Borrowing from a popular credit card commercial format, we toss out a longstanding fundamental belief about higher education.

Four years in-state tuition and fees: $17,360.00

Books and Supplies: $3,960.00

Computer Fees: $4,160.00

Room and Board: $31,200.00

Earning a College Diploma: Priceless

The Financial Benefits of a College Education

In general, most insist that you simply cannot put a dollar figure on a college diploma. It is truly a priceless commodity leading to greater future earnings and a better chance to pursue something one truly loves as a career option.

That said, in recent years, eyebrows have been raised. College costs have been soaring and critics have begun questioning the value of a college diploma.

For years, the generally accepted figure associated with earning a college diploma has been $1 million. Those calculated additional earnings a college graduate earns in his lifetime above and beyond of a classmate with just a high school diploma continue to be used as the rationale for earning that coveted diploma.

However, that generally accepted $1 million figure has recently been called into question by a gentleman named Charles Miller. According to his analysis, the value of a college diploma may actually be significantly less than the popular dollar figure generally tossed around.

A Much Lower Return?

Miller, the former head of the Commission on the Future of Higher Education, raises some interesting dialogue with his set of calculations. He, in sum total, insists that higher education just might have gotten too expensive for what it produces and is certainly too costly for the typical student.

To arrive at that conclusion, he first insists that the calculation procedure used to determine the $1 million figure contains too many false assumptions. For example, Miller rails against one fundamental criterion used in creating the million dollar figure.

When computing the $1 million in additional earnings, estimates are based on an assumption that students finish college in four years. Miller correctly notes that other college graduation data utilizes six years as the standard for earning a degree. So the first significant way that Miller’s numbers are adjusted is to take away two years of earnings for the average college graduate.

Miller also notes two other major calculation adjustments. First, current procedures typically report lifetime earnings in the “present value” of the dollar totals, rather than adjusting for inflation over time. Second, most calculations do not isolate the benefit of those who have only a bachelor’s degree.

Using his assumptions, Miller contends that the lifetime earnings differential for a bachelor’s degree over a high school diploma is a much more modest figure: $279,893.

Easy to See Why Concerns Are Being Raised

There are numerous folks who insist that Miller has low-balled the calculations. In their eyes, he has done everything he can to reduce the value.

Still, the difference is a rather significant number. Certainly, $280,000 in additional earnings is nothing to sneeze at.

However, if we do assume that this more modest differential is somewhat accurate, then the current cost of a college degree does raise interesting questions. Four years of in-state tuition at a local university will set a student back at least $60,000, especially if some time is spent living on campus.

As a monetary investment that number still seems reasonable. We certainly can advocate spending $60,000 knowing full well we can one day expect to pocket $280,000 as a result. Add in the ability to better control one’s career choice and the investment seems to be a no-brainer.

But what of those private schools, of those topping $50,000 per year? Four years of expenses will top the $200,000 mark.

Under such a scenario the monetary piece becomes suspect. In such an instance, the rate of return falls to less than 2% return on the money invested if figured on a per year basis.

With those numbers it is easy why folks are concerned with the skyrocketing costs of a college education. If the costs keep rising, the rate of return ultimately diminishes.

As President Obama has stated on multiple occasions, we must find ways to make college more affordable.

So Where Do We Stand?

Interestingly, Miller’s strong push has at least one agency acknowledging that the $1 million figure may not be entirely accurate. In responding to Miller’s criticisms, the College Board acknowledged that $1 million in additional earnings is misleading.

At the same time, the College Board noted a thought many concur with: there is a very high individual return from a higher education.

According to the Board, a public college graduate will break even by the age of 33. At the higher priced schools, the private colleges, the Board offers a break even point at age 40.

Given those assertions, it is easy to see why education does in fact pay off. Of course, if costs do continue to rise, those pay back ages would rise as well. Pushing them back another ten years would make the dollar return a far more questionable discussion point than as it currently stands.

Without a doubt, students must be mindful of the debt they are incurring as they earn that diploma. They must also have an excellent understanding of potential future earnings: a career in social work or a job as a teacher will not necessarily produce additional earnings towards the $1 million mark.

Great Experience

Ultimately, college can be a great place to spend four years. Students often get their first chance at learning to be on their own. At the same time, you still have a safety net, a “shelter where you can develop yourself.”

At the university level, you will also meet many interesting people and have access to adults who are willing to help you learn new things. Once in the world of work, there will be far fewer people willing to help you become successful.

