Bloomberg’s Janet Lorin reports on Princeton University’s loan program, which offers loans at interest rates as low as 1.2 percent for parents who earn as much as $500,000 a year. TMN, who has long been a very lonely voice defending college loans, is happy to have an excellent illustration of the payoff from college loan programs.
The usual line on college loans is that we have a trillion-dollar-or-so crisis with students taking out unsustainable debt to fund degrees that may or may not let them pay it back. The usual solution proposed is replacing loans with grants, thus letting graduates walk into their bright futures unshackled by the costs of their education.
Unfortunately, the flip side of this is that it costs a whole lot more to provide a dollar of grant aid than a dollar of loan aid. Princeton, it so happens, provides a lot of grant aid too; many other universities don’t. In any case, if you’re set on the idea of grant aid and have a limited budget, then you basically have to limit grant aid to the poorest segments of students. Supporters of the grant model sometimes present this as a desirable feature. TMN is pained to see why; you might consider reading Shaila Dewan at the New York Times to see how college decimates middle-class savings.
Once you get rid of the “all-debt-is-bad” assumption that animates much of the college funding debate, just how much value colleges can create with low-interest rate loans becomes clear. And frankly, as far as TMN is concerned, it doesn’t matter if the loans are available only to the poor, the middle class, or even the very well off.
Princeton is offering students and parents a very good deal here at what’s likely to be a fairly low cost to the college (you can bet the vast, vast majority of those loans will be repaid). How good a deal? Derek Thompson at the Atlantic has a very useful chart of the colleges that offer the best return on investment. On average, the return on the cost of a Princeton education — for all majors — is 13.2 percent a year. It’s obviously not the only way to measure educational value, but for our purposes right now it’s a pretty good one.
Take out a loan at 1.2 percent and you still have the college generating a 12 percent return on the money you pay. That’s a pretty great return, and likely a whole lot better than what you’ll get going to a cheaper school to avoid loans. 1.2 percent now to generate 13.2 percent later? Thanks, The Market Now will take that deal for his own (still way under college-age) son any day of the week.
Update: Obviously, Princeton is an extreme example, for which folks have taken this post to task. An example:
I wouldn’t put it quite the same way, but the point is noted. There are plenty of colleges that are overpriced to start no matter how you cut it. And unlike Princeton, they don’t give out loans at 1.2 percent either. The point here is not that all student loans are good, but that loans are generally a cost-effective solution for colleges that are worth paying for in the first place.
Some colleges, especially for-profit ones, have found a profitable niche in getting students to take out loans to pay for degrees of zero educational value and minimal value in the job market. That has tainted the perception of loans in general. Even many legitimate colleges are overpriced (and, as I’ve noted in another post, will never deliver the kind of security folks hope for) but that’s a separate issue.
PS: As Janet Lorin’s story makes clear, not all of Princeton’s loans are at 1.2 percent. That’s the rate for variable-rate loans; the college charges 4.3 percent for fixed-rate loans. Other Ivies offer loans at closer to the 7 percent range. At those rates the math on the economic value of the loans changes. Though maybe not as much as it once did, as schools that were once less expensive have moved to charging Ivy-level prices.