: Edit

Correct, Dadster...there is evidence that the difference is rather small...the smart kids will get the cushy job whether they go to Harvard or State U. As I mentioned before, I know some elite school grads with massive debt and are doing data entry for $29,000 a year. So maybe it doesn't matter...still, it boggles my mind to hear of 18 year old kids literally mortgaging their future because a college is "good fit". (although even state school grads don't get off easy either)

By Dadster on Saturday, January 26, 2002 - 10:05 am: Edit

I think part of the problem is that college choices always tend to lag the reality of the job market. Students often choose careers and colleges based on information that was current while they were in high school - which fields are "hot", what typical starting salaries are, etc. A kid who's a junior in HS likes airplanes and reads a magazine article about high salaries for aerospace engineers (based on the previous year's data, of course), and decides to pursue his dream. With a high projected starting salary, a few loans don't sound like a bad way to realize his career goals. A few years later, the market for that specialty turns down; unfortunately, short of spending another year (or more) in undergrad school for a new major, that student is more or less locked into his choice (and his loans).

In the current weak job market, it's hard to remember that a couple of years ago, elite grads were in great demand. Investment banking firms and management consultants were competing against dot-coms flush with venture capital. Even students not fortunate enough to be coveted by J.P. Morgan or Amazon had good choices. Just about anyone with a technical degree was guaranteed $50K+, and even liberal arts grads were landing $40K+ jobs with firms desperate to fill open positions with kids who could at least write coherently. Dot-coms showered new employees with stock options, creating the expectation that these new grads would be soon be millionaires just like their twenty-something bosses. In this environment, loans, even moderately large ones, made sense. Now, of course, the dot-com bubble has burst, securities firms and consultants are laying off people, and the loans that should have been manageable are a looming burden.

By Roger (Roger) on Monday, January 28, 2002 - 03:14 pm: Edit

It kind of gets back to your earlier post, Dadster - today kids seem to work from a "best case" rather than a "worst case" scenario, i.e., what will happen if I don't land a high-paying job, or if I lose my job and have difficulty finding one that pays as well?

By Mark Y on Monday, February 04, 2002 - 10:56 pm: Edit

R Storm's friend's son and the other kids with the huge mid to high-five figure debts better start to get concerned...this is not a good market for college grads --http://fyi.cnn.com/2002/fyi/teachers.ednews/02/04/graduates.jobsearch.ap/index.html

I am wondering what will happen to these kids with the huge debts and what will happen if they can't find the job that will allow them to pay off their enormous loans. Lucrative offers in finance and computers, which during the last couple of years masqueraded the burgeoning debt loads, are not as common today. I doubt that the default rates will go up that much because Gen-Y borrowers have more "safety nets" than Gen-X to temporarily releave the burden (although accrued interest will in the long run neutralize that easily) and the government and private lenders are making more efforts to make sure they get their money. What I think will happen is a generation of "educated poor" people; graduates who are more highly educated and more sophisticated than any generation in history, but who are so far in the whole that no matter what their starting salaries are, they will have extremely limited options when it comes to discretionary spending. This will be especially true with the current economic problems, and I hope that this is a wakeup call for the government to do something.

By Roger (Roger) on Tuesday, February 05, 2002 - 09:37 am: Edit

Absolutely right, Mark - most of the big college loans haven't had a chance to go into default yet. It seems inevitable that we'll have a crisis of some sort in this area. Nothing like the savings & loan fiasco, but an awakening to the consequences and risks of these loans.

By Dadster on Thursday, February 07, 2002 - 08:08 pm: Edit

Good point about the "safety net", Mark - I wonder how many parents will end up covering for a defaulted cosigner or forking over retirement cash to bail out a kid in trouble?

By Mark Y on Saturday, February 09, 2002 - 03:53 pm: Edit

Hard to say...I assume most parents will try to help their kids, but only if it's an extreme emergency. Like R Storm said, his friends' son will have to carry the burden of a $60,000-80,000 load, or about $700-$1,000 a month post-tax, himself, and that they will probably only help him (and his siblings) out if they are in dire straits. Even if you make $40,000 a year, that is a tremendous burden, that will wipe out virtually all discretionary income (imagine being 23, 24 years old, and instead of having $1,000 a month discretionary, you're lucky if you have $100). Yet, due to the fact that parents today are having kids at late ages...first time parents in their forties is not unusual today, and due to the fact that they would retire right around the time that their kids are leaving college, I do not think that many parents today will be that accomodating when it comes to helping their children out with loan debt. Some will, of course, but many will not.

