Sunday, May 30, 2010

The next lending crisis

The New York Times had a good column this week spotlighting the dangers of student loans through one family's story: an undergrad NYU education that left $100,000 of loan debt in its wake.

Almost everyone I know has student-loan bills, which vary in severity from "enh, it's not that bad" to "holy god, that's more than rent." But there's one clear similarity in all our stories: No one knew what they were getting into.

It's the undergrad debts that make me wince the most. You take those loans on when you're 17 or 18, and I don't care how academically smart you are, I've yet to meet any college-bound 18-year-old able to make sound judgment calls about loans, debt, estimated paychecks and so on. How can you? At 18, you haven't had the experience of trying to line up all your bills and make them fit within the bounds of one fixed monthly income number -- and until you actually do that, month after month, it's all hazily theoretical.

You can sign on a dotted line saying "yes, I understand that if I take on this loan I'll owe $200 a month to repay it," but is $200 a lot or a little? To me at 18, who considered $20 a windfall, it would have sounded staggeringly huge -- but me at 18 (circa 1996) hadn't ever had a job paying more than $6 an hour. I had no framework at all for making adult financial decisions.

I guess this is where parents enter the equation, but at 18, you're supposed to start making your own decisions -- and what 18-year-old is going to listen to the parent who says "this expensive school you got into and want to go to? Sorry, you can't." You spend all of high school hearing that college will be exciting, life-shaping, career-door-opening and so on. The last thing you want to think about at that point is what's cheapest.

I basically got lucky. My parents scrapped together the cash and took on the debt themselves to pay for most of my trip through the pricey college I wanted to attend. I helpfully repaid them by dropping out right before my senior year. (Thanks, Dad, for not driving up to NYC and strangling me when I told you that ...) The consolation prize is that I dropped out because the college basically did what it was supposed to: Help me get a good, full-time, decent-paying job in the career field I wanted to pursue. I left to take the job.

My three years at Barnard resulted in loan debt of $11,000, which required monthly payments of around $90. That was manageable.

But five years later, after a few halfhearted stabs at night classes, I finally decided to go back and finish off my degree. And once again, I didn't want to make practical-and-affordable choices -- I wanted to do what I wanted. Which, this time, meant going to the school best set up to deal with working students. That turned out to be New School University -- which cost about five times more than I would have spent finishing my degree at Hunter or another state school.

Result: Three years after graduating from New School (much to my Dad's delight -- I finally got the BA!), I'm currently sitting on a student-loan balance of $21,664.59. I now pay $250 a month for my loans, and have been paying that for almost five years. I have ten more to go. If I'd done the less-expensive thing, I would instead have my loans fully paid off about two years from now.

Was it worth it? In my case, maybe -- I can afford the $250, and my previous efforts to finish the BA hadn't actually worked. If New School was what it took to get me through, it was probably a sensible thing.

But really, all it boils down to is that I got lucky. I don't even remember signing the loan papers for my first set of loans, for Barnard. I definitely didn't do it with any "this will cost me X dollars each month" idea of what I was obligating myself to. The second time, when I took on the New School loans -- this time, as a working adult, and even a personal-finance blogger -- I again didn't do any precise monthly cost forecasting. I just eyeballed the total sum and said "well, it looks manageable."

Which is why I get nervous every time friends of mine talks about going back to grad school. There are, for sure, financially responsible ways to do it. You can use savings, go somewhere very inexpensive, or pursue a degree that has a very clear payoff in your chosen career field.

But you can also spend a small fortune on a degree that's hard to monetize -- or, worse, trains you for a field with salary prospects that don't align. To pick on my own alma mater and career field: A journalism or creative-writing master's degree at Columbia will cost you about $40,000. A typical entry-level journalist or any-level fiction writer would be lucky to make $40,000 a year -- and managing a $350/month loan payment on a take-home salary just north of $2,000/month starts to get pretty restrictive.

I don't see any obvious solutions, but it's scary to see a whole generation of 20- and 30-somethings (and on into their 40-somethings) chained to massive debts right out of the starting gate.