So independent of the financial figures, college can be a great place to learn about you and about society. College is a place where students get a safe chance to mature even as they pursue a degree and a potential career.

And if you manage the financial piece appropriately, you can expect the opportunity to earn additional funds even as you work in your preferred field. Just don’t go around thinking that a bachelor’s degree is going to make you a millionaire.

On Wednesday, under the College Cost Reduction and Access Act of 2007, the repayment of college loans will become a whole lot more manageable for lower income wage earners.

New Options

The new Federal Student Loan Forgiveness Law is set to help student repayment in two significant ways:

• Lowering the monthly student loan payment on federal student loans (Income Based Repayment or IBR); and

• Canceling remaining loan debt after 10 years for those who have entered public service (Loan Forgiveness for Public Service).

Income Based Repayment (IBR)

Income based repayment (IBR) offers enormous potential reductions in the monthly payments for high debt/low income borrowers. Designed for those with “partial financial hardship,” IBR limits annual educational debt payments to 15% of a borrower’s discretionary income. For the purposes of the law, discretionary income is defined as adjusted gross income minus 150% of the poverty level for the borrower’s family size.

Under the IBR plan, the loans eligible for consideration include: all Federal Direct Loans (FDL) and federally guaranteed loans (FFEL) including subsidized and unsubsidized Federal Stafford loans; Federal Grad PLUS loans (but not Parent PLUS loans); and Federal Direct Consolidation loans. Federal Perkins Loans are only eligible when part of a Federal Direct Consolidation Loan.

The Detroit Free Press offers the following as an example of the potential savings:

Take a college grad who has $40,000 in federal student loans and an adjusted gross income of $30,000 each year.

If we use this example, the grad would pay $171.94 a month using the new plan — compared with $460.32 with a standard 10-year repayment plan or $277.63 a month for an extended 25-year repayment plan.

As a person receives annual salary increases, the monthly payment would rise only according to the percentage of salary increase. In the case of a married couple, each would be eligible for the program and the eligibility would be dependent on each individual’s situation, not the combined income of the two individuals.

The new IBR option goes into effect July 1, 2009. Members of the Class of 2009 become eligible within two months of graduation.

Loan Forgiveness for Public Service Employees

In addition to repayment reduction under the law, students entering public service are also eligible for loan forgiveness. Upon entering full-time public service, once a borrower makes 120 qualifying loan payments on a Federal Direct loan (including Federal Direct Consolidation loans), the unpaid balance remaining including the accumulated interest on the loan is forgiven. The worker must remain in public service for the entire ten year period and the 120 payments timeframe but there is no limit to the amount to be forgiven.

The time period for public service is retroactive to October 1, 2007 meaning those borrowers who have already elected public service may begin counting the ten year period at that point. Some restrictions occur for those who had already consolidated their loans and those restrictions may move the eligible period forward to July 1, 2008.

In the case of loan forgiveness, only Federal Direct loans (including Federal Direct Consolidation loans) are eligible. Payments made on federal loans in the Guaranteed (or FFEL) program are not eligible for the loan forgiveness aspect (only eligible for IBR).

A Major Step Forward

The new law represents an enormous positive development for those students who have accumulated significant federal college debt yet have limited income. To learn more about the program and examine the calculation process visit:

• Georgetown Professor Phil Shrag’s law review article detailing IBR and Loan Forgiveness for Public Service Employees (pdf).
• The IBR monthly repayment calculator.
• Federal direct consolidation loan information and applications.

Last week we featured the impact of the credit card legislation recently enacted by Congress, particularly the impact that legislation would have on college students.

Many have noted that for students, the changes represent a “throw the baby out with the bath water” approach. Certainly, college students and credit cards have not been an ideal mix as a universal rule.

One of the changes makes great sense, limiting credit lines to a student’s ability to pay makes perfect sense. But the changes will make credit more difficult to obtain for all individuals.

In what is dubbed as a move to protect students, the new legislation will require those under the age of 21 to have a cosigner to have access to a reasonable credit line. Without one, there will be exceptionally little credit available.

While such a step appears to make sense, the fact is not every student will be able to secure a cosigner. And those unable to obtain adult assistance are likely to be the group of students most in need of a basic credit line to be able to attend college.

Better Approach

Karen Gross, the president of Southern Vermont College in Bennington, Vt., recently offered a simple suggestion that would deal with the propensity for college students to get into credit card difficulties. Gross told Sandra Block of the USA Today that the new rules may well have very negative impacts on low-income students, the group that truly rely on credit cards to help them secure their opportunity for a degree.

