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Friday, March 30, 2012

Smart Money Mag: Student Loans for K-12

It isn't new news that Orthodox parents have been financing private K-12 education (usually via home equity lines of credit), but this Smart Money article, sent to me by another wonderful reader, outlines the newest loan industry, K-12 loans.

Personally, I'm just not that committed to private schooling to take out pre-college loans. I'm not convinced that college loans are an "investment" worth making in many cases. It goes without saying that I'm not going to favor student loans for the K-12 set.

The article states that most of the demand is coming from high-income parents (i.e. $150,000).

Much of this demand is coming from high-income families. Roughly 20% of families that applied for aid to pay for their children's kindergarten through 12th grade private school education had incomes of $150,000 or more, according to 2010-11 data, the latest from the National Association of Independent Schools. That's up from just 6% in 2002-03. Those who don't get approved for free aid, like grants, increasingly turn to loans, experts say.

This does not surprise me a bit. Being that it is tax season, I'm once again reminded that when you hit the $110,000 mark, some valuable credits like the child tax credit start being reduced and by $150,000 (!), these credits are other valuable losses that can reduce taxable income are long gone or limited in their entirety.

At $150,000 there is a large tax burden, a full tuition bill, and not a chance at aid, grants, scholarships. So, to loans such parents turn.

Besides the risk that loans entail, the entire idea of taking a K-12 loan in order to increase the chances of getting into a better college is upside down. What happens if the parents can't take on anymore debt? The kids will end up with less college opportunity.

Something interesting which I've pointed out on my blog before, paying private school tuition over 10 months, which is default in Orthodox Jewish schools, is NOT standard in private schools. Some schools, as you can see below, claim a 10 month plan is a "financing" plan and they charge a hefty sum of money to help you finance over 10 months. We'd run into ribbit issues, but it is still good to remember that paying over 10 months is a gift of sorts.

Schools are offering their own financing options as well. The Blake School in Hopkins, Minn. says 132 of its families signed up for its 10-month payment plan this year -- which charges an 8.5% fixed rate -- and that's up 19% from the previous academic year. The Hawken School says it provides a small number of loans with a 6% rate. "These loans aren't as taboo as they once were -- there are a lot more schools that are much more willing now to present a loan program as an affordability option," says Kristen Power, northeast regional director for the NAIS' School and Student Services, which processes families' financial aid applications to private schools.

Student Loans for K-12 in book equal a lot of risk and little benefit. . . . . .you can't even deduct the interest repayments to reduce your taxes, making the other financing "solution" of a HELOC look like a smart idea, although none of the above is smart in my book.

39 comments:

JS said...

A few points:

1) In terms of taxes, people with high incomes that is not derived from investments get killed in the current tax system. Nearly all deductions and credits are phased out. You can basically only deduct mortgage interest and charity. No child credits, no property tax credits, no student loan interest. Plus the AMT then adds back in many deductions.

2) I wouldn't be so quick to dismiss this. Nor would I be so quick to compare the private schools these parents are shooting for with yeshiva private school. In fact, I'm not at all surprised these are high income earners who earn a lot, but not enough to be truly wealthy. They have managed to put themselves on a certain trajectory and they're trying to put their kids on to an even higher one. They want their kids to be truly wealthy, not just high income earners slaving away.

Yeshiva private school doesn't do that. Yeshiva private school is a phenomenal expense whose sole goal is perpetuation of Orthodoxy. It's not intended to put you into the stratosphere of high earners. Private school is partially about the education, but a lot more so about certain intangibles like meeting the right kinds of people and knowing how to behave and interact with people in these social circles. You simply can't learn that in yeshiva. In fact, yeshiva is probably detrimental in this regard. The schools teach you how to speak, how to dress, and how to look the part. So much in this world is about that, though maybe people don't want to admit that. If you have two smart applicants applying for the job, but one is "your type of person" that one is much more likely to get the job. so, smarts and education and hard work are necessary ingredients, but they're not sufficient ingredients.

A Harvard education is no doubt a very good one, but people don't struggle to get into Harvard solely for the education. Just saying you went to Harvard opens doors and, if the time spent there is used wisely, creates a network of people and opportunities that can launch a career.

