‘Don’t borrow for college,’ warns Harvard economist’—why he says it’s a ‘waste of money’

'Don't borrow for college,' warns Harvard economist'—why he says it's a 'waste of money'

Thinking of borrowing for college? Don’t do it: It’s far too risky, far too expensive and, in many cases, a waste of money.

These are strong, unexpected words coming from a college professor and economist. To be clear, I’m not saying anyone should give up on getting a college degree. But there is a much cheaper college route — and it doesn’t require becoming indentured to a ruthless, unforgiving lender, namely Uncle Sam.

Think about it: How many of us would borrow at a high to super-high interest rate for the opportunity to invest in something with a 40% chance of a complete loss? Not many.

But 18-year-olds face these odds when they borrow for college. Two in 5 will enter the hallowed halls of academia only to drop out. The majority will have borrowed for the privilege. As for college graduates, over two-thirds will leave in debt.

Parent PLUS loans are burying families in college debt

Outstanding student loans now total $1.7 trillion — larger than credit card debt. Some $100 billion constitutes borrowing by parents on their children’s behalf.

These “parent” loans likely represent additional borrowing by the children as the parents either guilt their children into repaying or extract repayment in the form of leaving a smaller bequest to their children.

Given that the true borrower of “parent” loans is unclear, no one knows the full extent and distribution of informal plus formal student debt. Today’s college students are graduating with close to $33,000, on average, in formal student loans. About one in seven formally owe over $50,000.

Uncle Sam is now charging college students interest at 3.74% on their borrowing, up to a four-year maximum of $32,500. But there’s no limit on what he will lend to “parents.” And the current rate on “parent” loans is 6.28%! That’s over four percentage points higher than what Uncle Sam pays when he borrows long-term.

How to attend college and not go into excessive debt

Do your research

If you’re from a low- or middle-income family, colleges with high prices may end up being cheap because the net price they would charge you is very low. It’s important to comparison shop to understand each school’s net price.

Parents need to take steps early to limit at least the specific assets, if not the income, that will raise their children’s net college price given what enters the government’s needs-based formula.

And applicants must form their own research-based rankings of the departments of interest in the schools to which they apply. National rankings lists are popularity polls; they aren’t serious comparisons of research excellent — which, in the end, is the basis of outstanding teaching.

As for Uncle Sam…

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