Episode #291: Ron Lieber, The New York Times, “If You Look At Private Colleges And Universities, On Average, They’re Discounting Their Tuitions by 52%”
Guest: Ron Lieber is the author of The Price You Pay for College: An Entirely New Roadmap for the Biggest Financial Decision Your Family Will Ever Make. He has been the “Your Money” columnist for The New York Times since 2008. Before coming to The Times, he wrote the “Green Thumb” personal finance column for The Wall Street Journal and was part of the startup team at the paper’s Personal Journal section. Ron Lieber is the author of The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money, which was an instant New York Times and Wall Street Journal bestseller when it was released in 2015.
Date Recorded: 2/10/2021 | Run-Time: 44:40
Summary: In today’s episode, we’re talking about what Ron describes as the biggest financial decision your family will ever make: paying for your child’s college tuition. We begin with some background as to how the sticker price of college has soared over the past few decades. Then Ron explains what merit aid is, how it can save you tens of thousands of dollars, and how schools are using it to compete with other schools for prospective students. Ron walks us through some of the best ways to start preparing for this big expense and why he believes you should talk to your son or daughter before they enter high school about all the factors impacting this important financial decision.
As we wind down, Ron explains what policy suggestions he’d love to see implemented to help fix the student debt crisis.
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Links from the Episode:
- 0:39 – Intro
- 1:38 – Welcome to our guest, Ron Lieber
- 2:13 – Ron’s first book – The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money
- 3:56 – Ron’s path to writing about saving for college
- 5:13 – Answering the question of what to pay for college
- 7:30 – The feelings behind choosing a school
- 8:26 – The unchanging residential undergraduate education industry
- 10:02 – Breaking down the price of college
- 11:22 – Need-based financial aid
- 12:19 – Merit aid’s beginnings as a marketing scheme
- 14:28 – Private schools that turned around their market positioning with tuition leverage
- 15:26 – The Alabama-Illinois bidding war
- 16:46 – Selectivity and full-tuition students
- 18:51 – Admission via donations
- 20:22 – The complexity of figuring out the price you should pay for college
- 21:48 – When to start thinking about college for your kids
- 22:28 – Getting clarity on what you’re able and willing to pay for college
- 25:01 – Understanding what your kid needs in a college
- 27:35 – The $1.7 trillion experiment
- 29:25 – High default numbers on student loans
- 30:14 – Federal student loan debt safety
- 31:15 – Student loan debt and the economy
- 32:55 – Non-partisan policy solutions
- 34:55 – What 2020 showed us about residential undergraduate education
- 36:53 – Why the status quo is unlikely to change anytime soon
- 38:22 – Income share agreements
- 40:57 – High Point University
- 43:55 – Where to find Ron Lieber – RonLieber.com; Twitter: @RonLieber; Instagram: @RonLieber
Transcript of Episode 291:
Welcome Message: Welcome to the “Meb Faber Show,” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Meb: What’s up, friends, today? Great episode. We’re welcoming back our guest who’s been the Your Money columnist for “The New York Times” since 2008, and recently came out with a new book, “The Price You Pay for College.” In today’s episode, we’re talking about what our guest describes as the biggest financial decision your family will ever make, paying for your child’s college tuition. We begin with some background as to how the sticker price of college has soared over the past few decades and we learn about merit aid, how it can save you tens of thousands of dollars, and how schools are using it to compete with other schools for prospective students. Our guest then walks us through some of the best ways to start preparing for this big expense, and why he believes you should talk to your son or daughter before they enter high school about all the factors impacting this important financial decision. As we wind down, our guest explains what policy suggestions he’d love to see implemented to help fix the student debt crisis. Please enjoy this episode with “The New York Times,” Ron Lieber. Ron, welcome to the show.
Ron: It’s great to be back.
Meb: What is it like, three years ago? I think last time we had you on I had a newborn right out of the gate and now almost a four-year-old. I can’t believe it, and you got a handful of kids varying ages. Is that right?
Ron: I’ve got a ninth-grader and I’ve got a kindergartner. And I’m now dying to ask whether your little one is asking you money questions yet? Is it happening? Is it starting?
Meb: A little bit. Mostly it’s about our patrol, ogres, and trolls. We’re getting there. And Moana, Moana right now. Your book… Listeners, we’ll post this to the show note links. The last time we talked, we talked about one of my favorite personal finance books, “The Opposite of Spoiled,” which applies not just to kids but also to big kids too. And you got a new book out called “The Price You Pay for College.” Congrats on the new book. You just had all this time during quarantine, just thought you’d write another book?
