By Joanie Connell
Parents and students beware! Don’t get suckered into taking out unaffordable college loans because you think you have to. You don’t.
The problem with financial models is they assume people make rational decisions. There’s nothing rational about overspending. People overspend for emotional and psychological reasons, not rational ones.
We overspend because…
- We feel anxious: we need to keep up with the Joneses, we feel insecure about our abilities, looks, or status. (Salespeople prey on people’s anxieties to sell them things. See techniques used and a sales example.)
- We want something really badly: we see a beautiful house and we have an overwhelming desire to own it. (Salespeople also create customer desire to sell. See techniques used and a sales example.)
- We think we deserve it: we feel entitled to go to a good college because we are a member of a certain group or because we have worked hard to get good grades.
- We invoke psychological defense mechanisms to believe we can afford what we are buying: we deny that interest rates will go up, we rationalize the luxury car is necessary to impress clients.
There are many more irrational reasons for overspending, but the point is we need to stop doing it.
OVERSPENDING ON COLLEGE
One of the biggest problems in our nation right now is that young people are overstretched with costly student loans and it’s limiting their ability to live independently. Financial analysts have shown that, for many people, the investment in college has a negative return. (See The Economist and The Wall Street Journal for recent articles). Why are people spending so much on college then?
Frankly, I think the biggest reason why young graduates are in great debt is because they thought they had to go to the college they chose to get a good job. This is driven by anxiety—the fear of not being attractive in a highly competitive job market. Evidence shows that expensive college degrees are not necessary for most jobs. Check out the College Planner for more on this and for advice.
Prestige is another driver for choosing a college. I think that parents are the main contributors to the prestige factor because it makes them feel more successful as parents to have their children go to more prestigious colleges. The Boston Globe reports on how parents are using Face Book as a bragging platform to boast about their children’s college acceptances. Here is a great blog from the Huffington Post for all you parents out there who are doing this.
Entitlement is another major factor. A high school student told me she wouldn’t consider going to the local state college, as she literally turned up her nose. I was confused because it was a good school at an even better price and her family had only modest means. She chose to go to a state college in a neighboring state and pay out-of-state fees instead. She also moved back home after graduating, burdened with large student loans.
These are all psychological reasons for choosing colleges that may turn an otherwise practical decision to an impractical one.
OVERSPENDING ON LIFESTYLE
Student loans aren’t the only factor contributing to young people’s financial problems. The new grads feel entitled to a high standard of living right out of college. I have been surprised at how many 20-somethings I know who have lived in their own apartments, walking distance from the beach here in costly San Diego. Some of them have moved back home because they say the cost of living is too high for them to afford. Well, of course it is if you expect to have an apartment next to the beach! Seriously, who can afford that?
What are reasonable expectations for a standard of living for a recent college graduate? A used car, an apartment with roommates and mismatched, self-assembled furniture in a rundown part of town would seem like a start. It takes time to earn money and save up to buy furnishings, piece by piece, and eventually make enough money to rent a nicer apartment or get a nicer car (emphasis on “or”). It’s not reasonable to expect to have all this right out of college, especially if you have loans to pay. It’s also part of the experience and the fun of being young.
All of the issues here are affected by the economy and demographics as well as psychological factors. Yes, it is more competitive to get into college these days and there is higher unemployment than at some times in our history. The standard of living has also increased so we should expect to have a higher standard of living than at previous times in history. Yet, young people are still financially overstretched and they don’t have to be. We don’t have control over all of these factors. Yet we can take control of the psychological factors if we are aware and deliberately make practical choices.
Be wise. Make a practical decision on where to go to college. You will be thankful later.
