College Students Borrow Money for Pizza and Beer

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The $15K figure is, at the very least, out of date.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]

College, Dave Ramsey | Frank Curmudgeon | March 31, 2010 11:59 am

251 Comments

By Paul Williams, March 31, 2010 @ 12:10 pm

I wonder if part of the reason we might look unfavorably on using student loans to improve your lifestyle is because those loans often flow out of government-subsidized programs to some extent.

I think the biggest reason we don’t look well upon it in general is due to the dangers you pointed out. Plus, that pizza is going to cost you a lot more than $10 if you’ll be paying interest on it for the next 10, 15, or 20 years.
By Lance, March 31, 2010 @ 12:22 pm

The moral dissonance can be particularly weird when you think about the disparity between private and public education tuition. For instance, tuition at St. Edwards in Austin, TX is about $13,000 per semester. Tuition at UT-Austin is about $5,000 for in-state residents, per semester. Assuming an eight semester academic career, the St. Edwards premium is $64,000. Assuming a more typical ten semester career, it jumps to $80,000. A student who goes to UT borrows an additional $10,000 a year to party is much better off financially than a student who goes to St. Edward’s and lives like a pauper. The St. Edward’s premium doesn’t even buy a more marketable degree; if anything, UT has the edge there. And yet, the Ramseyites would eviscerate the former and praise the latter. It’s bizarre.

And yes, I did go to public school for college and law school. I borrowed quite a lot of vodka and pizza money as well. No regrets.
By Klaas, March 31, 2010 @ 12:26 pm

I’m sure it depends on the rental market, but I paid way less living off campus than I had been paying to live on campus and eat in the cafeteria.
By Steve, March 31, 2010 @ 12:26 pm

“Spending it at a constant rate over the years” was given the moniker “consumption smoothing” by some economist or other.

I have to disagree with the lead-in; I personally found living off campus and not eating in the cafeteria *significantly* cheaper. Especially the not eating in the cafeteria part – the meal plan’s cost at my college was somewhere between making one’s own food and eating at a restaurant, but closer to the latter than the former. In fact the biggest savings of living off campus was not being forced to pay for such a meal plan.
By Tyler, March 31, 2010 @ 12:29 pm

Living on campus will NOT save you money.

Meal plans at Penn State where I just graduated from a year ago range from $1775-$2245 per semester. With the $1775 plan I would say you could probably eat on campus 9-12 times a week without running out by the end of the semester, meaning you would have to feed yourself if you wanted to eat more than once or twice a day. I spent much less than $1775 for all my food for 4 months not having a meal plan.

Dorms start at $2270 for the semester (4540/yr per person). However, my girlfriend’s off campus apartment is $900/month split between 3 people (3600/yr per person) plus utilities (~700/yr per person). Meaning it is cheaper to live in an off campus apartment that is pretty nice and large as opposed to sharing a 12′x15′ room with someone.
By Tyler, March 31, 2010 @ 12:29 pm

Check the rates out for yourself. Non-profit my ass.

http://www.hfs.psu.edu/rates/fall10spring11.shtml#up_undergrad

http://www.hfs.psu.edu/rates/fall10spring11.shtml#mealplan
By dusty, March 31, 2010 @ 12:30 pm

I did it too. I paid off my $25k in student loans about 5 years ago. It cost me about $350/month for 10 years. The thing that makes me so angry at the college version of me is that I took out nearly 100% of those loans for non-school stuff. I was an idiot.

Eg: My parents paid almost enough money to cover my classes and books. The student loans I took out where for rent, food, and mostly fun. One year, when I changed from freshman to sophomore I was suddenly allowed to borrow more money. So, I extended my loan and used that money to pay for spring break.

WTF was I thinking?

It didn’t stop there. I knew what my debt was, knew what my payments would be. But, always figured, I’ll pay it off later when I am making tons of money. I always said I was “managing my credit”. In all honesty, I was just ignorant. Not once did I calculate my expected earnings, expected costs, and how the monthly payments would impact that. Then again, I don’t know if I even could have at that point.

Now, it did work out. I guess I was correct. But, I wish I had done things differently. I eventually paid off all my debts, including my student loan, 10k in credit cards, a mortgage, car, tv, etc.. But, I certainly spend less money now in my 30s than I did when I was in college with nearly no income. I also own less (sold that tv this year and my family has only 1 car now).

I think part of the problem is educating young adults about this. I hear countless stories about people that take out $200k in student loans for a liberal arts undergrad degree! Perhaps they just don’t understand the big picture.