Ron: I wish that was how it went. In fact, the time during quarantine which I very much did not have because we lost a ton of childcare for the kindergartner and the demands at my day job to write about personal finance at “The New York Times” approximately quintupled in terms of the demand for my services. No, what I was actually doing during that time with my third arm or my fourth arm was revising the book that was already done. I had pressed save on it. We were, sort of, ready to go, like, the first week in March. And then we were like, “Shit, we’re not going to be able to do this right now. We need to wait and see what happened.” And so we hit the pause button and thought, “This will all be over in September when everybody goes back to school.” The next couple of months, it became clear that it really was going to be over in Taiwan, South Korea, China, Australia, other countries, but not here. And so here we are. So I had to figure out how to essentially write through the manuscript in anticipation of what would happen when people came back to school and also in anticipation of what kind of shopping decisions, different ones, the parents were going to need to make now that it was clear that we really have no idea when this will be over.
Meb: Well, what was the inspiration? Was it your 14-year-old, sort of, coming of age, getting ready for this whole process? Was it something that you got feedback from the columns you wrote, where people were like, “This is just such an impossible, unbearable, complicated situation? What was kind of the origin story?
Ron: Well, the real origin story goes back to when I was in high school and applying for college and applied for need-based financial aid myself. And we ran into a guy running this incredible side hustle. He was the assistant director for financial aid at Northwestern University, but he had the side business going where he was taking cash from local families and essentially tell them how to beat the financial aid system, how to fill out the financial aid forms and, you know, do it all right, and how to appeal and the things that nobody tells you if you don’t find an expert. And so, in some ways, it’s no big surprise that I grew up to be a personal finance writer, somebody who’s bid is beating the system, encountered Roger Kester back in the fall of 1988, and having him helped me work my way through all of that stuff. Fast forward a bunch of years, I become a dad, start saving in a 529 account, like a good little personal finance writer, start writing for “The Wall Street Journal” at the time about how to save for college. A couple of years later, I get to “The New York Times,” a whole bunch of people are watching out during the recession with, you know, $100,000 in undergraduate loans. What the hell happened there? So I start writing about how to pay for college or how not to pay for college as the case may be. Flash forward, another 4, 5, 6, 7 years, I’m starting to age into the cohort, where my friends from college and high school, some of my peers in the workplace and, you know, a whole bunch of readers having sensed my interest in this topic are all approaching college with their own kids, if they were early breeders or earlier than me. And they’re saying a couple of things. First of all, “Ron, nobody raised a flag and told me that the flagship state university in my state had passed $100,000 for four years. What the hell happened here? That’s outrageous. Or the private college my parents managed to pay for 25, 30 years ago, it’s now over $300,000. And I’m not sure my kids can get in. But even if my kid can get in, even if I do have the ability to pay, I’m not sure I should have the willingness.”
So they said, “Your paper, ‘The New York Times’ doesn’t shut up about how we live in the era of big data. Where is the big data set that tells me why Northwestern University in Evanston, Illinois is $100,000 better than Kenyon College at a discount in Ohio? And why Kenyon is $100,000 better than the University of Illinois, Champaign, Urbana. And I said, “I don’t know. I don’t think that dataset exists.” And then it occurred to me in a flash, you big dummy, you’ve been spilling all of this ink over how to save for college and how to pay for college, but you missed the most important question of all, what to pay for college. You missed the value question. And now that this thing has spiraled past $300,000 for four years, if you don’t get any discounts, and you got a couple of kids, pretty soon it starts looking like the biggest financial decision your family will ever make. And not only is it the biggest, but we’ve got a giant pile of money involved. We’ve got a whole bunch of complexity. We’ve got a system that’s partially opaque and we’ve got a whole bunch of feelings getting in the way of level-headed decision-making because as ever, money equals feelings. So this felt like my sweet spot, big numbers, lots of complexity, lots of feelings. These are the things that I like to write about. And moreover, it felt like a new personal finance question altogether. And we don’t get those very often. You know, in the world of investing, in the world of personal finance, we don’t see a whole lot of new questions, but the question of what to pay for college, that felt like a new one and it felt like one that I could not answer in one newspaper column, or 10, or 15, or 20. And that’s why I wrote the book.
Meb: Imagine every listener is just rewinding back to their time when they were at school or even thinking about their current situation with their kids or having been through it, and it brings up so many memories. People love to think in terms of personal finance being black and white. Hey, here’s how you optimize portfolio. Here’s how you should take out a loan to do this, that, and the other. This is how you should pay down debt. But the squishy money equals feelings is such an important part of it. I mean, if you were to list the reasons why I ended up choosing the school that I did, a lot of it honestly, it was like the most picture-perfect, beautiful spring day. There’s my tour guide who is a beautiful girl and sundress. None of those reasons were the engineering school, right? So there’s so much involved in it. We’re going to, kind of, walk through a lot. My first question is, it seems like college and universities are such a big business, what’s changed, and then we’ll kind of talk about the state of affairs today and then walk through this whole darn thing.