By R Storm (Anonrs) on Saturday, February 16, 2002 - 03:51 pm: Edit

MyRichUncle.com was a news feature on a local TV news show (an affiliate of a major national broadcaster) this past week; several days of promo for upcoming piece. A richuncle rep said that in the first year they did about $1 million in loans and are expecting to do $3-5 million this year!

The student in the feature has been paying his way totally on his own and has already maxed out his student loan options. If the info was provided, I didn't catch what year he was or what school he was at -- but he looked like an upperclassmen, perhaps looking at grad school now? also, I don't recall info as to college type -- public or private -- and exactly how far he was in debt to date and how much he hoped to get from richuncle. Anyway, the student saw this program as manna from heaven; that it would be a real stress-reliever for him and that he really hoped that his application would be accepted.

Re payback, once payments start they continue so if you're laid off it remains a monthly obligation -- though it was said that Richuncle would (possibly) work with the student in perhaps adjusting the monthly amount, if need be. Also, there's a percentage cap on payback.

There was one nay-sayer in the piece with a financial advising background -- really thought the richuncle concept was a bad idea for both the student consumer and the investor -- but his contribution was pretty much glossed over. Very much a positive marketing tool for Richuncle.

By Dadster on Sunday, February 17, 2002 - 10:50 pm: Edit

Interesting, RStorm. There is another thread going about charging tuition by major, as a proxy for ability to pay. Obviously, one's undergrad major is not the best indicator of future income. I suppose engineers, on average, make more than teachers, but many grads go into fields not directly related to their majors - some lucrative, some less so. The myrichuncle funding scheme actually accomplishes this objective pretty well, by creating a higher cost of undergrad school for an investment banker than a Peace Corps worker. It SEEMS fair, at first glance - it's just when you run the numbers and realize what the kids are committing to that it gets kind of scary.

By Mark Y on Monday, February 18, 2002 - 10:59 pm: Edit

A couple of things regarding what you said, R Storm...as I mentioned before there's really no way to "max out" on loan options nowadays...you can borrow as much as your heart desires. If you want to go to an Ivy and borrow $150,000, there's no stopping you. So I don't think the kid on the news is in a serious debt situation like your friend's kid, who no doubt took out private loans. Also, $1 million in loans a year, or even $3-5 million, is not even a drop in the bucket compared to the rest of the loan industry, which processes tens of billions in government loans and at least five billion (and that is likely conservative given the huge debts of today's kids) in private loans.

But I think that if it's legit, My Rich Uncle could definitely be a boon for today's college students. It reminds me of a graduate tax, which is being hammered out in England. Essentially, the graduate tax is a tax in which the graduate pays a certain percentage of their income to the government for a period of time (15 years?) So, if you make 10,000 pounds, your overall "debt" would be lower than if you make 40,000 pounds, even if you had the same exact education. I do not know if all students have to pay this tax, including the rich ones.

Obviously, since the higher education system is much more complex in the US with state funded and private colleges (unlike England, where most of the colleges, except for a few like Cambridge and Oxford are nationally funded), the government tax would probably not work well in the US. However, something private like this may work, since there would be minimal government red tape. Of course, the government and the big banks will not be happy...but this will definitely help millions of students, especially those who have oppressive debts.

The big question, of course, is: how can this be profitable (which in an ideal world would not be an issue, but in the USA, where the Almighty Dollar is king, you know the rest of the story...)? Of course, if MyRichUncle is to assume minimal debts from students, it may not be a problem. But as tuition rises and debt loads ramp up, how will this program fund these debts? Say MyRichUncle assumes a debt load of $70,000. Even a kid making $40,000 a year is not going to make enough to pay back a debt equivalent to $70,000 or so in fifteen years under the terms of MyRichUncle, which caps the repayment percentage at what, fifteen percent of income? Sure, the $70,000 kid is in the minority now, but in ten years, that will likely become more and more the norm, and it may become too much for MRU to fund.

By Roger (Roger) on Tuesday, February 19, 2002 - 08:27 am: Edit

Good points, Mark. I have to assume that MyRichUncle caps the loan amounts, too, lest they run into exactly the kind of bind you describe. Or, I suppose, they could just play the numbers and hope that enough of their customers land lucrative jobs to make up for the ones who can't pay off the entire loan.

