I’ve seen the various articles regarding Starbucks announcement that they are going to fund their employees’ college tuition at Arizona State University. I’ve seen the articles that are pro and con (more con than pro, I should mention). I’m not sure how I feel, because I need to understand it better and to see what’s going on. I was researching the subject when I came across an article on Market Watch called “Why Starbucks is right, and Obama is wrong, on Tuition“. The article is interesting and we do need to figure out how to lower tuition costs, but the article, also, makes a wrong point about college loans and interest rates.
According to the article, the average college student leaves college with $29,400 of debt. The argument is that a payment of $375.14 a month isn’t that much of an economic problem. It’s merely a car payment. See the quote below.
Numbers don’t lie. That $29,400 borrower would pay $375.14 a month for 10 years at Sallie Mae’s highest current rate of 9.17%. But if that loan commanded 0.01% interest, the payment would still be $245.12. The real average is somewhere in between and covered by the spread between a college grad’s income and a high-school grad’s. It’s a car payment, and not really the economic problem many posit.
Except the author is missing a bigger point, that $130.02 a month savings adds up to a difference of $1,560.24 over a 12 month period or $15,602.40 over a ten year life of the loan. Perhaps, that’s not a lot of money for the author, but it is for most people.
Realistically, the average student isn’t going to pay an interest rate of less than 1% and President Obama and Senator Warren haven’t suggested one that low. Their plan calls for an interest rate on a refinanced loan of 3.8%. Even at that amount, the total cost of the loan works out to $35,384.90 – $9,631.54 less than $45,016.45. That’s half a car.
One more item I’d like to point out. He mentions spending $150,000 on an education for a $42,000 position. In his opinion, this is way too much money. He doesn’t really say if this was tuition or the cost of a loan, but I’m assuming he means tuition. Here’s where the 3.8% interest rate comes in handy. At this interest rate, the total cost of the education works out to $180,535.21 . It makes his argument look even stronger, doesn’t it?
Except, the $42,000 isn’t going to hold as the yearly salary for the rest of the student’s working life. They, if they’re any good, should get some raises over the next forty years (assuming they start at age 25 and work until age 65). But, let’s say they don’t receive any raises over the next forty years. The student will have earned $1,680,000.00 minus the education cost, that’s a profit of $1,499,464.79. That’s not such a bad return on investment.
(The author, also, set me off by knocking people who scored a 20 on their ACT. I scored a 19 – not only have I graduated from college, but I’m at the top of my field, proving that test scores mean diddly squat. But, I digress, as that is off my subject.)
My whole point is this: tuition needs to be controlled in some manner. However; distorting facts and not telling the whole story isn’t going to help the overall debate.