Ron: First of all, we are correct to discuss it as an industry. We should treat it as such. We should analyze it as such. We should shop it as such and we should look at its marketing schemes as such. As to the question of what has changed, I’m not sure there is any industry in the United States of America, or maybe even on Earth, that has changed less than residential undergraduate education in a generation. Some of the buildings are nicer, newer, maybe a little more technology in the classrooms. But other than that, it’s kind of the same, not a lot of new majors, a lot of the professors, the same people who were there 30 years ago, a lot of the buildings look the same. Can you name a single residential undergraduate institution in the United States of America of note that has come into existence in the past generation that is nonprofit? You can count them on half of one hand, essentially. And the ones that I’m thinking of are at least 20 years old. So, not much new, right? But if you look over on the pricing side, that’s where things have changed a lot. And this is where otherwise sophisticated people get really screwed up and screwed over, because they, kind of, look at what they’re getting from their alumni societies if they went to college or they look at what they’re seeing on the tours and it all looks kind of familiar and kind of similar from place to place. But the pricing, wow, has the pricing change, and that is what people need to be concerned with.
Meb: And when you say pricing, you mean going up?
Ron: If this was simpler, I wouldn’t have felt compelled to write a book. So let’s see if we can break it down. First of all, the list price. That’s what you’re referring to. And when we say that the flagship state universities, now “cost” $25,000 per year or more all in, including room and board before discount, that’s what we’re talking about, the retail price, the rack rate, did all the private colleges and universities. At the University of Chicago, it is now $80,000 per year. So 325, essentially, at a minimum, if you’re paying full price, and lots of folks are there. So that’s the list price. Then if we’re to talk about averages overall, if you look at private colleges and universities, on average, they are discounting their tuitions by 52%. It seems crazy to a lot of people and, sort of, unbelievable, but we’re talking about averages and we’re talking about all the private colleges and universities in America. Now, you are not average, your kid is, of course, above average, way above average. And the institutions you’re thinking about for your above-average kid are themselves above average in selectivity, prestige, whatever. This is how it goes with many parents, particularly many parents of younger children who have high aspirations for them. So, what exactly is going on at those schools? Well, it depends. So, let’s go back to Ron Lieber, 1988. He’s applying for need-based financial aid. That system, still pretty similar to the old system, depends on your income, depends on your assets. You got to fill out this thing called the FAFSA. And if you’re applying for a private college university, you probably have to fill out a second form called the CSS Profile. School sizes you up, decides if it wants you at all, and then sometimes it decides how much it wants you and apportions your need-based aid accordingly. And maybe there’s going to be more loans in that package or maybe there’re going to be more grants that you don’t have to pay back. And then you’ve got to decide whether that looks affordable to you. So, that itself is not simple. I’m trying to predict what kind of offer you’ll get from a school. Also not simple. You’ve got to fill out this thing called the Net Price Calculator that every school maintains to try and even get an estimate of the offer they might make. And then that might change if your data changes or obviously if you filled out that calculator wrong.
This is the simple part. The less simple part is something known as merit aid. And that is a separate parallel track of financial aid that has hived itself off from the old-fashioned need-based system. And that exists along essentially a parallel set of train tracks. And sometimes the train crosses over in complicated ways, so we won’t even get into now. But merit aid works like so. Best to think about it as a coupon scheme, a marketing scheme, a form of leverage. The way it began in earnest was in the 1990s in states like Ohio, where there are a lot of above-average, but not super-elite, private colleges and universities. And the schools at the bottom of that particular food chain didn’t like where they were because people with the ability to pay were questioning whether they should have the willingness to pay the ever-rising list prices. So this school said, “We got to get out of the bottom of the Ohio tier here, so we’re going to go out and buy a bunch of really good teenagers.” And when teenagers of above-average academic prowess applied to those institutions or when those institutions went out and solicited people with better PSAT scores by buying their names from the College Board and sending a bunch of mail, they started throwing $5,000 and $10,000 at them. Giant piles of green cash money, essentially in the form of a discount. And it worked so well, that the other institutions were losing their students to these institutions that were trying to buy their way up the prestige ladder so they would improve their standing in U.S. News and more people who were willing to pay would actually apply. They started responding competitively. And then farther up the food chain, others needed to respond. And so, you know, flash forward 20 years, every single school in America except the 50 or 60 most selective ones, now have to offer some form of this merit aid.
Meb: I loved your… Was it the Alabama example where they got into, like, a bidding war essentially?