This is what people don't understand in the "frum" world. Maybe it's because they don't have these same ambitions - their goals are to raise good Orthodox Jews, not wealthy, successful Jews. That's understandable. But, it's dangerous to try to compare the yeshiva system K-12 with these private schools K-12 or yeshiva college (YU/Stern, Queens, Tuoro, etc.) with Ivy or Ivy equivalent universities.

I'd take out loans for the latter, but I can't see the value of going deeply into debt for the former.

The real question shouldn't be on these parents, but on frum parents. Why are frum parents going so deeply into debt and mortgaging away their future and their children's future on yeshiva education?

Miami Al said...

There is also social pressure on parents in regards to private schooling. If you are a lawyer/accountant that has reached the managerial ranks, you're supposed to start rainmaking, but you aren't making big bucks yet. However, if you want to be a big shot lawyer, you need to look the part, so you lease a Lexus and borrow for private schooling.

These people also think that they are going to keep climbing the income ladder. Sure they need a loan for PreK, but the schools are super competitive to get into later, and they'll be a partner in a few years and it will all work out...

And if they make partner, it generally does all work out.

And if they don't, the parents are screwed, and the kids are screwed, because if their income hits 250k-300k, they are in the same boat as the 200k chumps in Frum world, so no student aid for college, parents should pay/saved, but there was so saving because of heavy debt loads.

I understand the motivation, but I saw far more people in prep school whose parents leveraged themselves end up at a state university for financial reasons... and had they started prep school in 9th grade, even at a second tier school, and college savings, they'd have been alright.

It boggles my mind that on Honestly Frum's site, they were talking about sending their kids to Queens college, since they couldn't afford YU because of Yeshiva, and Rutgers was treif.

That to me is CRAZY.

Anonymous said...

There is nothing wrong with Queens college. I am not sure why Rutger's is ore treif than Queens, but Queens is a very good college and since most people still need to go to grad school, if you can do well there, you are no worse off than if you'd gone elsewhere and a lot better off financially.

JS said...

Yeah, to clarify what I said above, I understand the motivation - I'm not saying in every case it's a smart financial move. Miami Al pointed out the financial downside. My point was simply that the motivation behind what they're doing and the motivation behind yeshiva K-12 and yeshiva college are in completely different worlds. It's crazy to even try to compare them.

The thing is, these people are trying to put their kids on a different trajectory, I don't think this is really about the parents looking the part. With yeshiva it's not about a different trajectory - it's about maintaining the status quo. Tons of money could be saved if you didn't care about your kids going off to the left or to the right - both options are far cheaper. So, the parents are bankrupting themselves for the status quo while setting their kids up to be a financially worse path because the parents can't afford anything but the cheapest universities.

Dave said...

Debt inherently closes off options.

It's only worthwhile when it is either absolutely necessary, or when they options it enables outweigh the options it precludes.

Anonymous said...

Now that such loans are available, there can be circumstances where it is preferable for someone to take out such a loan rather than rely on scholarships - i.e. charity. An example would be the parent who is doing a medical residency or fellowship and in a few years will be making 200,000 and in a few years after that will be making 300,000+. Same for someone who is getting an MBA from Harvard. In other words, those on an upward income trajectory.

ProfK said...

I can foresee one problem with the K-12 loans for yeshiva parents. If there are such loans it lessens the incentives for the yeshivas to hold down costs and keep tuition "real." And where would be the incentive for donors to fund scholarship programs? That parents taking out loans now may be in financial trouble sooner or later won't bother them, as long as they get theirs now.

Re the Queens/Rutgers issue, I find it amusing that Jerseyites (Honestly Frum lives in Teaneck and most of his commenters are from that area)say that Rutgers, highly ranked and part of the Jersey State University system, is more treif than Queens, part of CUNY. I've had personal experience of both schools.

Yes, there may be a higher percentage of frum students in Queens, but if Jerseyites reversed their antipathy there would be equal frum populations in both schools. Jersey people should also be aware that they will pay higher tuition at Queens, being out of state, in the same way that NY students pay higher tuition at Rutgers, being out of state. These parents should also understand that Touro has taken a large bite out of the population that would otherwise attend Queens. Basing college choice in this instance on frum population is a risky business.

