The Wall St. Journal had a story on February 13, 2010, about the growing problem of student loan debts and the consequences of defaulting on student loans.  The story mentions many people who  now have massive student loans, including the medical doctor who graduated from med school in 2003 with a $250,000 loan debt that has ballooned into a $555,000 debt after default, penalties and interest.  On so many levels our society encourages borrowing without any consideration of the consequences.  Some segments of our economy are based on borrowing.  Higher education is one of the worst offenders of the borrow now and pay later philosophy.  Without students’ ability to  borrow virtually an unlimited amount to pay for higher education, our college and university systems would be forced to adhere to the laws of economics.  The government backed student loan system allows higher education to raise the cost of eduction without any consideration of the cost of living or the laws of supply and demand.

From the Wall St. Journal:

Unlike other kinds of debt, student loans can be particularly hard to wriggle out of. Homeowners who can’t make their mortgage payments can hand over the keys to their house to their lender. . . . But ditching a student loan is virtually impossible, especially once a collection agency gets involved. . . .There is an estimated $730 billion in outstanding federal and private student-loan debt . . . and only 40% of that debt is actively being repaid.  The rest is in default, or in deferment, which means that payments and interest are halted, or in ‘forbearance,’ which means payments are halted while interest accrues.

If students were not given a blank borrowing check, colleges and universities would enroll far fewer students.  Many colleges and universities would go out of business because the  number of students who could afford an education would be a much smaller number than today.  Consider a case in point.  There is a law school in San Diego, California, called California Western School of LawU.S. News & World Report, the bible of law school rankings, does not even give a rating  to Cal Western.  Notwithstanding that Cal Western is unranked in U.S. News, the school is charing students $38,400 tuition for the 2009 – 2010 school year.  Approximately 305 students enrolled for the 2009 – 2010 school year.  Annual tuition times 305 students equals $11,712,000 a year gross revenue.  Can you spell C A S H  C O W?

Cal Western estimates that the total cost for a single year of law school this year is $60,498.  Number one ranked Yale law school’s tuition for 2009 – 2010 is $46,200.  Yale estimates that the cost of one year of law school (room, board and tuition) is $67,240 for a single student and $72,340 for married students.  Are you kidding?

A Yale law degree for $201,720 and a Cal Western law degree for $181,494!!  These numbers do not include the opportunity cost, i.e., do not take into consideration the amount of money not earned by a student during the three years of law school.  A student who gives up a $50,000 a year job to go to Cal Western is really paying a cost of $331,494.  These numbers are bigger than the average home cost in most areas of the United States and homes can be financed over thirty years.  Consider the monthly payments on a $181,494 debt repaid over 10, 20 and 30 years at six percent interest:

  • $2,005 per month ($24,059/year) paid over 10 years = $240,595
  • $1,294 per month ($15,528/year) paid over 20 years = $310,514
  • $1,083 per month ($12,996/year) paid over 30 years = $389,784

According to the website, the average starting salary in 2009 for lawyers was $45,919 – $69,351.  Would you give up a $50,000 a year job to incur debt of $181,494 to spend three years in school a get a job the pays $45,919 a year?  Unfortunately, too many young people are doing just that.  For an interesting and detailed economic analysis of the cost and benefits of a law school education, see “Mamas Don’t Let Your Babies Grow Up To Be…Lawyers” by Herwig J. Schlunk, Assistant Professor of Law at Vanderbilt University School of Law.  The abstract for this article states:

This essay treats a legal education as an investment, and asks the question of whether, based on known costs and expected benefits, such investment should be undertaken. The inquiry will necessarily differ from one potential law student to another. But for three posited “typical students” at private law schools, the investment is shown to generally be a bad one.

For more on this article, including some eye-opening tables comparing the economic costs of law schools to three typical types of law students, see the story in the Tax Prof Blog called “Law School Is a Bad Investment.”

All people who are considering borrowing money to go to school should consider the total cost of the education, the earnings they will lose while in school, the realistic expectation of getting a job in the desired field and the realistic starting salary for their desired post education job before incurring massive debt that could be a burden for most of their adult lives.  Do not lose sight of the fact that big debt has big and lasting consequences.