Ron: Right. And we so wish this were simpler. But to break it down even more, you’ve got to think about what’s happening with the privates and what’s happening with the publics. So if you think about the privates, there’s a, sort of, demarcation line and lately above it is Carleton College in Minnesota and Swarthmore outside of Philadelphia. Certainly, the Ivy League, Colby College in Maine. These schools do not have to throw money at kids who have the ability to pay but not the willingness and have extra high grades. They don’t have to do it. But Oberlin, they got to do it. Occidental in L.A., they got to do it. Kenyon College in Ohio, they have to do it. Even Duke University does a little bit of this. And at the University of Southern California, at Tulane University in New Orleans, Northeastern University in Boston, they have made not just an art but a science of this and have bought themselves to a spot in the market using this tuition leverage as a form of marketing for where they were a safety school or commuter schools a generation ago. And now all the schools only accept, you know, 14%, 16%, 18%, 20% of their students. They did it brilliantly. And on the public side, they decided they should get in the act too. States cut their subsidies to the schools during the last recession and the schools are like, “What are we going to do? We could jack the tuition on in-state residents, but we only have so many in-state residents. Oh, let’s market ourselves as a super cool place to go to school from people far away, who used to be able to get into Cornell or get into Tulane but can’t anymore, and let’s go out and buy them.” So, Alabama did this brilliantly. They raised their out of tuition list price to the sky and then they started throwing $20,000 coupons at above-average students from Long Island and Suburban Chicago, making everybody feel good about themselves, parents get a gold star. They managed to lure them down there for a visit and they’re like, “Wow, southern hospitality. This is a beautiful place. They’ve got an amazing football team. And they’re going to make me an honor student. And we can walk around saying that we got an academic scholarship for five years and I could put that on my resume.” So many people left the state of Illinois that the state legislature had to cough up $25 million dollars annually to create a fund to buy home state students back from Alabama.
Meb: And so, who’s paying the rack rate? Is it oversimplification? Is it just wealthy, slightly lower academic scoring students? Is that right?
Ron: Again, much depends on where you are in the food chain. I mean, you can think about it in, kind of, rank order of selectivity, percentage of students that a school is accepting. If a school is accepting fewer than 25% of its students, under 30% of its students, it’s probably not offering much of any merit aid. And maybe 50% of the people are paying full price, maybe a little more, maybe a little less. It’s a bunch of families with household incomes of $250,000, $300,000, a year or more, and a lot of international families in increasing numbers. Although there was a pause during the Trump era. They very much want to send their kids to the United States for what they perceive to be an A grade, A plus education abroad. But then you go farther down the food chain and lower and lower percentage of parents who are both able to pay full price and willing to do so at Oberlin, Kenyon, and McAllister College in St. Paul, maybe it’s 10%, or 20%, or 30% of people paying full price. Then you go the next year down the food chain of selectivity, and it’s a single-digit percentage of people who are paying, mostly International, sometimes it’s alumni, parents who are extremely wealthy and whose kids were, like, marginal in terms of their admissibility. And so, they’ve got these checks that they’re writing from the bank of, “Thank God, my kid got in. I’m happy to write you a large check so that my kid can go to the alma mater,” occasional other situations like that. And then one step more down the food chain, there are all these private colleges where 100% of the people are getting a discount, which seems, sort of, nuts when you think about it.
Meb: I was smiling and thinking about back when the scandals were going on last year. Someone on Twitter was like, “You know what one of these colleges should do, which they never will, they’ll be like, look, 1% of our students, enough of this back-scratching, donate, whatever, you get your fake scholarship on the field hockey team, we’re going to straight up auction the top 100% or 1% spots, and you won’t pay $10 million, whatever it is in the top, you know, and just make it explicit and say, ‘We’ll just do that.'” Of course, no one’s going to do that but I thought that was a wonderful free-market idea that would probably raise millions of dollars. But alas, maybe we’ll see it one day.
Ron: It wasn’t crazy at all because that already goes on. That’s how Jared Kushner got to go to Harvard. That’s how all sorts of kids, really rich kids get to go to Ivy League schools because their parents make donations. And it’s essentially a tit for tat. And Daniel Golden proved it in a fantastic book he wrote a decade ago, essentially documenting all of this. One of the ironies of that scandal was that there were all sorts of people who were essentially paying bribes to the institution, but doing so legally and nobody had a problem with it. But then there was this illegal way that the grubby lower half of the 1% was using to get in because they didn’t have the seven-figure amounts to buy the buildings that the upper half of the 1% did and they went to jail. America, right?
Meb: It’s needlessly complicated as you mentioned, as we talk about, even 20 years ago, I recall there being essentially only two pieces of information you could find back then which was “U.S. News World Report” ranking and maybe best value, and that was probably it. Everything else was, kind of, at the mercy of your guidance counselor or like you said, if you found a…lucky to have a free agent or someone who’s been through it, how should someone… So example in your seat or parents out there, when do they start preparing and how do they do it? You have a whole section in your book on hacks and things to think about that dispel, I think, a lot of ideas and common misconceptions. But walk us through, little Johnny’s going to college, hopefully, when do we start thinking about it? How do we start preparing and what are the best practices?