She notes that those students that are unsuccessful finding a cosigner may well turn to other borrowing formats when money is short. Though the cosigner process is designed to protect students, those unable to secure a cosigner could end up turning to an even worse form of credit, payday lenders to help with expenses.

Instead, Gross believes it is time to develop a credit card specifically for college students. The concept she proposes allows for credit access but has two globally agreed upon limits that make sense for college age individuals.

She proposes both a limited credit line and an even lower monthly spending cap. Her suggestions were in the vicinity of a $600 credit limit combined with a $250 spending cap.

While those two numbers could be open for debate, such a design makes great sense. First and foremost, it allows low-income individuals limited access to credit even without a cosigner. Second, it would help students get started on a path to learning how to use a card without placing their future at significant risk.

As Gross notes, such a concept “would help students learn to use credit responsibly in ways that would maximize their credit score.”

Legislation Drawing Criticism

The new legislation has been drawing criticism in some circles. The key negative point centers upon the belief that the new regulations will result in higher rates and ongoing fees for those with excellent credit ratings.

But few are speaking out on behalf of college students. Students agreeing with the suggestions of Gross should contact their representative accordingly.

Perhaps with a little push from students Congress could revisit the issue and tweak the legislation accordingly.

The new credit card protections signed into law recently by President Obama have been both praised and belittled. On the positive side there is little doubt that the steps will eliminate some of the most contentious billing practices currently in place (raising interest rates without prior warning).

However, one group of critics insists that the costs of the new protections will be passed on to more reliable credit card holders. A second group of naysayers stipulates that some of the biggest issues have simply not been addressed.

In either case it is important for college students to understand that the legislation will have an enormous impact on their access to credit even as it seeks to protect them from predatory lending practices.

Credit No Longer as Easy to Get

In recent years, credit card companies have almost been throwing cards at students that were willing to sign up for one. Offering everything from t-shirts to iPods, these companies sought to develop brand recognition that they hoped would remain when college students began their post-campus lives.

Those days are likely over as the new legislation greatly reduces the availability of credit for students. Without a co-signer, full-time college students under 21 will now be able to obtain a line of credit only up to 20% of current income.

To get the full access that students once had a co-signer will be required. If a card holder does have a co-signer, most likely a parent, they will have enormous protection under the new law. The most recent legislation requires that any interest rate increase be approved by the co-signer.

Given the general financial status of most college students, the bottom line is that credit cards will be far more difficult for a student to obtain without a signature from a parent.

Major Negative Practice Still Permitted

The new law does not address one of the long-standing, college credit-card issues called affinity-card contracts. In simplest terms, colleges and universities can still sell a student’s contact information to a credit-card company.

According to BusinessWeek.com, this information represents incredible sources of money for colleges. The site notes that the e-mail addresses and contact information of the students at the University of Michigan are provided to Bank of America for the astonishing sum of $25.5 million.

The 11-year deal provides the Michigan Alumni Association 0.5% of the total purchases made using one of the school-branded cards. Therefore, the school has an incentive for students to acquire and use a specific credit card.

Given the current issues of mounting credit card debt for college students, the idea that schools would encourage debt accumulation is akin to heresy in many quarters. But the new law does not address this troubling issue.

General Positives for All Card Holders

For those holding credit cards and debt, the new law offers several protections. First, under the new legislation, interest rates may not be increased on outstanding balances until a person is 60 days late with a payment.

Second, the changes provide card holders a chance at redemption. If a card holder does become delinquent and is thus subject to a rate increase, they can regain their initial lower rate by paying on time for the next six months.

In yet another critical aspect for all card holders, the legislation also eliminates fees for paying balances online.

Changing Rules

Given the current status of credit card debt and the need for greater financial knowledge among college students, the restriction on predatory charges and the reduction in ease of credit will both be positives in the long run.

Easy credit has often meant the accumulation of debt and the potential for long term financial challenges for college students. Those challenges were then exacerbated by exorbitant interest rate charges.

Making credit tougher to get while reigning in rate increases represent a two-fold step in the right direction.

When it comes to reducing college costs there are several factors that students can control.

Cutting Expenses

Students can consider living at home for a semester or two. They can consider a community college for their basic requirements for either their first semester, year or even their first two years.

Students can also consider a quality state school, generally a third to a half less than the cost of a private school. As with a community college, students can consider a year or two at a state school then transfer to a more selective school for their junior and senior years.

