Hello again from Bill Parker, your friendly neighborhood University of Chicago alumni representative. As this ‘chapter’ is written, early admission decisions from colleges and universities are coming forth, and, with them, some happy acceptances and, with some of these, financial aid decisions -- which prompts a few words on this subject.
Tuition and other costs (at Chicago, yearly tuition and all other annual expenses are collectively referred to as the term bill) are paid through three primary sources: by the student (or his family); by the institution itself; and, by a lender. For fortunate students, all expenses are paid by their family; they do not need grants or loans to help pay their way through college, and so we will pay them no more attention. This leaves those who will require a little -- or a lot of -- financial help to pay their way, help which comes from the last two sources of funds, which together comprise the financial aid award. Funds supplied by the college come in the form of a grant -- a giant cents-off coupon on college education. By definition, grants are gifts, and gifts do not need to be paid back. [Some, though by no means all, selective colleges are monetarily secure (and fortunate) enough to offer their students financial assistance with no loans (it was only two short years ago that Chicago joined the exclusive no-loan club; previously, U of C students needing financial aid were forced to take out moderate to hefty loans)]
Which brings us to funds supplied by a lender: student loans. Many institutions -- including some very fine ones -- are as expensive to attend as the Ivy-Plus schools but are less well off financially, and, owing to (pun intended) this, student loans constitute an integral component of their financial aid awards. So, if you wish to attend such a college, and cannot pay the full freight, then you or your family will have to take out a loan. Stated in the most elementary way, to take out a loan -- any loan -- is to take on debt. And debt must be paid back.1
1Actually, debt doesn’t always get paid back. To not fully repay a debt is to default. To lenders, default is an abomination. And it is usually accompanied by severe penalties, such as damaging the defaulter’s credit rating, which means that for any future loan he takes out – if he can even get one – he is going to pay a penalty, a higher interest rate, because, based in prior lending experience, his default risk is judgedgreater. Simple economics.
Hey! My family doesn’t have much money, but my high school record is excellent, and I’d like to go to college, so I’ll be forced to borrow money to attend. Up to now, I’ve never borrowed more than movie money, and I’m really worried about the sudden prospect of taking on a major financial burden. How should I think about debt?
Well, we consumers take on debt far more often than you might suspect. For example, we might purchase a sofa or refrigerator in ten easy monthly installments, or we buy a $30,000 car, on which we might make, say, a $10,000 down payment and pay off the balance in monthly installments; many, if not most, cars you pass on the road see are not fully paid off -- especially the newer ones. A home mortgage is another common form of debt; a standard (or conforming) first home mortgage loan comes with a 30-year payoff schedule. Still another use of debt is a credit card purchase. By using a credit card to obtain groceries or a tank of gas or clothes, a purchaser borrows money from the credit card company -- a bank -- and (ideally) pays his monthly statement in full by the date payment is due, thereby discharging his debt obligation. If it is not fully discharged, if he does not pay in full, he will be assessed interest on the unpaid balance, and an additional charge gets tacked onto his next monthly bill – there’s a cost to keeping borrowed money, and the card user pays it. Good or bad, like it or not, debt clearly has become an integral part of day to day American life, and people and families in all economic strata use it.
So loans aren’t necessarily bad: in fact, they may do us a great deal of good. By assuming debt, we can obtain a good or a service or a resource we deem useful or desirable, something that we might otherwise dream of but from which we could derive no utility. Most would agree that a college education -- along with the degree that comes attached to it -- falls within that category. And many students have taken out a student loan, finished college, paid off their debt, and gone on to do great things. Jim Nondorf, Dean of College Admissions at Chicago, was one. His indebtedness didn’t stop him from deriving the maximum enjoyment out of college (among other things, he was a proud member of the Whiffenpoofs singing group at Yale), and he will tell you that paying off his student loan was an everyday part of his life after graduation. From his own experience, he’ll explain that taking out a student loan was part of going to college, and further (Bernie Sanders’ views on free college for everyone notwithstanding), that the idea of attending college without incurring at least some financial pain -- some debt -- regardless of the income stratum from which a student comes, may not be such a good thing. Nondorf isn’t alone in his view; Milton Friedman, the great Chicago economist who himself received financial aid to complete his graduate studies at Chicago and Columbia during the Great Depression, agreed, opining that financial aid is good, in that it allows able applicants from lower socio-economic strata access to a degree program that would otherwise be far beyond their financial reach; however, a free ride raises in the mind of the recipient the specter of an entitlement, which, in turn, causes it to be undervalued or devalued for the extraordinary benefit it is. But enough pro and con.