Anonymous said...

Hate to say this but just living an orthodox lifestyle limits your child's options with regard to higher education and entry into an elite type of career. So you might as well opt for a Yeshiva education and perhaps your child owning a business of some sort that will pay the bills. Higher tier universities are populated by nonobservant students and professor who truth be told find the very existence of orthodox Judaism an embarrassment.

Anonymous said...

I took out a loan against my house to pay tuition just as the the economy fell apart. I lost my job about 6 months later and had a heart to heart talk with the head of the scholarship committee. His advice have your wife sell her engagement ring and pawn the silver. We did this but only raised $4000 which all went to tuition. we lost our house and now live in an apartment. Our son ended up in public school and is getting a better education than he did before and we ended up leaving the Orthodox community.

Nephew of Frum Actuary said...

"His advice have your wife sell her engagement ring and pawn the silver."

Perhaps your answer should have been to pull your children out. As much as he has the right to charge for service, you have the right to refuse the service.

Miami Al said...

Anonymous,

"Hate to say this but just living an orthodox lifestyle limits your child's options with regard to higher education and entry into an elite type of career."

Outside of professional sports, I don't know of a single career/profession that doesn't have some Orthodox Jews in it. The nations top Universities have Orthodox minyanim at them (Harvard, Yale -remember the lawsuit, Princeton, Stanford, MIT, etc. all have Orthodox minyanim and Orthodox students).

The idea that your child can't have it all is a cop out.

Professional baseball has some proud non-Orthodox Jews that sat out games for Yom Kippur (Hank Greenberg, Sandy Koufax).

I think it would be hard (but not impossible) to be a professional Golfer, NFL player -- NFL is hard because of playoffs, but NCAA would be VERY hard to manage, but any career path based upon education is possible.

Are certain things harder? Sure. IT is hard because you normally schedule hardware upgrades on Friday night so if there is a problem you have Saturday night/Sunday to roll it back, but I know Shomer-Shabbat IT Managers/Consultants that do extra fire-drills during the week so they can do their upgrades Saturday night.

The idea that you can't go to a top college and/or a top flight career being Orthodox is absolute nonsense, unless you define Orthodox VERY narrowly.

We've had practicing Orthodox Jews on realty shows (even if they edited them to look bad, that's how the shows work), a model toveling dishes with her own cabinet of food, Jews with really tough residency shifts servicing Shabbat on matzah and tuna fish cans.

If you are dedicated to remaining observant, you can absolutely accomplish nearly ANYTHING in this country.

Hell, a different ballot in Palm Beach County Florida and/or a different campaign in Tennessee and an Orthodox Jew would have been a heart beat away from the Presidency.

Now, if you define "Orthodox" as RW Frum, which includes never being challenged in your observance, than yes, you have limitations. But if you define Orthodox as Shomer Shabbat/Shomer Kashrut, any option is open to your kids.

Anonymous said...

I have recently suggested to the finance committee of the board (on which I sit) of our school that part of the scholarship application process now include a requirement that an applicant has applied for and been rejected from these k-12 financing companies for the amount they are seeking in tuition reduction. I have not been advised as to whether they will implement this initiative.
I think this would remove a significant burden from the school. There are far too many parents who receive a modest reduction in tuition. Those same parents should (and would likely qualify for these loans) finance that small reduction individually rather than have the school finance it on the backs of full payers.

Again, I simply advocate that our choice to send to Yeshiva day schools reflects a life-time commitment to judaism. There is no reason that the obligation to pay for it should stop (if you could not afford it in full at the time) when the child graduates.

JS said...

"...our choice to send to Yeshiva day schools reflects a life-time commitment to judaism."

I could be wrong, but I think if yeshivas forced parents to seek outside loans, we'd all see just how "strong" that life-time commitment to Judaism is (at least using modern communal sensibilities that one cannot be truly Orthodox without yeshiva education).

Avi Greengart said...

JS - Nah. People would take out loans. It would become part of the culture.

Mark said...

Avi - and what would happen when nobody is willing to give them further loans?

Anonymous said...

