Tuesday, October 28, 2014

College for Two Kids Costs Parents One Million, One Hundred and Twenty-One Thousand Dollars

I know the headline seems unbelievable, but please read the LA Times story below about the Madden family for the details:

Parrents, too, could use a break on student loan debt

by Kerry Madden

Sen. Elizabeth Warren has been fighting the good fight for student loan debt reform. As
she put it recently: "Millions of young people are just stuck. They can't buy homes, they
can't buy cars … all because they are struggling under the weight of student loan debt."
I hope she gets a reform bill through Congress. But I also hope that she and others who care about
education debt relief will expand their sights on loan reform to another group of people who can't
buy homes or new cars because of college loan debt: parents.

My husband, Kiffen, an elementary school teacher, and I have three children, spread out in age.
The two older ones went through public elementary, middle and high schools, and our youngest,
now a high school sophomore, is following in their path. But we wanted them all to have the option
of attending four-year colleges of their choosing. 

Our son went to UC Santa Barbara, our daughter to Sarah Lawrence. They both got some aid and
they worked to help pay for their educations, but we financed a total of about $120,000 of their
education with Parent PLUS loans. I'm not asking for absolution from that debt, but every time I
make another pot of chicken soup and wonder how far I can make it stretch, I think about what
lower interest rates would mean for us.

The master promissory notes we signed for our kids through the Department of Education Direct
Loan Program made us responsible for 80% of the amount borrowed, while our children are each
responsible for 20%. The Parent PLUS loans we were given came with an average interest rate of
about 8% annually. The kids' interest rate was 3%. All of the loans were dispersed through the
Department of Education and are managed by Sallie Mae.

We have consolidated those loans into one automatic payment of $954.42 a month. Barring a
miracle, Kiffen and I will make our last installment when we are nearing 75. By that time, with
interest, we will have actually paid about $300,000 for our $120,000 in loans.
We qualified for all this borrowing because we have good credit and pay our bills on time. But
continuing to do that with the added education debt has required some sacrifices.

In 2009, facing the prospect of having a second kid in college, I accepted the only tenure-track job I
could find, which happened to be at the University of Alabama at Birmingham. But we couldn't
afford for Kiffen to give up his tenured job in the Los Angeles Unified School District and the
retirement benefits he is slowly building. I love my job, and Kiffen loves his, but we hate living
apart so much of the year.

Our youngest daughter, now 15, attends the Alabama School of Fine Arts in Birmingham, a public
school. She adores school and makes excellent grades, and although we try not to pressure this
sweet kid, she understands that to go to college, she will need to get close to a full ride. As her big
sister says, "OK, no pressure there!" But we simply can't go any deeper into debt.

After Kiffen and I graduated from college, I paid about $65 a month for 10 years on my loans, and
he paid about $160. Our parents didn't go into debt putting us through college, and the debt we
took on was manageable. But education costs have skyrocketed, and middle-class families like ours
are particularly hard-hit.

For years now we've done everything we can to maximize our income. Kiffen has taken every
possible course designed to move him to the top of the teacher salary scale. And in 2010, I took a
second job teaching at Antioch University, which is a low-residency MFA program in Los Angeles.
But it still feels like we're chipping away at a mountain. We've paid off one car now. And all three
kids' braces are long paid off. We've never been able to afford to buy a home, though. And last year,
we were evicted from the Silver Lake home we had rented for 15 years after it was sold to a flipper,
who now has it on the market for $1.3 million. Rent on our two homes, in Birmingham and Echo
Park, comes to more than $3,000 a month.

Kiffen likes to point out that we are rich in love and friends and family, and this is true. But we are
also rich in stress.

When Warren says that "exploding student loan debt is crushing young people and dragging down
our economy," that's true.  But it's crushing middle-aged people too, and I'm hoping she'll spare a thought for us as well. In the meantime, there has been one upside: I've developed some amazing chicken soup variations.

So where's the $1.1 million, you're wondering?  Here's the math with a few assumptions to facilitate the calculations:

Assumption 1 : The Maddens are 45 years old.  Mrs. Madden said they were middle aged, so I'll go with that.

Assumption 2:  They'll be making payments for the next 30 years, since the last payment is planned at age 75

Assumption 3:  They could make 7% annual return on any money invested over the 30 year period.

Now, what if they hadn't taken out the student loans?  Well, the $954/month is real money that they are paying out today.  If they hadn't taken out the loans and instead plowed the $954 into equities for the next 30 years at an annual return of 7%, they would indeed have $1.1 million at the end of the thirty year period.  Instead, they will end the 30 year period with not much more to show for their "investment" in their children's' educations than an empty payment coupon book.

The Maddens think they will have paid about $300,000 over thirty years, but the student loan debt will actually have cost them almost four times that amount.

The real message here is not that Elizabeth Warren needs to craft some further student loan bailout scheme, it's that people should avoid student loans altogether.

Admittedly, I wrote the headline thirty years too early, but I bet it's pretty accurate.  And that's pretty sobering isn't it?



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