Before you get a student loan please read this

The following is an excellent analysis of how to minimize your exposure to deblitating debt and maximize your investment of time and money.  If you are rich then don´t worry about sky high tuitions, but if you are a normal person you need to think hard about whether college is really the best use of you time and money, and if you do decide to get higher education how you can get the best value and bang for you buck.  A lot of college students naively pile on debt to go to college based on the belief that a degree is the ticket to success, only to find themselves unemployed or underemployed swimming in a mountain of debt.  The education mafia uses the same emotion based strategies to stop us from thinking rationally and skeptically and to get us to start thinking emotionally about how great college suppossedly and to not worry about the risks.  The same sentimentalization was used to pump up the housing market and sell a lot of mortgages to people who could not afford them.  The student loan sharking business, however, is even worse because people can walk away from mortgages but student loans are usually forever.

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Josh Kaufman: Unbundling College: How to Avoid Spending $100,000 (or more) on a Credential You Don’t Really Need

On my way back from a recent trip to New York City, I found myself in a rush hour subway car bound for JFK International Airport. It was a long ride, and you can only be smashed next to someone for so long before it becomes more comfortable to strike up a conversation than endure the cramped silence.

One of the interesting people I met on that subway car was a young woman (let’s call her Jennifer), who was beach-bound to celebrate graduating from a masters program “in Boston.” After prying a bit, she told me she had just graduated from Harvard Business School.

I asked her what she planned to do next. “I’m moving to the west coast to work for a consulting company,” she replied.

“Are you excited about that?”

“Not at all,” she said with a grimace. “I want to work in developing countries, but the World Bank said I had to have a masters degree, so I went to HBS. When I applied after graduation, they told me that they’d already ‘filled their quota of Americans,’ and there was nothing they could do. I don’t want to be a consultant, and I know I won’t enjoy it, but it’s the only other job I can get that’ll pay enough to cover my student loans.”

For all of her intelligence and drive, Jennifer was an indentured servant.

Then Jennifer asked me what I do for a living. I told her that I’m a business teacher, and that I’d just finished my first book.

What I didn’t tell Jennifer is that I teach people to avoid making the same mistake she did.

“You can’t put a price on a good education”… or can you?

If you ask your parents or mentors how to become successful, their answer will most likely include four interrelated invisible scripts:

  • “Get the best education you can.”
  • “Colleges provide the best education.”
  • “The best colleges are expensive.”
  • “More college is better.”

Like so many of the invisible scripts we grow up with, three of these assumptions aren’t necessarily true.

After graduating from high school, almost everyone will tell you that you should obtain a bachelor’s degree – at a minimum. If you’re smart and want to become extra successful, go to medical school to become an MD, go to law school to become a lawyer, or get an MBA to become a C-level executive with a company jet, stock options, and golden parachute.

Most people seem to think that that the path to becoming a successful person is linear, non-negotiable, and unchanging: go to school at the best institution you can get into (where “best” equals “most expensive”), and pay whatever it takes to attend. Common wisdom says that no price is too high to pay for a “good education”, as long as that education comes in the form of a degree from a prestigious school.

Common wisdom is dead wrong.

Separating education from credentialing

Don’t get me wrong – I’m a huge advocate of getting a world-class education. Here’s the rub: education and credentialing aren’t the same thing.

Education is the process of learning something useful – concepts, knowledge, and skills that improve your life in some way. Education is what happens in your head, not necessarily what happens in a classroom.

Credentialing is the process of completing a (mostly arbitrary) set of criteria in exchange for a social signal – a degree, certificate, or other form of verifiable proof you’ve played by the rules.

If you want to succeed – to do work that matters, make a difference, and live a rich life, you owe it to yourself to get the very best education you possibly can. That does NOT mean mindlessly mortgaging your financial future (and/or the financial stability of your family) in order to obtain an expensive and unnecessary credential.

Education and credentialing are sold as a bundle, but you’re usually better off unbundling them as much as you’re able. By treating them as separate tools with different objectives, you expand your available options enormously.

Where the scripts came from…

It’s not that our parents and mentors are misguided: the world of credentialing has changed dramatically in the past few decades, and the scripts haven’t caught up.