We took out private loans to pay for our kids' yeshiva tuition and now have no way to help pay for college without setting up a situation in which we will never be able to retire. I was talking with my brother in law, whose is in way worse shape than us, and his comment was that "Hashem will provide." From what I can see this is a pretty common attitude, but it's I think that even bigger "retirement crisis" will be on the way 20 years from now.

Miami Al said...

I'm pretty sure that RELYING on Hashem to provide is heresy... One should have faith in the Almighty, but not expectations.

Acting with the expectation of a miracle is problematic.

So when a whole slew of Jews make bad decisions because of "faith," what will the next generation think when they see that their parents faith was unrewarded.

It is important,as a parent, that you do not set up situations where your children will be disappointed in Hashem.

Avi Greengart said...

Mark,

For many people, that won't actually happen - their income and assets make them good credit risks. But when you can't borrow any more, that's when you ask the school for scholarship.

I know this is really cynical, but it's sort of happening in reverse now. You pay as much out of pocket as you can afford for day school tuition, then you ask for tuition assistance, and then you lease cars you couldn't afford to buy and put the iPad/brisket/takeout/camp on credit cards.

Personally, I like to live well and I define that, in part, by living within my means. It's easier for me to do that because of the choices my wife and I have made (when we got married, careers, housing, JFS instead of local day schools) and because Hashem has blessed us with everything we need and more. But I am aware that you could just as easily have the same blessings that I have and define it as not having everything you need. Apparently, that's what credit cards are for.

Mark said...

Avi - For many people, that won't actually happen - their income and assets make them good credit risks.

I don't quite understand this statement. You are saying that they cannot afford to pay for yeshiva, yet somehow their "income and assets" enable them to pay for yeshiva and also pay for the interest? It doesn't make sense in most cases (it makes sense in the case of a doctor whose income is expected to increase rapidly, but not for most other folks).

Personally, I like to live well and I define that, in part, by living within my means.

I define living well like this as well. And despite it not being very popular nowadays, I am also of the opinion that halacha demands one "live within his means". Not living within ones means could be construed as a form of theft (from the community at large).

I despise credit card debt. I mean, if you can't afford something, then you DEFINITELY can't afford it with 12, 15, or 18% interest added to it!!!

anonymous743 said...

Anonymous 6:52 I feel for your situation. My kids are also getting a better education in public school, but people should not underestimate how hard it is to remain frum after your kids switch to public school. We are definitely on the slippery slope.

My oldest son's friends from his yeshiva days are leaving town next year for high school. He will be terribly lonely without them.

Those long Shabbos afternoons are torture when noone is around to hang out with. He HATES!!!! Shabbos (his emphasis).

Because he is in public school he really does not fit in with the kids in any frum venue (too young for NCSY). When he encounters kids in shul, they tease him because he doesn't go to a "real school". Last Shabbos he was dismissed by a group of boys - they made it quite clear he was not welcome to hang out with them. He came home very hurt and it was all I could do to keep him from heading out on his bicycle. But it's only a matter of time.

I should add that we switched only partially for financial reasons. I definitely don't think the schools should be responsible to cover parents who can not pay tuition. But I think if more people lived financially "honestly" more people would put their kids into public school and those of us who have taken that leap would not feel like aliens.

anonymous743 said...

In case it's not obvious where I stand on the topic at hand -- I think it's nuts to take out loans on K through 12 education. But when making these decisions, it *is* important to consider the spiritual life of the whole family. It's not a trivial thing for a frum family to send kids to public school.

conservative scifi said...

anonymous 743,

That is a truly horrible story which, unfortunately, confirms a prejudice of mine that young orthodox boys lack any sort of derech eretz. I think this is the sort of issue which should be brought front and center to your Rabbi, who should make it clear to both the children and their parents that this sort of behavior is entirely inappropriate. Even if your son is "challenged" in some way, exclusion is particularly painful and wrong.

But if your Rabbi and the adults in the community sanction this sort of attitude by their children, perhaps one answer is to try a different community, whether visiting parents or friends for Shabbat, finding a right-wing conservative synagogue that might suit your family, Chabad, or some other venue where your son will learn to love Shabbat.