Another simple suggestion that students should carefully consider is to take one additional course per semester, regardless of the cost of the school they are attending. Doing so for five semesters will generally allow students the chance to complete their program in three and a half years.

Finishing just one semester early means a significant reduction in non-tuition costs, eliminating one semester of room and board and academic-related fees. Being able to take a semester off during the four-year period also gives students a chance to work full time to earn funds and thus reduce the amount of money that must be borrowed.

In fact, one of the more interesting ideas that has been thrown around of late is for schools to examine three-year degree options for students. Students should keep an eye open for such schools as finishing a full year early can really reduce the costs for students.

Negotiating College Costs

In addition, when it comes to the costs of college, Lauren Starkey, admissions expert for the Examiner, insists it is possible to negotiate the costs of college. While most of us tend to focus on the price which is indeed likely to be fixed, Starkey notes that students and their families should treat college like any other retail purchase.

In other words, prospective students should not simply accept the financial aid offer from the school without at least meeting with the aid officers to see if they just might be able to do better by you.

Those in Best Position to Negotiate

First off, it must be noted that one group of students is in the best bargaining position. Those who have a record of achievement, either in the classroom, in the athletic arena, or on stage, are in the best position to negotiate.

In addition, students accepted at more than one school also are in a better position. Students can compare aid packages then use those packages as a negotiating tool.

In fact, a decent aid offer from one school can be used as a bargaining chip with a second school that maybe did not come through with any aid. Used in a positive, non-threatening manner, you just might receive an aid offer from the second school after all.

Additional Aid Options

Once you have filled out the Free Application for Federal Student Aid (the FAFSA), you will know what sum you are expected to pay for college. Here Starkey offers some solid advice.

“If school A costs $25,000 a year and FAFSA’s equation says you can afford $12,000, your need is $13,000 a year,” notes Starkey. She then goes on to relate a critical aspect of that need calculation.

While schools will expect you to carry some loans, “many schools don’t expect you to carry all of that in loans,” writes Starkey. “They have work-study programs, grants, and loans to help close that gap.”

One of the more interesting developments is that the more selective a school is, the greater chance a school will “meet 100 percent of a family’s need.” Here again, only students with strong credentials will be considered at these colleges, so high-achievers are the ones most likely to secure additional funds.

But the critical step, according to Starkey is not to simply accept the offer without first asking if the school can do any better. In other words, “you have to ask.”

Cost of College

The increase in college costs in recent years have led to enormous challenges for students and their families. Unless you are one of the very fortunate folks for which money is no object you need to give careful consideration to controlling college costs.

A college degree can be a ticket to a good job and a better future, but that is only true if you can earn that degree while minimizing the debt you take on.

Most people will insist that college cannot be done without some form of financial assistance. That is most likely true for the vast majority of prospective college students.

However, the idea that one must borrow significant sums of money to earn that coveted diploma is not entirely true. In fact, it is possible to graduate with little, to no debt if you follow these five basic steps.

Earn Money While Attending College

While it is far more enjoyable to ease through four years of college study with a focus entirely on academics and your social life, the simplest way to minimizing debt is to work when you can.

During the summer months look to work two jobs if you can. Not only can you bank significant amounts of your earnings if you set your mind to it, keeping busy during the summer months helps reduce your spending tendencies. The result is a win-win.

In addition, plan on working, at least part-time during the school year. Working as little as 6-8 hours a week can produce ample amounts of ongoing spending money. Push it to 12-18 hours and you can actually earn enough money to pay next semester’s fees and book costs.

Lastly, research schools that offer co-op work options. Many schools are affiliated with specific industries whereby students can combine work and study options. With such a program, students earn money while working in their desired field or the company receiving work services helps pay a portion of the student’s college costs.

Select Your College Based on Costs

After countless hours of preparation, it may seem that your choice of college should be based on prestige. That simply is not the case in the long run.

What is true is a diploma from a prestigious school can help you with that first job. But thereafter, your value to any employer will be based on your performance.

If choosing a dream college means borrowing then you should rethink your choice. State universities offer quality educational options often at half the price.

Beginning your career in a financially stable position will allow you the time to prove yourself. If you accrue significant debt while in school, that debt will impact your career options for years to come, forcing you to choose employment based solely on pay.

Apply for Scholarships and Grants

Research every scholarship and grant option available to you, whether it be from your home town, your high school, your chosen college, etc. Then apply for every one that matches your situation.

This is free money, as good as any you can earn, and can go a long way towards reducing college costs. Also, many scholarships and grants are renewable: once you have obtained one, as long as you meet the academic expectations you may well receive the funds for all four years.