Twenty five years ago, college was less expensive by a factor of ten, even after adjusting for inflation. You could pay most of your costs by working for minimum wage part time and full time over the summer, and the degree opened enough doors to make a credential a pretty good investment. According to research published by USA Today:

The average debt for a college graduate has soared 50% in the past decade, after inflation, according to the Project on Student Debt, a non-profit advocacy group…

Today, students who don’t want to borrow at higher rates have few other options. Twenty-five years ago, students who wanted to avoid debt could use money from part-time and summer jobs to help pay for college. But since then, college tuition has risen at twice the rate of consumer prices. Tuition has soared much faster than pay has for the kinds of low-wage jobs that students tend to hold.

In 1981, a student could work full time all summer at minimum wage and earn about two-thirds of annual college costs, according to an analysis by Heather Boushey, economist for the Center for Economic and Policy Research. Today, a student earning minimum wage would have to work full time for a year to afford one year of education at a four-year public university – and that assumes she saves every penny, Boushey concluded.

A recent article in The Economist paints a similar picture:

“College fees have for decades risen faster than Americans’ ability to pay them. Median household income has grown by a factor of 6.5 in the past 40 years, but the cost of attending a state college has increased by a factor of 15 for in-state students and 24 for out-of-state students. The cost of attending a private college has increased by a factor of more than 13 (a year in the Ivy League will set you back $38,000, excluding bed and board). Academic inflation makes medical inflation look modest by comparison.”

The benefits of credentials have declined over time, but the costs have increased dramatically. It’s basic math: the higher the cost and the lower the benefit, the worse the return on your investment.

Credentialing is primarily social signaling

“This is a story about us, people being persuaded to spend money we don’t have, on things we don’t need, to create impressions that won’t last, on people we don’t care about.” – Tim Jackson, in a TED talk on conspicuous consumption

College credentialing has become a luxury market. Students (and their parents) aren’t really buying education – they’re buying social status. The credential is seen as a straightforward path to prestige.

In “The Prestige Racket” journalist Daniel Luzer of the Washington Monthly exposed one of the primary reasons behind the last few decades of credential inflation: perception engineering.

Today George Washington, like many “up-and-coming” second-tier schools – American University, New York University – is ruinously expensive. After decades of offering a low-cost education, GW took a sharp turn upmarket in the late 1980s under the presidency of Stephen Joel Trachtenberg. The university went on a high-class building spree, financed by a dizzying series of tuition increases. When Trachtenberg took office, undergraduate tuition was $14,000 – below average for a private, four-year college. By the time he left in 2007, it had mushroomed to $39,000 a year (or, including fees and room and board, a whopping $50,000) – making GW the most expensive school in the United States.

What Trachtenberg understood was that perception is reality in higher education – and perception can be bought. “You can get a Timex or a Casio for $65 or you can get a Rolex or a Patek Philippe for $10,000. It’s the same thing,” Trachtenberg says. The former president gambled that students who couldn’t quite get into the nation’s most exclusive colleges – and who would otherwise overlook a workmanlike school like the old GW – would flock to a university that at least had a price tag and a swank campus like those of the Ivy Leagues. “It serves as a trophy, a symbol,” he says. “It’s a sort of token of who they think they are.”

What’s amazing is that this strategy worked. During Trachtenberg’s tenure, applications for undergraduate admission increased from 6,000 to 20,000 a year, GW students’ average SAT scores increased by 200 points, the endowment increased to almost $1 billion…

Welcome to today’s increasingly elite higher education system, where lavish campuses, high tuition, and huge undergraduate debt loads have become the norm. In dogged competition for affluent, high-scoring students, today’s second-tier colleges aim to achieve higher prestige by aping the superficial characteristics of America’s traditionally elite schools. Indeed, there are few alternatives for ambitious administrators. “If you want to rise, you try to do the things that make you look like Harvard,” says David Labaree, a professor of education at Stanford University. “It’s hard to take a different path.”

(Reading this article is instructive – reading the comments from GWU alumni is even more so. Watch what happens when people believe their social status – which they’ve paid for – is in jeopardy.)

Expensive credentials are rather like expensive cars – you’re paying a lot of money for a depreciating asset whose value declines within five years of purchase. When purchasing a car, you can choose between a Rolls Royce and a Honda Civic. Both will get you where you need to go, but at a dramatically different cost. Is the short-term bump in perceived social status really worth it in the long run?

The Student Loan Industrial Complex

Make no mistake – credentialing can certainly open doors, but it can just as easily close them if you pay too much. If you finance your credential with student loans, you can quickly find yourself in a position where you’re paying the equivalent of a mortgage. Today’s student loans are often mortgage-sized, and work pretty much the same way. You’ll pay 5-10% interest, depending on whether or not it’s a Federal or private loan, and the payments amortize like a mortgage loan. For the first few years, you’ll be paying mostly interest, and if all goes well, you’ll ultimately pay 2 to 3 times the original principle to discharge the loan.