Some of my children attend public school, but they are excited to attend our (mainstream conservative) synagogue for Shabbat not only to play with their friends after the service, but to see family, grandparents, and others. Shabbat should be a delight, not a penance.

anonymous743 said...

We live in a large community where people who don't fit the mold are expendable. You don't need people to "fill up the minyan". In smaller communities every soul counts.

If anyone is still reading this thread: Moadim l'simcha!

mother in israel said...

Anonymous 743: How is it such a large community, if all of the boys are going to high school out of town? In my town there were always a few Orthodox kids in public school, because their parents didn't want to send them out of town. You might find that not all of them end up staying out of town.

anonymous743 said...

mother in israel:

My son has 3 close friends. Our town is a bit more on the yeshivish side and there isn't really a modern orthodox high school in our town. Since I posted my original post the Dad of one boy did tell me they are checking out something local.

My son does not make friends easily, but I'm sure it will work out. After the initial sadness I find I'm able to take a "gamzu letova" attitude about it.

Anonymous said...

I am a parent who took out a loan against my house to pay for day school tuition. I subsequently lost my job and had to declare bankruptcy. We moved in with my in-laws and my kids now go to the local public school and study with a local rabbi. Things are okay for my wife and I, but my sons lost all of their friends who now make fun of them because they go to public school. I talked to the head of my kids former school who said there was nothing he could do about the name calling. He also suggested that it was my fault and that I was a bad father because I had to send my kids to a different school.Funny thing is that many of the kids at the public school are better mannered and seen to care more about school than my sons' former classmates.

Anonymous said...

Anon 7:39 - I'm so sorry that you have had these financial set backs and that your children have been mistreated by fellow jews. It sounds like you kids will be both better jews and better people than had they remained at that day school. Too many orthodox jews fail to realize that there is a very fine line between teaching pride in judiasm and being observant and teaching arrogance and condescension, and between sheltering kids from "the other" and teaching xenophobia and prejudice.

JS said...

Maybe a topic for a post?

http://money.cnn.com/2012/04/18/pf/moms-work/index.htm?hpt=hp_c2

Don't forget loss of scholarship!

Miami Al said...

On the bright side, your son isn't in that school anymore...

"I talked to the head of my kids former school who said there was nothing he could do about the name calling."

What other sort of educational and behavioral problems was there "nothing he could do about." Perhaps doing math homework?

Anonymous said...

"I talked to the head of my kids former school who said there was nothing he could do about the name calling."

Nice to see rosh yeshiva who admits that they don't teach good midos or have any role in character development. The 15K tuition is to keep your kids segregated and learn a little hebrew and a little gemorah

Anonymous said...

I was recently told that I was financially irresponsible by the finance director of my son's MO yeshiva because I lost my job and, at the last minute, had to ask for financial assistance. Go figure. My brother offered to loan me the money and a friend suggested I try to get a loan though "Prosper."

Anonymous said...

Anon 5:20 Very sorry about your job loss. I realize it can be hard to move a child out of a school, but why would you want your child attending a school with management with that attitude. Whatever happened to a little rachmanus. Taking out a loan to pay for primary education while employed is dicey enough, but while not employed could mean digging a hole that would be really tough to climb out of. Is this what the day school or bust mentality has come to?

Anonymous said...

Can k-12 student loans be discharged in a bankruptcy? I know that you usually can't do this with college loans. I send my kids to a Jewish community day school and was advised by a friend that I could take out one of these loans and have it taken care of via Chapter 11 or 13 if I run into trouble. I have also thought about taking out a loan against my house and my wife's 401K. We had a lot of expenses this year due to my son's bar mitzvah and my wife had her hours cut at work. We would welcome any suggestions.

Sorted Megablocks said...

These tuition discussions freak me out. We're both 38, 2 kids. We rent and don't plan to buy. We drive decade old cars. Our kids are in public school. We still owe $70,000 on student loans. We have no savings, so we won't be retiring. We're financially up a creek and I know it.

But who's worse off---- us with no home to lose slowly clipping away at debt, or a family paying tuitions with their house on the line taking loans to pay the tuitions--- it's ridiculous.

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