One good thing, from MRU's viewpoint - their approach provides a built-in inflation hedge. While normal lenders get hammered by inflation, as the real value of their loan assets falls, MRU stands to benefit if salaries grow at or above the inflation rate.

By Dadster on Sunday, February 24, 2002 - 03:42 pm: Edit

>>One good thing, from MRU's viewpoint - their approach provides a built-in inflation hedge<<

The key phrase, Roger, is "from MRU's viewpoint". Moderate to high inflation actually works to the student borrower's advantage, as he ends up paying the loans off with cheaper dollars. Still, how this approach compares to conventional loans really depends on the income numbers.

By California Mom (Calmom) on Sunday, February 24, 2002 - 04:51 pm: Edit

I think you guys need to read the fine print on the MRU site. They do not promise to finance all comers, nor to foot the bill for the entire education. Basically, they are using a lot of discretion in picking and choosing who they will finance. I bet it would be pretty hard for a liberal arts major with uncertain goals and a B average to get on to their plan. On the other hand, a pre-med student might be exactly what they are looking for. I'm sure that their selection criteria is geared to making sure that the student they finance is a good bet for them.

By Mark Y on Sunday, February 24, 2002 - 06:46 pm: Edit

Yeah, so someone who has an EFC of $25,000 but their parents can only pay (or don't want to pay more than), say, $5,000, will probably not be eligible, and will have to take out conventional bank loans instead. This probably works best for public school or lower middle class students who may have an EFC of say, $6,000, but whose parents can only afford $3,000. It also is worth noting that MRU will only fund you after you take out the loans given to you, so you're not exempt from the standard loans.

By Dadster on Monday, February 25, 2002 - 10:51 am: Edit

>>It also is worth noting that MRU will only fund you after you take out the loans given to you, so you're not exempt from the standard loans.<<

Wow, I didn't notice that... I fully understand their need for selectivity in choosing applicants, although basing a decision on expected career still has to be kind of risky. Doubling up loans with MRU might be quite a burden, though...

By Mark Y on Monday, February 25, 2002 - 05:04 pm: Edit

Honestly, I'd still prefer this over convential bank loans, which expect you to pay it off no matter what your salary is. At least with these you don't have to worry about making enough to pay off $50,000 in debt...the only fixed obligation is the debt awarded to you. Say, for example a kid wants to be a teacher in New York City, which may pay $30,000 entry level (it's actually a bit more, but I'll use this to make it easy). Say he/she attends Big Name Private U which gives you $6,250 a year or about $25,000 in debt (assuming subsidized loans) over four years in their finaid packages. Say Mom and Dad's EFC is $15,000 and they can only pay $9,500. That's a gap of $5,500 a year. If the kid takes out conventional loans, that's another $25,000 after capitalization, giving the kid a $50,000 debt at graduation. This will require $600-700 a month for ten years to pay off...virtually impossible on a $30,000 salary. She will need to look into consulting or another high salary position, and her dreams are wasted away due to high debt.

However, if the kid is "accepted" into MRU and say, her contract has a 5% provision, she will pay 5% of $30,000 or $1,500 a year, or $125 a month. Add that to the $25,000 debt, or about $300 a month for ten years, and the debt is now only $425 a month for ten years, plus another $125 for another five. This is still extreme, but it is a bit more reasonable, and if she lives frugally, she may have a fighting chance.

However, if the income rises to $50,000, and ther percentage is say, 10 percent (I think they increase the percentage as the job gets more lucrative) this will require $5,000 a year or $417 a month on top of the $300 for the college loans, and you're looking at over $700 a month...and the terms are longer for MRU than conventional loans, so you're not better off this way.

By Roger (Roger) on Tuesday, February 26, 2002 - 10:02 pm: Edit

Nice analysis, Mark. Seems like the MRU topic is a lot like other areas of financial aid: one is forced to make decisions that will have a big impact later on. These decisions must be made with imperfect information and the understanding that the best assumptions today may prove to be wildly inaccurate in the future. The kid who expected to be a missionary might get a whopping offer from J. P. Morgan, or the high-GPA pre-med might become a parochial school teacher...

By antoine on Wednesday, March 06, 2002 - 09:34 am: Edit

i'm european, and i think MRU financing solution is really interressant,because they enable students that don't have enough money to pursue the studies they want and not only the studies they can afford to pay for.Even if after the rembursement payment period, i'd have reimbursed more that what they got for my studies, it wouldn't be boring for me, because i would have paid only a percentage of my monthly income, it enables me paying less when i earn less and when i pay a lot, it means that i have big incomes...thank to the studies i could have followed.