Ron: Let me try to answer that question this way because the real answer to your question is just way too long for a podcast, and it involves like 20 steps. I was annoyed, frankly, not only that I had to write this book, but that it had to be so long. I wanted it to be short. The chapters are really short, and you can bounce around all you want. I tried to make it super readable. But there’s just a lot to do. There’s too much to do. How much is there to do? Well, I mean, look, you’re somebody who appreciates markets more than most. In the last couple of years, not one, not two, not three but four startups, four profit startups have emerged to try to begin to sort out this madness for people, this, like, pricing, and discounting, and merit aid, and what the hell is going on and am I getting a good deal or not? And what am I missing? Four startups trying to solve for this, trying to make it so that nobody has to read my book, and they can just use software and other people’s experience to kind of benefit themselves. A partial answer to your question is that you really do have to start sooner, which I know makes me sound like a Type A freaked out helicopter parenting nut job. And, you know, we all have a little bit of that in us. But the unfortunate reality is, is that this stuff is just complicated. And the pricing system is complicated. And you want to get educated on how the system works. You know, when your kid is in seventh and eighth grade because you begin to lay the track work down and lay the record down, your kid does starting in ninth grade. And as a parent, in middle school at the latest, you probably want to begin to have a sense for yourself and with your spouse, if you have one, and with your ex if you’ve got one of those because you really don’t want to be fighting about it when the kid’s in high school about what you’re able to pay, which is a personal finance question, and what you’re willing to pay, which is both a value question and a values question. So these are complicated things, not simple. And the dollar amounts are large. It pays literally to begin to figure out how the system works and how you want to play in it when your kid is in middle school. Why? Well, I think you owe your kid an explanation by the time they start high school. They should know the rules of this ridiculous game. As much as I’d like to burn the system, that’s not something I can do alone. And burning a system this big takes decades usually. I’m just trying to help people beat the system. And you have to start sooner than most people think.
Meb: That makes sense. I mean, that’s like anything in personal finance, the saving, investing, the big muscle movements, the earlier you start, the better. And also, with everything involved with money, expectations are so important. And money is such a taboo topic. No one wants to talk about it. I remember our last conversation we were talking about the dad who came home and put all the money on the table. So this is how much we pay for rent. This is how much we pay for insurance, you know, just trying to make it tangible because kids don’t know. My number one complaint, I complain about on Twitter almost on that weekly, maybe daily is we don’t teach personal finance in school. And so, so many people are just unequipped. Anyway, assuming you have the beginnings of this having those conversations because worst possible scenarios, little Johnny gets into some super expensive school and has his heart set on it, little tears in his eyes, “Mom, dad, like, this means the world to me,” and you can’t say no, and next thing, you know, you’ve co-signed into more debt you could ever afford for the rest of your life. Kind of walk us through what are some of the things you could be doing, thinking about the main muscle movements about, hey, these are the type of aid packages I should be hiding income in Bermuda in the next six years. Like, what can we be doing?
Ron: I think it’s helpful once you’ve established what you think you may be able to pay and what you may be willing to pay. And I get that knowing what you’re willing to pay may depend on what kind of high school student you end up with and what the school seemed to have an offer or you’re an idiosyncratic kid. And every kid is idiosyncratic in some way. But you at least need to frame the discussion. And it can’t be as rote as trying to come up with some maxim, like, great or state. We won’t pay more than the State University unless it’s great. Well, how are you going to define great? Great according to whose measure? Great for what kind of kid? It just depends. I so wanted there to be some, kind of, magic algorithm that I’d be able to come up with where everybody could feed in their money and feelings and outward spout, pay no more than $240,000 for Kenyon College in Ohio and no more than $178,000 in Occidental in Los Angeles. But that’s it, right? Definitely don’t pay full price at the University of Alabama out of state. I wish It was that simple. Instead, I think you need to begin to take your kids’ temperature, starting in ninth grade prior to get a sense of, is this kid is going to thrive in an urban environment, in a rural environment? Is that not going to matter? Is this a kid who’s going to be okay at a big school with a lot of choices in really large classes where they might never meet a professor until junior or senior year? Is this a kid who has intense academic interests, the learning, the mind-blowing and the mind-growing process of being in the classroom is going to be paramount? Is this a kid who is going to graduate at 22 and work in our family business, and they’re going to start as a salesperson for five years? And we don’t really care what they learn at college. We don’t really care what kind of credential they have. What we care is that this kid of ours becomes a people person and we’ll teach this kid everything they need to know about the business.
And so, maybe, then what you really want is for the kid to go to the Flagship State University or the second or the third one, and join the fraternity or sorority with the best parties because those are going to be the kids who are extroverts, and they’re going to come out, and they’re likely to be the most affluent. And my kid is going to come out of that fraternity or sorority experience with an amazing list of connections and awesome LinkedIn profile. And those are going to be the prospects at the top of our sales funnel. And that network that our kid has bought him or herself with our tuition money at Michigan State University, or the University of Wisconsin, or at Texas A&M, that’s what we’re paying for. So much depends on what it is you’re trying to get out of it and how you’re defining college.