Be sure to research school-related options that pertain to your area of study. Some may not be available until your third or fourth year of school.

One, Paid-off Credit Card

As you enter adulthood, you will be besieged by credit card offers. Each will likely offer a free gift in return for signing up.

Select one card based on its cash back or reduced-expenditure percentage that makes sense for you. Some cards reduce gas purchases by a nickel a gallon, others offer cash back on all online purchases, still others offer travel benefit options.

Select the one card that works best for you and say no to all other cards. Limit your use to those purchases where it directly benefits you; otherwise pay cash to ensure you realize just how much you are spending with each transaction.

Most importantly, pay the monthly balance every month. Do not accrue interest or payment fees. Those costs can kill you, putting you quickly into a position where the card expenses are more than you can handle.

If you cannot discipline yourself to pay off the monthly balance, then cut the card in half and dispose of it. A significant amount of debt accrued by college students is directly attributed to the ease at which credit cards facilitate unwarranted discretionary spending.

Consider Living at Home

One of the biggest college expenses is the cost of room and board. Clearly, if you are attending school a significant distance from home, you will need to consider living on campus.

But living at home can save you significant sums of money. Many students are taking advantage of their community college network, living at home for the first year or two of study while earning their basic course credits.

For those who live near their state college, the same opportunity is available.

Living at home will limit the social options, no doubt, but college is first and foremost about earning a degree. Minimizing room and board expenses is an excellent way to reduce the costs of college and helping you graduate debt-free.

Graduate with a Secure Future

Earning a college diploma can be the catalyst to a wealth of career options but the debt you accumulate while earning that diploma can greatly impact those options. The best way to ensure your future is to minimize the debt you accrue while securing that coveted diploma.

With a little extra effort and a few sacrifices, it is possible to earn a diploma and remain debt-free in the process.

There are those news stories that really give you pause. And we are not talking about those AOL headliners mind you, the ones like “NASA astronaut insists government covering up evidence of alien visits.”

What we are talking about is the latest news regarding college students and credit cards. According to a study from Sallie Mae, many students are now using credit cards for almost all of their college expenses, including tuition.

Talk about giving one pause – we might have expected students charging books and fees on their card. But we could never imagine anyone in their right mind putting their tuition on one, not with those cards carrying anything from 14.99 to 18.99 percent interest rates.

The Numbers

Today, Sallie Mae notes that more than 84 percent of undergraduates have at least one credit card. Half of all college students carry four or more cards with the current average at 4.6 per student.

An incredible 92 percent of all undergraduates with a credit card charged textbooks, school supplies or other education expenses. College seniors led the way with an average credit card debt of $4,100.

According to the report, “How Undergraduate Students Use Credit Cards: Sallie Mae’s National Study of Usage Rates and Trends, 2009,” students charged an average of $2,200 in direct educational expenses per person, more than double the $942 amount from four years ago. Of those charging educational expenses, roughly 30 percent actually placed tuition on a credit card as well.

Terrible Choice

While many students were using the cards for convenience, the overall findings of the study pointed to college students using credit cards to live beyond their means. In fact, 82 percent of the students incurred finance charges by carrying a monthly balance.

In a clear indication that credit management was a huge problem, roughly 40 percent indicated they had charged items even though they knew they did not have the funds to pay the bill.

Given the going interest rates and monthly charges of as much as $30.00 for transactions beyond credit limits, the idea that students would place their tuition charges on their credit card demonstrates a real lack of knowledge regarding how credit cards work.

There is no doubt that credit cards offer great convenience. No need to fill out the FAFSA forms and no need to complete additional paperwork to apply for a loan. Add in the ease of online payments and the process is indeed extremely easy.

But credit card interest rates of 15 percent are more than double the current rate for Federal Stafford loans (6.8 percent). Even private loans, considered the least advantageous of loan options carry current rates of only 8 percent.

The result is that credit card users are overpaying for college big time. Unless a student pays off his or her card in full, by placing these charges on a credit card he or she is paying far more than the list price for books, fees and tuition.

College, Expensive Enough

There is no doubt that college expenses are extremely taxing – however, students should be aware that using credit cards to cover these costs only makes the costs of college less manageable in the long run.

First and foremost, students need to build a budget ahead of time that tallies the cost of tuition, books, fees and travel. Once the need is determined, students must pursue the most advantageous funding help available.

That means completing the FAFSA, the standard federal form that is the ticket to potential grants, scholarships and federal loans. Filling out the FAFSA form does take time but it is a must for any serious student.

