Yellowstone Financial, Inc.

The higher education credit card

Almost two weeks ago, Boulder hosted its first presidential visit since the Eisenhower era. President Obama’s stop at The Sink and the yogurt incident became local legends. Now that the phalanx of helicopters has left town, we should think about the topic of his speech — higher education and student loans.

The thrust of his talk was that Congress should vote to keep the interest rate of subsidized Stafford student loans at 3.4 percent. While this change would help improve student finances by lowering interest payments by $1,000 over 10 years, truthfully it’s a drop in the bucket when you consider that the median debt for graduating college seniors was more than $27,000 in 2008.

It’s no secret that college costs continue to outrun inflation to an alarming degree. According to the Economist magazine, median household income has increased by a factor of 6.5 in the past 40 years, with the cost of an Ivy League education by 13 times, an in-state education by 15 times, and an out-of-state public education by 24 times.

Rather than quibble about $100 of interest a year, the real question is how has higher education grown to become the second largest purchase that we make in our lifetimes? Rather than worrying about the interest rate of the purchase, you should focus your efforts on keeping the price of higher education reasonable.

We see this struggle among parents with kids who will be entering college soon. Your children have worked hard to excel in school and have gained admission to elite universities. You have planned and saved for college, but have not been able to amass enough to cover all of the costs. While your child was toiling away in school, you were wondering how you would pay for it all. How can you tell your children to turn down their top choices when they have held up their end of the bargain with a superlative high school effort?

The answer for most families is student loans. Your children may be eligible for unsubsidized Stafford loans, although most undergrads can only qualify for $5,500 for the first year. When in-state public universities have annual total costs of $22,000, most students must borrow additional funds. So the parents sign up for PLUS loans at almost 8 percent interest. Interest begins accruing the minute you take the funds. Unlike the Stafford loans, PLUS loans do not have a set limit, excepting the total cost of education.

With PLUS loans, the parents have been given an educational credit card. If you have good credit, you can borrow practically the entire cost of college. This is debt that will stay with you. Even the bankruptcy process is not guaranteed to discharge student loan debt. With such high credit limits, it’s no wonder that the total amount of student loan debt now exceeds $1 trillion and now surpasses credit card debt.

Often, parents sacrifice their retirement savings to pay for college. If you think you’re doing your children a favor, imagine them worrying about your finances once you retire.

Instead of maxing out the education credit card, do everything possible to keep educational costs down. Ask your children to work part-time and summers, consider in-state public education, and take a close look at universities where your child would be in the top quartile of admitted students, thus positioning him or her for merit aid.

We have been hoodwinked that taking out more than $100,000 in student loans is an acceptable price for higher education.

Your retirement may depend on seeing through this delusion.