Meb: It’s hard, too, because the parents often have different incentives and goals than the kids do, and also look, these kids are 17 years old. And, in many cases, I mean, thinking back to all my friends, how many are actually doing even what their undergraduate degree? Half, less, the quarter, 10%. The best thing you do is make an educated guess. Let’s say you have the conversation, you start to identify some of the potential candidates and what’s at least within the realm of possibility for the majority of people, and we hear so much in the headlines about college debt. It’s just this national crisis. Maybe walk us through, is it a crisis? What are the characteristics of this borrowing, assuming you have to borrow to go to college in some format? Walk us through that whole part of the world.
Ron: So let’s talk about the economy and then let’s talk about the individual. When we think about student debt and we think about the economy, let’s start by being honest about what’s actually going on here. We are in the middle of conducting a 1.7 trillion with a T, $1.7 trillion, generation-long economic experiment with no real social controls or not many of them and we’re using children as the guinea pigs because they are under 18 when they apply for college and they fill out their financial aid forms. That sucks. That’s not how we ought to be operating. And so if you wonder why a bunch of people in the Biden administration are thinking about slicing off $10,000 in everybody’s debt with stroke of a pen via executive order and why they’re calling a cancellation, and not forgiveness, right? Forgiveness implies that somebody did something wrong. Most of these teenagers got into debt because the schools and our nation were telling them to do so when the government was, in fact, handing them the money. Cancellation implies that maybe we as a nation got it wrong. Maybe this wasn’t the way that we ought to be doing things. With that rambling preamble, there are all sorts of people who are in default on their student loan debts who have under $10,000 in debt. Their credit is racked. They are off the grid. It’s not like the education department and the cheapskates that it hires to track and service these loans are doing a great job of tracking people down, because if they could, they could get them enrolled in repayment programs and repair their credit. But so much of the debt that’s in default is under…or so many of the people, the units of defaulters are people with not a lot of student loan debt. If we wipe away $10,000 for everybody, all those people are back in good graces eventually with their credit reports. So why did that happen? How did that happen? Well, we do a terrible job of tracking them. We make people do too much that’s too complex to stay on the books with their loan servicers. And a lot of those folks got taken in by for-profit schools and then dropped out after a semester midway through.
And so they’ve got the debt but not in the benefit that comes from getting a degree. So I worry about them the most. Then there are a bunch of veterinarians and chiropractors who’ve got $378,000 in student loan debt. And those people were grownups who borrowed knowing exactly what they were getting into. And most of them have six-figure incomes and are probably going to end up being okay. As for the everyday undergraduate, as long as they don’t borrow more than the federal student loan limit, so as long as they don’t go out with their parents, get their parents to cosign a loan and get a private loan too, as long as you stay under the $31,000 $32,000, that the federal student loan program will let you borrow, you’re good as long as you finish the degree. I think the average debt is maybe 25, 26. So, a lot of people max out. Two-thirds of people who go to college end up borrowing something. So, the reason why that’s safe is that there are all sorts of income-driven repayment programs that only apply to federal student loan debt. So if you get into trouble, you can get yourself into one of those relatively easily, as long as you know to do so, which a lot of people don’t. Your payment gets adjusted according to your income until you’re back on your feet. So that’s about how it breaks down. That’s about as simple as I can put it. Where it gets complicated is, you know, for the people who are required to have master’s degrees for low-paid jobs or lower-paying jobs, like teaching or becoming a social worker, and they end up with another 50 grand in debt, that gets complicated. And the bigger macro questions that hang over us, besides the ethics of conducting a $1.7 trillion experiment on children, the other thing that hangs over us is like just how much are people delaying or forgoing business formation, home purchases, having a second child or having a third one. I mean, these are all things that matter a lot to our economy. And it is very difficult to separate student loan debt out from all the other factors that might weigh on someone before they chuck their day job and start a company or before they laid out 25 grand in down payment funds. And so, there are a lot of strong suspicions that as the nation’s student loan debt balance rises ever higher, that we are doing some damage to our economy. But the evidence is not crystal clear. And where the evidence seems strong, it’s not completely clear how big of an overarching impact it’s having.
Meb: This is a tough question because obviously, this subject is so emotionally charged. We talked about a few on the blog the other day, unrelated to this topic, but about policy ideas, in general, for personal finance. And you can pick from either private market or public policy. Do you have any general suggestions about like this system is clearly antiquated? Like, many, it’s been built patchwork over 100 years and there’s a lot of vested interests? Like, what would help kind of fix this whole system?