Even if students do not qualify for grants or scholarships, the first credit option everyone should pursue is the Federal loan program. Simply stated, they represent the best borrowing bargain.

Only after completing the federal application process should students pursue the more expensive private loan option. Such loans carry higher interest rates and other processing fees may be assessed depending on a student’s credit standing.

Still, private loans are a bargain compared to the fees and rates associated with credit cards. Unless a student has a wealthy friend or relative paying that credit card bill for them, placing one’s tuition on a credit card is a recipe for disaster.

In fact, it is as preposterous to us as that NASA astronaut claiming our government is hiding evidence of intergalactic visitors.

Editors note: The full study is available in PDF format online.

The recent economic downturn has Americans thinking very differently about the process of borrowing. In what just might be the silver lining of the current crisis, the idea of creating extensive future debt obligations has both students and college trustees rethinking recently-accepted borrowing practices.

Borrowing for College

The first concern centers upon the amount of debt students have been taking on as they pursue a college degree. While most students have always needed some financial assistance to be able to attend college, the level of debt many students have recently been willing to rack up while in school has truly gotten out of hand.

Today, the median debt load for a student earning a bachelor’s degree is about $20,000 while the average now exceeds $21,000. Most alarmingly, roughly one-fourth of all undergrads borrow more than $25,000 and a tenth borrow more than $35,000.

If the choice is made to attend graduate school, then students generally add tens of thousands of dollars to the accrued debt. Depending on the graduate degree program students pursue, the current average debt for graduate degree students ranges from $42,000 to more than $125,000.

However, a student loan for school is often referred to as “good” debt because it is an investment in one’s future The reason is simple, upon earning a college degree, you will have the chance for a better job and far greater earnings than a person without a degree.

But many students are starting to realize that those greater earnings still may not be enough to pay off the debt incurred while securing that degree. All too often, students are finding their debt obligations from school eating up such a large portion of their pay check that purchasing a home or starting a family is beyond their financial means.

Colleges Borrowing

On the flip side of student’s borrowing, it seems that colleges themselves have also been incurring significant debt in recent years. Now, amidst the current economic downturn, some colleges face financial perils.

According to the folks at The Chronicle of Higher Education, “June 30 could be a day of reckoning” for many colleges. What makes the issue so compelling is this day of reckoning is one that most never saw coming.

Effectively, the competitive rush for top shelf facilities led many schools to borrow tens of billions of dollars over the past ten years. With their borrowing, many schools created extensive debt obligations against the potential for future earnings.

However, the financial downturn has made it tougher for students to attend school and thereby has greatly reduced projected future returns. At the same time, in the process of borrowing funds, colleges used the existing value of their facilities and endowments as asset collateral. Here again, the recent downturn has greatly reduced the value of these assets.

With large liabilities accompanied by shrinking assets, some schools are now finding themselves in violation of specific bond or loan requirements. At the same time, with banks and lenders under pressure, cash-strapped colleges are not as likely to be given forbearance should it be requested.

According to the Chronicle, the result could create a situation where bondholders subsequently “demand immediate repayment on part or all of an institution’s bonds.” In addition, in the cases of a school facing variable-rate debt obligations, those institutions holding a loan could legally hike the interest rate exacerbating the debt repayment challenge.

To repay these loans on the quick, schools must then turn to their endowments for cash, a factor that then further reduces their assets and thus increases their debt to asset ratio.

Beyond the debt obligations themselves, strapped schools could ultimately violate the eligibility standards set by the U.S. Department of Education for federal student aid. Any college so indebted as to lose eligibility to receive federal student aid would soon find its enrollment falling through the floor. That drop in enrollment would further exacerbate the debt repayment issue to the point that the school would have to cease its operations.

Carefully Consider Any Debt Contract

Any incurred debt carries with it an expectation of repayment, plus some additional cost (interest). Debt also generally requires some type of collateral in case the borrower defaults on the repayment expectations.

It is extremely important that students understand that debt is ultimately a claim against future labor and earnings. The borrower essentially gains something immediately but in turn makes a pledge to pay for that something down the road.

The recent economic downturn has hopefully taught many people a great lesson. First, as many have recently found, there is no guarantee that those future earnings will in fact be enough to meet the debt commitment. Second, if you default on that commitment, you will lose your collateral as well as your credit rating.

The number of home foreclosures and businesses filing for Chapter 11 combined with the current issues facing institutions of higher learning serve as a great reminder to us all: entering into debt is not to be taken lightly.