They really ought to teach some valuable life lessons for kids growing up, rather than focusing on temporarily memorizing facts for a test.
By Neil, March 31, 2010 @ 12:31 pm

Generally, college students overestimate their future earning potential, particularly for the years immediately after graduation. Aside from those of you with prestigious and well-recognized schools, the wage benefits of a degree tend to manifest themselves when combined with a few years of job experience. (Simply put, everyone gets the same entry-level job, but graduates then get promoted).

I think it’s this propensity to overestimate earnings that society wants to protect students from.

And in my city, living off campus will probably save you money…as long as you take on a couple roommates.
By Adam, March 31, 2010 @ 12:41 pm

The biggest flaw with the Dave Ramsey paragraph for me is that living off campus was about 50% cheaper for me than living on campus, along with a huge leap in standard of living (about 900 square feet v 50 square feet, my own kitchen/bathroom v sharing with 40 other guys, etc.).

The “mandatory” meal plans of on campus dorms etc. are like going to an all inclusive resort when you don’t drink. Why pay for the extra expense you won’t use? I, like the majority of my friends, slept through most breakfast as was in class for lunch. Dinners were typically disgusting. And the price was much more than my monthly grocery bill after I moved out.
By Dangerman, March 31, 2010 @ 2:40 pm

“…you would be most happy spending it at a constant rate over the years…”

I believe Larry Kotlikoff includes the option to model a slight increase in spending power over time in ESPlanner. People are most happy when life is stable but getting better.

Also, here’s why Trent disagrees: http://www.thesimpledollar.com/2009/11/22/consumption-smoothing-and-why-it-doesnt-work/
By Wendy, March 31, 2010 @ 3:56 pm

I went to a state college in the late 80′s. Everyone I knew that lived off-campus had part-time jobs and existed on Ramen noodles and PB&J sandwiches. The biggest problem I have with the college kids I see today is that they think they should have everything their parents have and should be able to eat at the mid-range to expensive restaurants that have popped up in our college town.
By Andrew Choi, March 31, 2010 @ 5:19 pm

it’s really shocking how much credit card debt that many people have out of college. Credit Cards 101 should be a course in itself.
By Paul, March 31, 2010 @ 5:24 pm

As a recent Vanderbilt graduate, I would have to agree with the off campus living comments. I calculate that my 12 by 10 dorm room (with a shared bathroom) and the meal plan costs 130% of the federal poverty line. And that figure doesn’t include room and board for the summer. Did I mention that undergraduates are strictly forbidden to live off-campus?
By jim, March 31, 2010 @ 5:57 pm

Finaid.org says for 2007-2008: 65.6% of graduating students had MEAN loans of $23,186 and the MEDIAN debt was $19,999.

So theres not a huge difference between median and mean, but it is skewed up. And note that about 1/3 students graduate with ZERO debt.

I used credit cards to subsidize my life still in college. I wish I had taken out higher student loans instead just cause I would have saved on interest. I really don’t regret going into debt due to spending beyond my means in college. I ran up credit card debts with the intention of getting a decent paying job after graduation and that worked out for the most part (only took a couple graduations to get it right). I should have spent the money more wisely but hindsight is 20/20.

I think people might be judgemental of student loans used for frivolous spending since we’re generally sympathetic towards student loans and think of it as a ‘good debt’. So if you hear that Bob in Indiana has $45,000 in student loans and is unemplyed and having a hard time paying for it many people are more sympathetic to Bob’s plight. But when you hear he spent 75% of the loan money on beer, having a 2 bedroom apartment to himself and a new motorcycle and he majored in Philosophy at Indiana state you feel betrayed that you cared about his debt struggles initially.
By Mt, March 31, 2010 @ 8:41 pm

I went from -11k at graduation to +34k five years later. I was unemployed four months after graduating, and then began work at $14/hr. I never lived with parents, or even had roommates during this time. I even bought a new car, and my net worth bottomed out at -14.5k.

I simply can’t believe that people struggle to repay their debts. I believe they kick the subsidized can down the road, forget about repayment, and live like there’s no reason not to party. They choose careers based on what they “enjoy” rather than the pay.

I mean, I was never on a gilded path. I knew I had to pay off the debt quickly, because it was spread across several cc’s. Good grief. I just did it.

Although I don’t totally lack sympathy, I can’t stand the whining. If you have all this school debt and you’re middle aged, you should have paid more attention to money. It’s a fact that a lot of people seek to maximize their spending rather than their wealth. Some actually defend that philosophy. Then they’re up shit’s creek and it’s time to whine? Sucks to be them – but it would have been nice to have been them, when they were spending all that credit… I was studying my personal finances. I wasn’t really enjoying myself, I was sacrificing in many ways for the specific benefit of avoiding financial problems.

