Free Money Finance has a post this morning which is a riff on a quote from Dave Ramsey to the effect that the average college student graduates with $15,000 in debt, which is also about how much the average student spends by living off campus and not eating in the cafeteria.
The $15K figure is, at the very least, out of date. The quote was from Ramsey’s book, published in 2003, and he cites as his source a conversation he had “a couple of years ago.”
But it has a bigger flaw than that. This is one of those numbers where average should not be confused with typical. Strange but true, many college students graduate with no debt. Others graduate with many multiples of the average.
So I have a lot of trouble with the premise that there exists a big population of college students who would have graduated without any debt, had they not modestly improved their lifestyle by living off-campus. But for the sake of argument, let’s accept the premise at face value. Assume that a college student has borrowed $15K solely to live a little more comfortably, that is, for pizza, beer, and the like. Is that a bad thing?
As with many such questions, the answer cannot be a simple yes or no. But in this case I’m leaning strongly to no.
$15K is not a spirit-crushingly large debt. (Even ten years ago. $15K in 2000 dollars is about $19K today.) I am assuming that a recent college graduate should be able to find employment that will allow him to pay it off over a few years. If not, then the whole going to college thing was a questionable decision, but that’s another issue entirely.
Of course, paying the loan back can only involve a somewhat less comfortable life in the post-college years. Is that wrong? Is a diminished lifestyle during the four years after college in exchange for an improved lifestyle during the four years of college irrational? Or is it just morally reprehensible in some vague way?
Borrowing money to spend now based on the expectation of having more money in the future has some dangers. The most obvious one being that you could be wrong about your future wealth. Running up the credit cards because you expect to win the lottery sooner or later is crazy. But a college student who expects to be doing well enough after graduation to pay back $15K or $20K is likely being quite rational.
It is a basic principle of economics that as your level of spending rises, each marginal dollar you spend brings less happiness than the one before it. That is fairly intuitive. A dollar is worth more to you if you make $20K than if you make $200K.
From this principle can be derived the proposition that given an amount of total lifetime income, you would be most happy spending it at a constant rate over the years, rather than spending more when making more and less when making less.
We generally accept the ramifications of this with regard to retirement. Most people aspire to saving enough while working to maintain a similar lifestyle once retired. In other words, they attempt to average out their spending over the decades by living a little less comfortably than they could have while working so that they can live more comfortably when retired.
Living a little better as a young adult at the cost of living a little worse as a slightly less young adult is exactly the same idea. And yet college students in debt are considered a moral failing of some kind and something of a national embarrassment.
I’m honestly not sure I understand why this is, but I will make the observation that it is particularly college students borrowing for non-academic expenses that strikes a cultural nerve. We are much more forgiving about debt taken on for tuition, rarely considering it to be evidence of a moral lapse. And a young person outside of college who borrows too much is apparently much less troubling. Consider, for example, the provisions of the CARD Act meant to protect college students in particular, rather than, for example, all young people.
Are we disturbed by the idea that our young scholars might be engaging in frivolities rather than showing a properly monkish attention to their studies? Or is it some extension of the idea that a twenty-year-old college student is a child while twenty-year-old with a job is not? I’m really not sure.
[Photo – Kathleen Conklin]