Are You Borrowing Too Much for College?

When it comes to soaring college costs, much of the blame has been leveled at the colleges themselves — and their nonstop spending on everything from lavish student centers to generous salaries for administrators.

Certainly the schools deserve criticism for their extravagant outlays. But what's often overlooked is the role of the parents and students who are determined to pay lofty prices for brand-name schools, even if it means going deeply and dangerously into debt.

Want proof? Consider the recent efforts by New York University, which costs $54,000 a year, to warn families that they might be borrowing too much to send their child to the school.

As The Chronicle of Higher Education reported last month, NYU contacted families of 1,800 students over the past year — about 25% of those accepted who qualified for aid — to make sure they understood their potential debt loads. But the calls ending up having absolutely no effect — zero — on the rate of students who chose to enroll.

NYU should get some credit for at least trying to warn families about their financial situations. With one of the lowest per-student endowments among elite colleges, NYU cannot afford to meet the full financial need of its students, while the aid that is available comes mainly in the form of loans. As a result, its grads end up with an average of $34,850 worth of debt — 50% higher than the $23,200 national average for students who borrow. The school’s heavy debt burden drew national attention recently, when The New York Times profiled a 26-year-old NYU grad with nearly $100,000 in loans who is struggling to repay them.

So why do so many parents and students make such poor financial decisions? For starters, many families still believe that all higher education debt is “good” debt, since a degree will automatically lead to a well-paying job. As a corollary, they buy into the “Chivas Regal” effect, as marketers call it — the notion that a costlier college is necessarily better than a less-pricey school.

Then there’s the issue of financial illiteracy. You might not expect most 17-year-olds to fully understand loans or the obligations that come with them. But all too often their parents are equally ill-informed; one recent College Board study, for example, found that families earning $100,000 or more were most likely to opt for private loans, which are more costly than federal aid. And families get little help from most colleges, who do not see it as their role to be financial advisers or to discourage students from attending.

The Great Recession may be changing all that, however. With many recent college grads still searching for work — even those with prestigious degrees — many families are becoming more realistic about what they can afford. After all, you don’t have to borrow immense amounts to get a college education. The in-state cost for the average four-year public college is just $15,000 a year. And you can still find private colleges that limit the amount that middle-class families need to borrow.

If you do need to get loans for college, be sure to figure out what those monthly payments will look like at graduation (try the loan calculator at FinAid, the informative college-financing site). How much debt is too much? Most experts recommend keeping your payments to no more than 10% of the income you expect to earn after graduation.

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