I’m trying to talk myself out of being a jerk, but apparently I just can’t. How wrong is it that I just feel like well, ‘screw you, heavy debtors – go wash dishes until your problems are solved’?
By Rob Bennett, April 1, 2010 @ 9:48 am

If you’re not willing to give up the luxuries in years when you are not earning any income, when the heck are you going to be willing to do so? I think that’s the point.

If you let things get out of hand when you are in college, you are really going to let things get out of hand when you finish college. It’s the attitude that debt doesn’t matter and the habits that follow from it that is the concern.

Rob
By Craig, April 1, 2010 @ 10:54 am

Flirting with “consumption smoothing” elides the overwhelming difference between making sacrifices in the present to improve the future and planning sacrifices in the future to improve the present: the future is unknown. One of the things that can happen to every one of us is that we are struck by a car and permanently disabled the next time we cross a street.

I think I’ve made this point before: everyone talks about retirement savings as if the point of it all were to get a membership at the nicest golf club in Florida. If you can afford luxuries in retirement, then good on you, but the point of retirement savings is to escape poverty and premature death.

(In a similar vein, lots of people think flight attendants exist primarily to serve drinks–they don’t. They are safety professionals who are meant to save lives in an emergency. They only do beverage services if they’re not otherwise occupied with evacuating the cabin during a flaming crash landing. Your 401(k) is in fact the flight attendant of your golden years.)

Still and all, I’m not necessarily against college debt, and not even if it funds a somewhat richer lifestyle. I graduated with about 11,000 in total debt, if I recall correctly, and I could have easily avoided that by working more and spending less time involved in the college theater, radio station, and so forth. But my overall experience would have been rather poorer as a result.

I don’t think I’m an immoral person for choosing to act in “Hamlet” back in 1993 rather than pulling a shift at Kinko’s or whatever. (They still have those, don’t they?) And I’m not going to pretend I’ve never put a vacation on the credit card. But we have to be careful about enjoying tomorrow’s money today, because one of the odd facts of physics is that time is not symmetrical in the macroscopic universe.
By Lance, April 2, 2010 @ 2:53 pm

Craig, I have never seen the 401(k)/flight attendant metaphor before, but that is awesome. Very nice comment.
By Aaron, May 7, 2010 @ 4:51 am

I saw Dave Ramsey speak once and I was generally impressed. I thought some of his advice was a little extreme, though. He struck me as talking about debt the way a recovering alcoholic would talk about rum. “It is always bad. Always.”

My understanding though is that he used to have a problem with debt, and I suspect he would describe it as being not completely dissimilar to alcoholism.

On the subject of consumption smoothing, while I also lived a full college life, borrowing when you have no income and no idea what your income will really be should be more disquieting for people than it is.
By ANDRE, October 25, 2010 @ 12:50 pm

I don’t think things are that complicated.
It is very simple, live within your means and things will turnout alright.
Not all college graduates get jobs after graduation and if they do get a job most of the time the pay is much less than expected.
IF you are the typical college students who needs to borrow money to through college then you can’t avoid getting into debt, and that’s find. when it comes to pizza and beer be smart spend what you have, not what you don’t have.
By Jay Sherman, March 3, 2011 @ 2:26 pm

Are you for real? You are virtually wrong on everything you post. Jeez.
By Becky, December 10, 2012 @ 9:19 am

im sure someone else already talked about this… but my college wouldn’t let you live on campus after your freshman year. at least not in the dorms. they had special “apartments” only 700 people got the ones that were even decently affordable (though were only for fall and spring) and the rest of us had to move into the super expensive 11,000 a full year apartments (fall spring and summer). it was cheaper to live in an off campus student housing apartment, most of which had shuttles to the campus included in your rent.

as a freshman, you couldnt get into an on campus apartment, and the cost of the dining plan was in the THOUSANDS to eat. so staying on campus doesnt really help much unless you have the money to pay for all that, or are willing to live off microwave meals and VERY sporadic trips to the dining hall (unless you have friends who are willing to let you have one of their leftover meals for the week)

so personally, i dont know what he is talking about when he says you can save money by living on campus. my husband went to a college maybe 40 minutes away from his parents home. he spent less his first year of college because he lived at home. when he moved into the dorms, he needed more money for housing and dining and fraternity and the list goes on an on…. staying on campus doesnt always equate to being the better choice financially.
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