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College pays, but does the debt?

Historically, college degrees have offered higher earnings over that of a high school diploma, justifying the debt burden for most graduates. And they still can, but now to a lesser extent. — By Gayle B. Ronan
Two Boston College students are seen walking across campus recently. College students are carrying an average of $19,000 in debt by their senior year, according the U.S. Department of Education.
Two Boston College students are seen walking across campus recently. College students are carrying an average of $19,000 in debt by their senior year, according the U.S. Department of Education.Chitose Suzuki / AP
/ Source: contributor

When college seniors complain about their heavy loads, they may not be referring to their courses.

Nearly two-thirds have outstanding loan balances according to the latest Postsecondary Student Aid Study, published by the U.S. Department of Education.  While these balances average just over $19,000, 25 percent of the students owe nearly $25,000 and a tenth were expected to graduate owing in excess of $35,000. And, this excludes any borrowing done on credit cards or by their parents.

Historically, college degrees have offered higher earnings over that of a high school diploma, justifying the debt burden for most graduates.

And they still can, just to a lesser extent.

The College Board’s Education Pays 2006 report estimates degreed women, aged 25 to 34, earn 70 percent more than their high school diploma holding peers. For men, the differential is 63 percent.  Over a working lifetime, even after the cost of attending college and forgoing several years’ worth of earnings while in school, most graduates can expect a financial payback.  But the payback often lessens with the amount of debt carried to finance the degree.  It can also delay the experience of feeling that one has an earnings advantage.

“Debt creates a drag on a young adult’s finances for at least a decade, impairing their ability to save for emergencies, a home, retirement and it often limits their career and lifestyle choices,” says Tamara Draut, author of Strapped: Why America’s 20-and 30-Somenthings Can’t Get Ahead and director of the Economic Opportunity Program at Demos, a New York City-based think tank. 

The debt also leaves many young adults caught between the proverbial rock — the need for a degree — and a hard place — the financing of that degree. It is a position made more manageable by minimizing borrowing costs and pursuing possible strategies for trimming college expenses outright.

Where do students and their families begin?

Forego extra credit costs
Contrary to the impression left by some of the current advertising campaigns for private lenders, government financing is readily available, affordable and may become more so given the proposals currently winding their way through Congress.

“The most important thing for families to do is to fill out the Free Application for Federal Student Aid, or FAFSA, each year,” says Draut. Even upper-income families should apply as well, as even if their situations are unlikely to generate federal grants, federal loans are also available to them.

Under the Government’s Stafford Loan program, students may borrow $3,500 in the first year of school; $4,500 for the second; and $5,500 for their junior and senior years. After that many students assume they need private loans. However, the government’s PLUS program for parents was actually designed to kick in and cover whatever remains left to finance.

Financial aid experts, including Draut, advise taking out federal loans before considering private alternatives, in part because federal loans offer fixed rates versus the variable rates many private lenders offer.  Also, with rates on some private loans reportedly in the double-digit area, the single-digit federal version should offer cost savings for many parents with decent credit ratings.

“A lot of people have no real grasp as to cost, or how the loans will impact them in the future. They are just doing what they feel they need to do to pay for school and taking what is readily available to them. The ads make it all sound easy, but there is more to it,” says Joe Hurley, CPA, and founder of, an independent college planning resource.

With so many moving parts — origination fees, variable rates tied to indexes versus fixed rates, different payback rules — comparison is essential.  Draut recommends using Web-based tools like those found at to run objective comparisons.  “Stay focused on choosing the lowest cost loans, not the least complicated sounding ones,” she adds.

Hurley suggests home-owning parents may also want to look beyond student lenders to their home equity. “The money is easier to access, the payback can be longer [and more flexible], the rates more attractive and the interest may be fully deductible,” she says. 

But while ensuring that all borrowing is done at the lowest possible cost is crucial to making college more affordable, interest is building in other non-debt related strategies for containing the cost of college.

Two plus two
“A strategy gaining momentum involves attending a lower cost school for two years then transferring to finish up with a degree from a more prestigious school,” says Richard Vedder, Professor of Economics at Ohio University in Athens, Ohio, and author of Going Broke by Degree: Why College Costs Too Much

Often the first school is a community or two-year college—where the College Board estimates average net tuition and fees paid by full-time students was about $100 in 2006. 

Go abroad
Vedder is hearing of more students choosing to attend college in other English-speaking countries.  By attending schools in Canada, or traveling to New Zealand, Australia or England, “they access high-quality programs, convert college into a cultural experience and save on tuition [even after travel expenses],” he says.

Slow borrowing by speeding up
“Another way students are using to beat the system is by doing college coursework, for credit, while still in high school,” says Vedder.  Thanks to the Internet and the expansion of community colleges, high school students can take courses that count toward both their high school and college diplomas. 

They also have the opportunity to take Advance Placement and ‘CLEP’ exams for college credit through the College Board. The testing fees are nominal compared to the per credit tuition expense at most universities.

“My son did that prior to attending college,” says Vedder. “He was able to graduate in three years, saving 25 percent on the cost of college.”

Seek reciprocity
States like Minnesota, for instance, have negotiated reduced tuition for residents wishing to attend college in neighboring states or the province of Manitoba.  Minnesota is also among the eleven states participating in the Midwest Student Exchange Program, which offers students access to neighboring states’ colleges at reduced rates.  Similarly, The Western Undergraduate Exchange unites fifteen western states including Colorado and California, through reduced reciprocity rates.  A third consortium involving sixteen southern states, the Academic Common Market, allows students pursuing degree programs not available in their home states to pay in-state rates when crossing the border.

Earn and learn
In its recent study, Salaried Employee Benefits Provided by Major U.S. Employers, Hewitt Associates found 87 percent of the large companies it surveyed provide educational reimbursement benefits. The benefit is considered key to attracting and retaining employees and is usually made available to all full-time—and at some firms even part-time—employees after their first year.

Starbucks, for instance, offers the benefit to employees working less than a full-time schedule, though it scales the amount it reimburses to an employee’s position, other firms do not make such distinctions in job titles.

Regardless, those taking advantage of such programs and willing to earn their degrees part-time have the benefit of employment, often health insurance coverage and usually some support from their employer regarding their need to study. 

Find forgiveness
The ultimate way to avoid carrying the cost of college well into adulthood is to find forgiveness for the debt.

Loan forgiveness is an option primarily available to those in teaching, health care and public service jobs who are willing to relocate — typically several years — to underserved communities in exchange for having part or all of their student loan balances wiped out. 

Here are some of the larger programs involved in forgiving student loans: