The Gift That Keeps on Giving: Graduating Debt-Free

The annual US News and World Report college rankings are out, and I always like to imagine the full list read at a press conference by Casey Kasem. Also, at this imaginary event, Kasem would point out that it would be a tragedy for your family’s financial health and your child’s future to send your kid to most of the colleges on the list.

Let’s recap a few facts about student loan debt:

• –The average student in 2009 (the most recent data available) graduated with $24,000 in loans, according to the Project on Student Debt. Graduates of private colleges have more debt, on average; graduates of public colleges have less. Students who attend for-profit colleges rack up the most debt: $33,050 per student in 2008.
• –As of 2010, there’s more outstanding student loan debt than credit card debt. MintLife’s John Ulzheimer noted the shift in his column last year.
• –Unlike credit card debt, student loans (whether federal or private) can’t be discharged in bankruptcy. They will follow you around forever. Federal loans have gentle repayment options like income-based repayment; private loans don’t.
• –Default rates on student loans are huge. Of the loans that entered repayment in 2009, 8.8 percent were in default by the end of 2010, according to the Project on Student Debt. When you default on a student loan, it doesn’t just wreck your credit: the loan continues to accrue interest, fees, and penalties.

So you want to avoid student loans. But you also want to avoid traffic jams, overpriced coffee drinks, and friend requests from old boyfriends. Here in the real world, is it possible to send your kid to a good college without saddling them (or yourself, via parent loans or home equity loans) with tens of thousands of dollars in debt?

You bet.

College matters. Which college? Doesn’t matter.

The key to graduating with little or no debt is your local public university. Mine is University of Washington (US News #42), where I graduated debt-free in 2002.

Given the current job market, though, isn’t it true that only top colleges get you the top jobs?

“There’s a complete lack of evidence that your kid will benefit from going to one college versus another,” says Zac Bissonnette, author of Debt-Free U and recent debt-free graduate of the University of Massachusetts (#94 on the US News list).

That’s quite a claim. But the academic research bears it out. Princeton economist Alan Krueger was the first to rigorously determine that there’s no good reason to go to, say, Princeton. His research was highlighted in 2000 in the New York Times under the headline “Children smart enough to get into elite schools may not need to bother.” He revisited the data in 2011 and the conclusion is the same: if you’re accepted to an elite college but end up attending a different college, it doesn’t affect your earning capacity whatsoever. Kids smart enough to get into Princeton wring a world-class undergrad education out of San Diego State.

Yes, I know a public university isn’t the same as a verdant liberal arts campus. But what the average student 18-year-old knows about the difference comes from drive-by campus visits and photos on the Carleton website. “The correlation between people’s satisfaction with their freshman year and how much they like their roommate is very, very high,” says Bissonnette. “Your experience is determined by these weird, idiosyncratic things that just happen.”

Furthermore, we know (from Noel-Levitz survey data) that satisfaction rates for students at public universities and private universities are the same. (Students at two-year community colleges are more satisfied than either.)

Get out of the middle of the road

Public universities aren’t the only option for the frugal and academically motivated. The most elite, Winklevoss-infested schools are lavish with financial aid. Harvard students get out with much less debt than average (about $10,000 as of 2008, according to the Project on Student Debt).

Harvard, along with a couple dozen other schools, makes a financial aid pledge promising only grant and work study aid for students who qualify for financial aid. Read the fine print, though: not all pledges are equally generous, and many students end up borrowing anyway.

“Where people tend to get hit really hard with the debt is in the middle,” says Bissonnette. “It’s in those private colleges that are a tier or two or three below the most elite colleges.”

We’re talking places like American University (average graduate’s debt load: $36,206, U.S. News 2010 data) or Cleveland Institute of Art ($30,188). Oh, and Bissonnette loves to pick on NYU ($41,375). Many of these schools are safety schools for kids applying to the top-tier pledge schools, but this is a dangerous move: Columbia and NYU are both in Manhattan, but when it comes to financial aid policy, they’re in different worlds.

No college—with the exception of the military academies, which charge nothing and guarantee a job upon graduation—makes it easy to graduate debt-free. Doing so requires saving, family sacrifice, and taking a job (federal work study or otherwise) during school. Students can and do rack up huge debts at public universities and financial aid pledge schools. And I know public school tuition is rising even faster than private school tuition.

But it remains possible for a dedicated middle-class student to make it out of a public or pledge school without a penny of debt, essentially an impossible feat at a mid-tier private or for-profit college.

It’s about options

If you’re uncomfortable measuring the value of a college education in dollars, join the club. I know there’s more to life than money. Before going to a public university and paying tuition in cash, I attended (and dropped out of) Pomona College (US News #4), a small liberal arts college in Southern California. I sang in a band, met my future wife, ordered lots of midnight pizza, occasionally went to class, and left with a good chunk of debt. (Pomona is now a financial aid pledge school.)

Like any parent, I want my daughter (class of 2026) to have the same options that I did and more. And I don’t want to be the kind of parent who never lets her learn from her own mistakes and is constantly interfering in her adult choices.

My wife and I have talked about it extensively, however, and we’re not going to send our daughter to American or NYU or any other school that will have her starting her adult life $40,000 in the hole. It would be heinously irresponsible. With any luck, she’ll want to attend her parents’ alma mater, and we won’t even have to discuss the matter. (Yes, that was a joke.)

Debt wraps a noose around your options. Tell your kids that going to a college that lets them graduate debt-free won’t lower their earning potential, but it’ll make it a hell of a lot easier after college for them to live the kind of globetrotting, artsy, nonprofit life that drives parents crazy.

And they can do it for longer than four measly years.

Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.