I know a french company that do a little like MRU, it's educangels.com, but they have an other financing solution, companies provide a financing to students, once graduated they enter the company for a fix period of time (3, 4 or 5 years) period during they reimburse a percentage of their income (they choose the percentage every month) and it's totally free for the students it's like a 0% loan, because they don't reimburse more than what they were provided; i think it's a better solution, what do u think about it ?

By burningman on Tuesday, March 19, 2002 - 07:44 pm: Edit

Antoine, MRU financing could be right for some. It's kind of like financing a company - for some selling stock is best, for others getting a bank loan might work. A company that is growing very quickly might not want to sell stock if it doesn't have to - just like a kid who expects to start earning $100K after graduation would probably be better off with loans.

By 1sttimecollegemom on Friday, April 12, 2002 - 02:28 pm: Edit

I wonder how long it will be before the universities themselves realize that long term financing might be the way to go. Lots of major corporations are going to self insured benefits so why can't a college become in essence it's own bank? Lets say you go to x university for 4 years. A percentage of your total yearly cost will be extended for a period of ten years after graduation. Principal and interest accrue at a simple interest rate and would be paid back directly to the college by monthly payment. This in turn would be a source of additional income for the university, and would also be an excellent source to judge the competancy of the program vs. the cost. In order to justify their costs they would see exactly how much their grads were making after graduation. If their grads are not making enough to pay back their loans, then obviously the money spent for the education wasn't worth it. I think it's time the colleges and universities start taking some responsibility for the outlandish cost of education.

By Mark Y on Saturday, April 13, 2002 - 06:39 pm: Edit

1sttime...I agree with you regarding a need for change and that the debt loads are getting too astronomical, but I disagree with you that if you don't make a lot after college that it's not worth it. What about the kids who want to be teachers or social workers or work in non-profit, where salaries are lower? Generation Y is turning out to be a very civic generation with most kids wanting to do good things for the world...not necessarily lucrative. Many, many smart kids really want to work in these lower paying fields....there are very few slackers who work at the Gap or at Starbucks after college nowadays. So how could you say that just because a kid doesn't make a lot of money that going to college isn't worth it?

The problem is that kids who want to do something noble after graduation are forced into Merrill Lynch because of $50,000-$100,000 in debt for a bachelor's degree. That is the major problem...kids are forced to choose between getting an education at an elite college and getting into that much debt, or to choose cheaper options (going to community college, etc) so that they will be able to afford to live on a teacher's or social worker's salary. And more often than not, they choose the former, figuring everything will "work out" in the end. When you have a $50,000 load at age 21 or 22, how could you afford to live on $25,000? Or even $35,000? College officials are going to have to look at themselves in the mirror very soon and do something. The MRU idea is a good idea, except that the greedy colleges who want their money will probably not want to do this, since the kids making $20,000 after graduation doing social work in rural Mississippi will not "give back" enough for the college's liking due to the low salary.

By 1sttimecollegemom on Sunday, April 14, 2002 - 04:57 pm: Edit

You said it much better than I did...I guess that's what I was trying to say and teaching was a great example. If my son was studying to be a teacher no way would I encourage him to go to school A which costs 30,000 per year. School B, most likely our State U at 15,000 would be more approriate. I just thought it might make school A more aware of how outlandish their costs are getting if they some how had a stake in all this.

By Mark Y on Monday, April 15, 2002 - 05:35 pm: Edit

Exactly, 1sttime, but the problem is the kids and their sense of entitlement. Kids today feel that if they do not get an elite education, that they are really missing something. Don't get me wrong...it's good that kids today are so education-minded...much more so than boomers and Xers. But the problem is that they are so focused on going to a "great" school that they don't take into consideration the sacrifices it will take to pay for all that. Another problem is that the high school counselors always go along with the kids...they always tend to say "go for it! Even if it means significant debt!". And why would they not? High schools would much rather have most of their kids go to Expensive Private U than State U any day for reputation purposes. And the boomer parents, who coddled their kids since day one and always made their kids feel wanted? They have a tough decision to make...sacrifice retirement or let the kid borrow six figures? Some of them make great sacrifices and continue the coddling, while many, many others say "enough is enough...eighteen years of coddling is plenty", and foist the loans onto their offspring.