If you find yourself experiencing financial hardship for any reason – unemployment, layoffs, medical emergencies, etc, you’ll quickly find yourself in what I like to call the “Student Loan Death Spiral”. Every time you defer a payment, miss a payment, apply for abatement or forbearance, or consolidate your loans, you’ll rack up automatic additional fees on top of your original principle. That can quickly make your total debt load grow to unmanageable proportions overnight. (For details, see this detailed infographic: The Student Loan Scheme: Gateway Drug to Debt Slavery)

Student loans are also subject to another unique legal provision (at least in the US): they can’t be discharged in bankruptcy. No matter what happens in your financial life, your student loan debts will follow you to the day you either pay them off or die. (The only other loans that fall in this special federal “no escape” category are debts from criminal acts and fraud.)

Taking on loans to finance a credential can make becoming a successful person more difficult than it really needs to be. Debts make it difficult to change course, even if you find you don’t like your new life as much as you thought you would. And, just like credit card debt, they can quickly overwhelm you if you spend more than you can pay. Know the risks before you sign on the dotted line.

Never forget that colleges, universities, and student loan providers are businesses, and have a vested interest in maximizing the total amount you pay for a credential. The more you pay, the more limited your options and the lower your return.

What to do if you ABSOLUTELY need a credential

Sometimes, you really do need the piece of paper. If your desired job mandates a credential as a legal requirement of doing business, you may have to suck it up and get one. The only time a credential is worth the cost is when it’s used as a non-negotiable screening criteria to do the work you already know you want to do, and there’s no other way. If the path you want to take absolutely requires a credential as a screening mechanism, it pays to do what you can to get the best signaling value as quickly and as inexpensively as possible.

If you absolutely must have a credential to do what you want to do, NEVER EVER PAY RETAIL. Here’s what you can do to minimize the direct costs of credentialing:

  • Counterintuitively, apply to the most well-known and prestigious programs you can. Well-endowed private universities are usually in a much better position than public universities and community colleges when it comes to awarding financial aid, grants, and scholarships, so “expensive” schools can give you the highest signaling value AND end up being less expensive in total. Aside from the time and money you invest in applications, there’s little harm in applying to evaluate your true options. Remember, it’s not about the sticker price – it’s about what you ultimately pay in total for the credential, and how much money you borrow to pay for it. If you can get a degree from Harvard or Stanford for a few thousand dollars, by all means, go for it.
  • Apply for EVERY financial aid program, scholarship, and grant you can – even if you think you won’t get it. Way too many people disqualify themselves for financial aid instead of letting the selection committee decide. My wife and I both completed our undergraduate studies on full-ride scholarships neither of us believed there was any chance we’d receive.
  • Establish residency before you attend. Most US colleges and universities give massive discounts to citizens of the state they’re located in, typically as a condition of state funding. Never pay “out of state” tuition – most residency requirements are ~1 year, so establish residency by taking a “gap year” before you attend to save boatloads of money.
  • Look for little-known backdoors. Competition to get into top programs can be intense, but there are often hidden backdoors if you’re willing to do some research and try an unconventional approach. Backdoors can help you pull off anything from getting an accredited bachelors degree in one year for $4,000 to skipping the admissions process and graduating from Harvard for $40,000.

In addition, here are five things you can do to ensure your credential investment pays off:

1. Don’t enroll in a credentialing program if you’re still figuring out what you want to do with your life.

Many people advocate going to college as a way to “explore the world” and “find yourself.” Here’s the secret: you can do this quite well on your own, without paying a college five-figures per 36-week-year for the privilege.

I’m a huge advocate of “gap years” – intentionally and mindfully taking some unstructured time to explore the world and experiment on your own. Most colleges allow you to defer enrollment for up to two years after you’re accepted, so there’s little reason not to take them up on the opportunity.

If you’re young, rent an apartment close to whatever college you think you’d like to attend, so you’re surrounded by people your age. (You don’t have to be accepted to a university to live near campus.) Talk with professionals in whatever field you’re interested in exploring. E-mail or call a professor or TA in your intended field and ask them which books you should read, who you should talk to, and which conferences you should attend. By showing more initiative than most enrolled students, you’ll receive help exploring any field you’re interested in – before paying tuition.

