Real Cost of a College Education (Part 1)

According to the policy think-tank the American Enterprise Institute (AEI), low-income families have a tendency to overestimate the cost of college. By overestimating cost of college, some of these families make the decision not to send their children to college at all. Other families advise their children to “aim low,” avoiding colleges and universities that are perceived as expensive and sticking instead to trade schools and community colleges.

“Sticker Price” Not Real Cost of College

According to AEI, part of the problem is the “sticker shock” with the cost of college. Take Stanford University, one of the most highly respected universities in the nation, and compare its sticker price to the nearby Cal State Long Beach. If you judge the price of these two universities by the sticker price alone, it would be easy to understand why some people would choose to avoid Stanford based solely upon cost. Stanford estimates that the cost of college for one year, including tuition, books, housing, food, etc., will cost each student a grand total of almost $56,000. By comparison, Cal State Long Beach estimates one year’s cost of college to be around $21,000. Even though the second school is closer to affordable, many low-income families might still feel that $21,000 is still completely out-of-reach.

However, when the average aid package, including the grants, scholarships and federal loans for low-income families, is taken into account, the one year cost of college at Stanford drops to about $4,500 and one year at Cal State Long Beach drops to $3,600. While the cost of college at the public university, Long Beach, seems much more reasonable, the average full-time male student there only has a 51 percent chance of graduating. At Stanford, 93 percent of its full-time male students graduate. Furthermore, due to its prestige, it’s reasonable to guess that graduates of Stanford will probably have an easier time being employed quickly at a good, high-paying job right out of school than the Long Beach students. For an extra $1,000 per year, that seems like a pretty good deal.

In 2010, the research firm Polimetrix did a survey to find out if parents understand that the “sticker price” cost of college is not the final price they will actually pay. While the majority of parents surveyed had at least some notion that the prices provided by schools were higher than what they would pay after aid packages were provided, parents in the lowest income bracket were the least likely to understand this concept.

What all this means is that many children of low-income families may believe that college is not a realistic option for them. Not bothering to even apply to a university, they may find themselves stuck in low-earning jobs that require only a high school diploma for years before they eventually make an effort to further their education.

What About the Student Debt Crisis?

Even when low-income and middle-class families understand that most traditional students will not pay the full-price cost of college for a typical four-year degree, they still worry about saddling young people with an incredible burden of debt.

For example, the website And Then We Saved features the story of Jeena Cho, a resident of Northern California who owed more than $100,000 in student loans after she graduated from law school. Paying the minimum payment on this debt each month, stretched over 25 years, would mean that Cho would eventually pay close to a quarter of a million dollars when interest was taken account.

Cho’s story has a happy ending; she and her new husband have started attacking their student loan debt through student loan consolidation and have already paid off $50,000 in the last two years. For many other graduates, however, the ending isn’t so happy. For as many stories as there are of people paying off their student loan debts, there are plenty of horror stories of people who go bankrupt due to student loans.

Thanks to the media and the nature of the problem, most people’s fears regarding student loans are almost definitely exaggerated. To start with, huge mountains of student loan debt like Cho’s are really quite rare. Consider these statistics, recently provided by TheAtlantic.com:

  • 5.9 percent of all graduates carry debt loads between $50k and $75k
  • 4.2 percent of all graduates carry debts between $75k and $150k
  • Only 1.2 percent of graduates have more than $150k in student loan debt
  • More than 40 percent of student loan debt ranges between $1k and $10k

In other words, if you go to college as a person from a low-income to middle-income family, will you graduate with student loan debt? The answer is probably “yes.” Will that debt be as terrible as you’ve been led to believe? The answer is probably “no.”

Next: Plan to Deal Swiftly with the Debt You Owe

Even if you don’t graduate from college with as much student loan debt as the horror stories have led you to believe you will, paying off student loan debt quickly still requires that you have a plan in place, preferably before you graduate. After all, even $8,000 of debt is nothing to brush off, especially not when you’re a brand new graduate just establishing your career. In the next post, therefore, we’ll take a look at some strategies for thinking about educational paths, career paths and ways to pay off student loan debt swiftly.