Ron: Given that I write a column, and it is a column for “The New York Times,” it’s on the news pages and not on the opinion pages, and so, to a certain extent, they try to keep me muzzled when I’m out here in public without the leash or without an editor looking over my shoulder. But there are nonpartisan policy solutions that are eminently sensible that we haven’t tried yet. It makes very little sense that the federal government has now lent out well over a trillion dollars. And we don’t have an automatic repayment system that’s duct-taped to the IRS, where everybody just pays back X% of their income until Y number of years have gone by or, you know, some other formula that just applies to everybody and is fair. The fact that there are all of these third-party loan servicers in the background and that more often than not, they don’t treat people very well, maybe because we don’t pay them enough because we as taxpayers, you know, want the best possible deal. But we’re getting too good of a deal. All of that nonsense, all of that red tape, and infrastructure, and extra steps, and administrative burden, you know, screw that. We could simplify this. We can make it easy. Australia did it many years ago now. It’s all right there for the taking. Everybody would win if we did that. But we don’t have the political will. Why don’t we have the political will? Well, you know, people in their 20s don’t vote as much and they haven’t shouted loudly enough for changes. And how do we get people to do that and what politicians listen? This is a bigger question. It’s a bigger problem that we have vis-a-vis our elected representatives and their ability to actually do stuff.
Meb: That was actually one of our suggestions in my piece, so I’ll send it to you later. But we said, Australia is also the gold medal example when it comes to retirement funds, where they just say, “Look, we understand something, behaviorally, which is we’re going to straight-up opt you in, like, too bad, 10% of your income… And the funny…everyone in Australia loves it. You talk to someone and they’ll share that I love my super It’s amazing. I have this massive balance because it’s been growing for 30… Anyway, Aussies, we need your help. 2020, obviously, a massive neutron bomb went off in the education space. Is this going to change anything in a positive way?
Ron: All we have to do is look at how people behaved. In March, a whole bunch of people, everybody essentially were sent home really quickly. And right away, it became clear that people didn’t like what was going on at all. If you think going to college is something that people do for three reasons, which I do, the education, the kinship and the credential, the education got a lot worse real fast. People didn’t like that. And the kid chip essentially disappeared. Your peers are scattered to the winds, your professor is wherever he or she is. It’s hard to form or maintain a mentorship relationship. So all that’s gone. The only things left is the credential. And, you know, you get something like electronic notification, and pose in a cap and gown on your front lawn after you’ve come out of your parent’s basement. I mean, the whole thing sucked, right? So, was it any surprise at all that against all public health reason and against a lot of economic reason, given how compromised the fall of 2020 was clearly going to be, that all of these students and their parents were just clamoring to come back. Why was that exactly? Well, I think the reason why that was, is that because residential undergraduate education has come to be seen as a rite of passage in the United States, so much so that it hasn’t had to change one lick in a generation, as we were discussing earlier. And not only that, even amid a pandemic, when it was pretty clear that a whole bunch of people were going to get sick, and they did, even when it became clear that professors were not going to come to class and they didn’t, even when it became clear that there was going to be no sex, fewer drugs, and not a lot of rock and roll with these places, right, people came back anyway. That suggests to me that people really like this. In fact, the middle-class teenagers and above, treat it, sort of, like an entitlement. So will there be a steam locomotive of technology and VC money that comes and obliterates it the way that it’s obliterated nearly every other industry? I wouldn’t rule it out. But is it going to happen by the time my ninth grader is going to college? I don’t think so. And there are all, sorts of, fantastic online educational technologies that already work really well. And most of them weren’t even tried in the spring.
They’re used for people who are 47, who have decided to finally go back and finish their degree or get a new one. They do that part-time online at online, and it’s awesome for them. But that’s not what 18-year-olds are shopping for. And I don’t think we’re about to see a C change, where 18-year-olds are going to be shopping for something different. And think about who the consumer of the product is of residential undergraduate education, the consumer of the product, graduate schools, and entry-level employers. So unless and until graduate schools and entry-level employers start asking for, and in fact, preferring the product of an entirely new form of undergraduate education that has yet to come into existence, unless and until that happens at some, kind of, mass scale, such that the parents paying the bills are willing to take a chance on something else entirely, even if their kids want it, I don’t think we’re going to see a C change.
Meb: A couple of quick topics and we’ll let you go, ISAs, income-sharing agreements, a positive and negative debt by another name, not a big deal? What are your takeaways?
Ron: I think it’s interesting that they emerged in force, at least, at Purdue University. Purdue is an interesting case study, and I’m pretty sure they’re only doing it there with certain degrees. And here’s why, federal student loan limit, roughly $30,000, $31,000 $32,000 for most undergraduates. If you are an engineer at Purdue, maybe you’re from out of state, maybe it’s going to take you four-and-a-half years, maybe that higher tuition is causing some strain on your family, but you’re getting As and Bs, you’ve had great internships. And you know that when you get out, you’re going to be earning $80,000 to $100,000 a year, and you just need another $10,000. At that point, signing up for an income share agreement makes a fair bit of sense, might even be a better deal than a private loan, which would just create more complexity in your financial life. And so, for those folks, is that a reasonable deal? It’s certainly a worthwhile experiment. As with all of these experiments that we’re performing on teenagers, let’s just not forget what we’re doing here. Well, I’m not sure this one should also turn into a trillion-dollar experiment, not at least until we have, you know, a couple of decades of data about how it affects decision-making later on.