Even accounting for living costs, gap years are an inexpensive but valuable education – your time is fully your own, and you can invest that time in any way you deem best: starting a business, meeting people, traveling, or doing research on your own. (Partying is also an option, if that’s important to you.)

You can also use this time to optimize the remainder of your education and credentialing. Find a way to graduate in 2-3 years instead of 4-5 (by planning your course load and testing out of classes), and you can easily save tens of thousands of dollars.

2. Don’t seek a credential in a field where skills and experience matter more than the certification.

In a recent New York Times article, Allison Brooke Eastman, an aspiring photographer, revealed that she racked up $170,000 in student loan debt pursuing a photography degree – a situation so bad her fiance broke off their engagement when he found out.

No matter how you slice it, Eastman’s credential was a waste – she could’ve learned just as much (if not more) at a fraction of the cost by picking up a top-of-the-line camera, buying a computer and a Photoshop license, paying for tutoring with a pro, and shooting pictures until her shutter wore out.

That’s what Mark Cafiero, a professional wedding photographer in Denver, did – he’s a self-taught photographer who’s been shooting photos for most of his adult life. Mark regularly charges over $4,000 to photograph a wedding, and he’s booked solid. He has also created two other successful photography-related businesses on the side. No one cares whether or not he has a degree – his skills speak louder than any piece of paper can, and he has more work than he can handle.

3. Don’t seek a credential when the up-front cost is more than a year’s starting salary in the field.

The field you intend to work in matters enormously. There’s no kind way to say this: if you pay $100,000+ for a degree in a uniformly low-paying field like social work, you’re a fool, and your credential will probably ruin your life. Sad, but true.

Before committing to a field and irreversibly loading yourself up with debt, interview/shadow/intern with people who are actually doing what you think you want to do. Ask about what it took to obtain the required credential. Ask if their investment was worth it. If you get the impression that they regret their choice, think twice.

4. Don’t seek expensive credentials in fields where jobs may not exist.

No credential will help you get a job if there are no jobs available. Some industries and markets have become financial death traps that require you to obtain expensive credentials to enter, only to discover no jobs exist to pay the student loan bill. The worst thing you can do is assume “it’ll all work out” without doing the research.

Law is a perfect example – a field that, for decades, was known for producing graduates that were able to immediately secure stable, high paying jobs. Borrowing huge sums of money for law school was a necessary evil, but expected compensation was more than enough to foot the bill.

Many recent law school graduates are now unemployed, but have over six figures in non-dischargeable debts. Here’s a common story of the Student Loan Death Spiral in action:

“I was admitted to one of the top 14 law schools in the country. And while I did well there I was forced to take out $150,000 in student loans. I know that is a lot of money but I figured this is prestigious, I can get a job making six figures. 2 years after graduation I was still unemployed… I filed for bankruptcy (which got rid of my $50,000 of credit card debt) which did nothing to stop the loan officers from the DoE. As it stands now I owe $412,329.57 (they expect monthly payments of nearly $4,000) and I am still unable to find a job. I am screwed, I think I will probably kill myself.” (Source)

This is a structural supply and demand issue that’s not likely to resolve itself in the near future. In short, this guy is royally screwed.

The same general principle applies to jobs that have traditionally been considered prestigious and high-paying, leading to oversupply. Take being a college professor: there are far more PhD-holders than available tenure-track jobs, particularly in the humanities. To make matters worse, having a PhD means that employers outside of academia consider you “over-qualified” for jobs, and won’t hire you. The PhD glut means that for every teaching position, there are thousands of possible candidates who are willing to work as adjuncts for low pay, just to do something. It’s like playing roulette: the only way to win is not to play.

An extra note of caution if you think that you’re smart and ambitious enough to beat the odds: that’s what everyone else in the market was thinking when they signed on the dotted line. Beware Excessive Self-Regard Tendency – if the structure of an industry is not in your favor, it doesn’t matter how smart or skilled you are.

As a general rule, avoid entering markets where the suppliers are desperate for whatever work they can find.

5. Borrow as little as possible, then mercilessly negotiate your debts.

The more you borrow, the higher your risk and the lower your return on investment. Pay as little for your credential as you possibly can, and find ways to pay for the rest without taking on debt. Here are a few things you can do to minimize your borrowing:

  • Get as many scholarships, grants, and assistantships as you can.
  • Work a part-time job or freelance while in school to pay for expenses.
  • Minimize your daily living expenses, so you’re not racking up credit card debt alongside student loan debt. (For extra credit, live in a van.)
  • Participate in paid co-op and paid internship programs that have a record of hiring participants full-time after graduation.
  • Graduate as quickly as possible – less time in school equals less tuition and fewer fees.

