Look at Student Debt Like a Business Plan

Students and their families must understand the implications of their education financing choices.

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Alejandro Crawford graduated from the Tuck School of Business in 2003 and is a senior consultant at Acceleration Group. He teaches growth and digital strategy at Baruch's Zicklin School of Business and the New School. Lisa Chau is the assistant director of Affiliated & Shared Interest Groups at Dartmouth College.

The days of bootstrapping education are all but over. For the vast majority of us, pursuing higher education means borrowing. We make this choice because education opens doors. A system that allows students to finance their education—whether college, trade, graduate, or professional—is key to making opportunities available to those who wish to pursue them.

The problem is that most of us take on educational debt without attempting—or even being equipped—to weigh its burden against the earning potential of our future careers. Yet education costs are rising precipitously and career trajectories are increasingly uncertain. In these circumstances, it is urgent that students and their families understand the implications of their education financing choices.

If, like so many others, you or someone close to you has borrowed tens of thousands of dollars to pay for school, ask that person (even if she is in the mirror): "Did you know what you were getting into?" Did you have the tools to understand the implications of your choice of school or major? Did you have the financial acumen required to think through the implications of grace periods and deferments, subsidized and unsubsidized loans—and the mental preparation to make wise decisions about them?

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Or did you just take the package deal because, well—no degree, no open doors.

This "package deal" aspect of education, when it comes to opening doors of opportunity, is a key reason educational costs are rising so fast. Free or less expensive options, including MOOCs (the "massive open online courses" now offered by universities and other providers), have generated much attention, and rightly so. But in most fields, when it comes to future opportunity, credentials are still king.

In fact, getting a degree or certificate can be so indispensable that families, students and society often pay not only for what opens doors and fosters growth, but also for many costs that may be incidental to this.When students and families are equipped to make clear-eyed decisions about how they raise the money to pay for education, however, then they can begin to exert informed influence over education budgets. Is fancy library furniture or a faculty full of elite researchers a good investment, from the point of view of the student?A beautiful campus can be a draw for lifelong relationships that advance careers and spur great projects, and faculty research can open vast possibilities for scientific and intellectual inquiry.

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These and other expenditures can have great value. But at a time of staggering growth in educational cost, those paying with their future incomes or their families' life savings have the right to ask what exactly such trappings contribute to one's education. And they need good information and customized tools that make the answers transparent, and bring their implications home.

From a financial point of view, an investor in a startup will tend to get very nervous about an entrepreneur's "burn rate" if she sees an office stocked with Herman Miller chairs and expensive equipment before the entrepreneur has a customer or takes in a dime in revenue. Whether it is keeping up the college grounds or funding faculty projects, costs need to be transparent, and their value justified to prospective students. After all, it is the students who are typically forced to raise money to pay for them.

It's true that limited opportunities exist to suspend, slow down, or forgive debt payments if a student faces financial hardship, pursues further studies, or chooses a career serving the public good. But such programs and options aren't for everyone—and they certainly can't solve our mounting student debt problem. Understanding the implications of student debt requires getting one's mind around present choices and future possibilities, and thinking through how they may play out as conditions change. 

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To get a sense of how this works, consider the experience of business owners after the economic bubble burst in 2008. Many of these business owners had written blue-sky business plans—imaginative exercises that projected how their businesses would perform several years out, assuming the proverbial skies stayed blue. Because credit was easy to get, and the economy was booming, these business owners got plenty of loans—and used their proceeds for expenditures many came to question when skies turned grey.

To help guard against this, business owners do well to consider both best and worst case scenarios, and adjust these as circumstances change. Financing that needs to be paid back reliably should be used only for expenditures likely to generate future cash on a stable and predictable basis.

Of course education is not business. To gauge its value merely in financial terms would be shortsighted, because so much of education's value is intangible. The fulfillment of human potential often depends on educational choices that defy cold calculation of the potential financial return that might follow. Nevertheless, students must reckon with the financial implications of how they choose to fund their education.

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By no means are we discouraging educational debt. Education remains perhaps the most important window to fulfillment and advancement. Nor are we arguing that only applied skills are worth the cost. Critical thinking skills, which enable students to master new situations and disciplines, have incalculable value in work, as in life. In fact, we believe that making one type of educational investment decision over another is a highly individual choice. Decisions about public versus private schools, preprofessional versus liberal arts majors, vocational, two year, four year, and graduate programs, not to mention various career tracks, are highly subjective.

But the borrower must understand the implications of debt, through the kind of scenario planning we do with businesses. Planning needs to take into account rainy day scenarios, as well as the prospective borrower's aspirations, lifestyle preferences, performance, and appetite for risk. In other words, don't just give the dashboard and rear view mirror a cursory glance, turn on cruise control, and zone out. Keep looking as conditions change and adjust accordingly. What we are advocating is that every student create a plan when financing her education. This kind of planning is both similar to and different from a traditional business plan. It is similar in that it asks students to think through how they will bring in income after they have finished school to pay back their loans.

It is different in that it takes changes in a student's preferences and prospects heavily into account. Instead of asking students to make fixed projections around their futures, we are asking them to take stock of the available paths forward at each stage of their education and their careers, and to make adjustments accordingly. Does this require students to master new planning skills? Absolutely. Are these skills indispensable for individuals making major investments or taking out significant debt? You bet. The key is to make the implications visible and comprehensible to students before they sign for their loans.

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On a general level this is beginning to occur, and that's a good thing. A February 18 article in the Wall Street Journal describes the "College Scorecard" released by the government a week earlier:

Families can search by school to see how much money students owe on federal student loans when they leave college, as well as estimated monthly loan payments.

A good start, but more transparency is necessary. Students must be offered concrete ways to evaluate their chances of earning enough to bear the costs of debt while pursuing their future goals, from publishing a novel to starting a fashion design firm. Giving students and those who invest in their education this kind of visibility will lead some to take a more conservative path. Others will realize that what might seem to be a reliable path to success for some, will not be so for them, either because of trends in the marketplace or specific facts about their ambitions or abilities.

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Still others will have the tools to sell their parents, investors, or other "stakeholders" on plans for making their first feature film or changing the world—while making clear-eyed decisions about the levels of student debt they'll have to carry while doing so. No student should start a term without being presented with concrete scenarios, specific to his course of study and performance, for what paying back the debt will mean over time.

With real transparency at their disposal, and with the right planning tools in hand, students can make informed decisions. And whether they are pursuing career advancement, critical understanding, or dreams of their own, they can do so with sufficient understanding of the financial commitments involved, just as well-advised business owners do.

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