Meb: You mentioned startups in the space of the software side trying to help you with these decisions. I’ve seen at least a dozen, maybe two dozen in the ISA space, and they’re of every possible flavor. Some in South America. Obviously, the Lambda School is the most famous for the software side, nurses targeted. Like you mentioned, it’ll be interesting to see it developed. And hopefully, it’s positive. You never know what these things but at least we’re trying something, I don’t know. It seems a little bit of, like, a mess. But I’d be curious to know if any of you software companies you’ve seen on the whole application side, it seems like an obvious aid. So I’m optimistic. We’ll chat more about that. Your book gave me a little FOMO. It took me a lot back to university. We didn’t have a lazy river. We did have a really nice aquatic center. Virginia is a beautiful campus. It’s what I think, you know, college-like, you think of these beautiful trees everywhere. Most people when they think of school being expensive, they think of buildings and, like, huge college football coach salaries or whatnot. But you mentioned in the book that it was actually…it’s a lot of just the business of managing the school, the teachers, a lot of the just actually running the school. What have you seen is the weirdest or most luxurious extravagant perk? Is there anything that you’re just like, “Oh, man, I shook my head. That’s odd for undergraduate University to be having.”
Ron: So, High Point University. Have you ever heard of High Point University?
Meb: Yes. But that’s because I went to high school about 20 minutes away in Winston Salem, North Carolina. So, I know where it is. I don’t know anything more about it.
Ron: It was turned upside down and inside out by a new president 10, 12, 14 years ago, who came in, borrowed a bunch of money, built a bunch of new buildings and a whole bunch of great amenities, and basically made it a wall for people who want their kids to live in the manner to which they’ve become accustomed and prepare themselves hardcore for business careers, and pharmacy careers, and things like that. And they’ve tripled the number of undergraduates. They have six or seven swimming pools. There’s an on-campus Steakhouse where you can use your meal card that is in effect, a place you go to learn manners and decorum. The thing that I found most interesting, anybody who’s an anthropological student of this, sort of, thing ought to go and see it. If you’re going to visit Duke, you’re going to visit Wake Forest, go and see Chapel Hill, take a side trip to high point. It’s like a tourist attraction at this point. There is a concierge in the Student Union. And as an undergraduate, you can stop at the concierge and ask for stuff. Ask questions about the shuttle to town, book a free ride to the airport. Whatever you want, you can ask the concierge and it’s the concierge’s job to help you. And at first glance, I thought, “This is ridiculous, right? I’ve never seen anything like this. What does this say about what this place stands for?” But then a bunch of months later, I had caused an interview with one of the concierges, and she said, “Oh, this is the hardest job to get on campus.” And I’m thinking to myself, “What? Wait, wait, what?” And I said, “Why is that true?” And she said, “Because the concierges get more out of this job than the students do.” And I said, “Explain that to me.” She said, “You’ve got anything and everything coming at you here on any given day.” So you’ve got to have a ton of knowledge, a ton of flexibility, a customer service orientation, well, a little bit of the salesperson in you because you want this job to continue to exist. So you want to provide value to the user and you want them to feel good about the transaction. She said, “I learned a ton. I use those skills all the time.” She now has a terrific job in PR in New York City, which was her career goal. And she got there within 12 months having graduated from High Point. And I thought, “Wow, I was kind of a jerk in the way that I responded to that.” This isn’t about necessarily trying to make it appear as if this place is the Four Seasons hotel chain, although there’s some of that that goes on. This is really about teaching the people who do the work what it means to do that kind of work well. And frankly, there are not a lot of opportunities on campus to have a job like that, that requires you to think on your feet and be flexible, and resourceful, and know a lot about a lot of stuff, and talk to people all the time. I wish I’d had one of those jobs turns out.
Meb: We’ll have to let you go. We’re going to solve all of our financial system policy issues in the next podcast when we have you back on. We’ll save that for next time. Ron, the new book out “The Price You Pay for College,” also the author of the must-read, “The Opposite of Spoiled.” Where do people go if they want to follow what you’re up to, what you’re writing about? What are the best spots?
Ron: Ronlieber.com that’s, L-I-E-B as in boy, E-R .com. You can just drop your first name and your email there, and I send out notes from time-to-time. And then I play around on the Twitter, like all of the rest of us @RonLieber same handle on Instagram as well.
Meb: We’ll have the links to the show notes, listeners at mebfaber.com/podcast. Ron, thanks so much for joining us today.
Ron: It was a pleasure. Thanks for having me.
Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at email@example.com. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening friends and good investing.