Once you’ve reduced your total debt load as much as possible, do everything you can do negotiate the best possible interest rates with your lenders, and set up automatic payments to avoid unnecessary fees. This is a classic example of Ramit’s 85% rule – a few hours here can save you tens (sometimes hundreds) of thousands of dollars throughout your life.

Whatever you do, don’t buy the line that student loans are “aid” – loans are actually reverse aid that makes your total cost much higher. The quickest and easiest way to screw up your life is to take on too much debt, so minimize your total debt burden as much as possible.

Remember, the primary value of the credentialing process is the credential itself, so the best strategy is to optimize for total cost and speed. After you graduate, focus your time and energy on doing real work and investing in your knowledge and skills on your own.

DIY has the best ROI

Most of the people who go to college say the same thing: most of the value of the experience had nothing to do with the school itself. As Ramit mentioned a while ago in “Your College is Not a Technical School”:

I think I could probably learn 80% of my college career simply from reading the books. But the last 20% – the hardest and most valuable part – came from talking to people, bouncing ideas off them, doing my own startup stuff, and making a bunch of mistakes. And I did all of this in the relative safety of college, where the worst that can happen is you get a “-” next to one of the letter grades on your transcript…

In the end, I think it’s actually more risky to focus exclusively on classes. Why? Because you have to compete against everyone else who will be trying to get jobs using the same criteria: grades. I hate competing against other people directly, so I’d rather simply go around them.

I agree with Ramit – those things really are the most valuable parts of college, and they have nothing to do with college itself. The freedom to experiment, explore, and socialize are the true benefits of the college experience – classes and tests mostly get in the way. Why pay unnecessary rent to a university for benefits they’re not actually providing? Might there be other viable ways to reap these benefits?

You can learn the essentials of most skills far more quickly and less expensively by reading, researching, traveling, meeting people, making friends, and experimenting on your own. With a little curiosity, hard work, and dedication, you can succeed on your own terms – and save a ton of money in the process.

Real-world experience (and results) will always trump credentials when it comes to getting rich. If you want to start a business (which is the quickest way to become a CEO), you don’t need a credential – what you really need are Economically Valuable Skills, a solid business idea, and a willingness to test it.

If your work can provide benefits that other people want or need badly enough to pay for, they simply won’t care whether or not you have a credential. Money in the bank speaks for itself.

As for potential employers, think about it from their perspective:

  • Would you rather hire someone who took marketing classes in college, or someone who actually helped a business get a 1200% return on their marketing investment?
  • Would you rather hire a random computer science major, or someone who’s actually built a fully functioning web application with real, paying users?
  • Would you rather hire someone who has taken a leadership class, or has actually recruited, lead, and managed a functioning team?

The more you invest in learning Economically Valuable Skills and gaining real-world experience, the more economically successful you’ll be. Learning the basics on your own, or enlisting the help of practitioner teachers, will help you learn the fundamentals without mortgaging the next 20-30 years of your life.

Mastering the art of business is how you get rich. If you’re ready to get started, you don’t need to wait for an acceptance letter from an Ivy League school. Here’s how to get started immediately:

  • Read great books. Authors spend years distilling their wisdom and experience into a form you can buy for less than $20, or borrow from the library. There’s no better educational bargain out there. Here’s my curated list of the best business books to help you get started.
  • Take business courses from practitioners. Learning directly from people who are already doing what you want to do is a great way to accelerate your learning process. Online business courses like Ramit’s Earn1k and my Personal MBA Business Crash Course can shave years off of your learning curve, and are worth the investment. (Watch out for “get rich quick” schemes, though – there’s no such thing as an effortless, instant path to financial success.)
  • Start your own business. Owning your own company is the quickest and easiest way to learn the ropes. Bootstrapping your own venture, even a small one, will teach you an enormous amount about how businesses actually work – skills you’ll use for the rest of your life.

Here’s to a rich, successful life – without unnecessary debt.

Josh Kaufman is a business teacher and the author of The Personal MBA: Master the Art of Business. He teaches craftsmen, programmers, designers, artists, and professionals how to learn the fundamentals of modern business without mortgaging their lives. Learn more at PersonalMBA.com.

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