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Student Loans Soar; Top 5 Money Mistakes; High School, College, Career in One

Aired October 22, 2011 - 09:30   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


CHRISTINE ROMANS, HOST: At age 4, a child living below the poverty line is a year and a half behind in academic ability. How do we close that gap?

Good morning, everyone. I'm Christine Romans.

Also, ahead: high school, and college and a career -- a new high school is offering all of the above to tech-savvy kids all at once. But is it working? We're going to take you there.

Plus, the top five money mistakes that are needlessly costing you thousands of dollars.

But, first, a stunning number surfaced this week. As 16 million Americans are out of work, the economy is struggling to grow and the housing market remains a mess, we learn that total student debt, student loan debt now topping $1 trillion for the first time. At the same time 15 percent of 20 to 24-year-old Americans do not have jobs, student loan delinquencies have jumped to more than 11 percent doubling just over the past few years.

Nicholas Kristof is a two-time Pulitzer Prize-winning columnist for "The New York Times."

Nic, the credit rating agency, Moody's, says it expects student loan problems to only get worse. This is a really tough situation for young people. No jobs, tons of debt, an economy that's not favoring the things it used to.

NICHOLAS KRISTOF, COLUMNIST, THE NEW YORK TIMES: That's right. And I fear that the result may be, you know, more people having trouble getting into college and one of the long-term problems affecting economic competitiveness is indeed that the proportion of the proportion of Americans going to college has flattened since the 1970s. So, I fear we're kind of digging ourselves into a hole.

ROMANS: The thing is even if you get a college degree and you get the debt, it slows down your ability in some cases to get married because you are trying to dig out of debt. It slows your ability to buy a home and start home ownership. There's a lot of other economic factors that follow-on from all of this debt.

KRISTOF: Yes. And, frankly, I think the whole economic model for tertiary education is broken, that costs have risen so much over the last few decades that people are being priced out of the market in a way that I think undermines what a college education is about.

ROMANS: It certainly feels like a bubble, but the bubble hasn't popped yet and that's what is really frustrating because people -- American families keep digging deeper to try to pay it for it.

I want to bring in Sal Khan. He's the founder of Khan Academy. It's a free online torturing service.

So, kids are graduating and it's almost as though, Sal, they need to be a money manager on top of whatever degree they get. How do you reconcile the value of a college education with all of that debt students are taking on? There's no room for error here for kids.

SAL KHAN, FOUNDER, KHAN ACADEMY: You know, I think the unfortunate thing is you can't reconcile the value of the college education with that level of debt, I think, you know, for better, for worse, we've fallen into the situation where we view this -- a lot of students view college as this magical end point, that if you get a college degree, you will have this, you know, great white collar job and be able to get a mortgage and a house and all of those things, and the reality is you're not.

And what you have -- when everyone views college as an end point, you have more and more people getting degrees happening. More people getting them. But to employers, that's becoming less and less of a strong signal.

And you add that with the fact that you have a ton of more debt and actually college is making it harder for people to kind of build their foundation for their lives.

ROMANS: You know, Sal, I'm not the first person to say that, but you look at the way student loan debt has grown and also the way delinquencies are starting to grow and they see a bubble, a subprime- type bubble. It can't go on like this, can it?

KHAN: No. And scary thing is, and unfortunately I don't think a lot of students are aware of this -- but student debt is one of the few debts that's not cancellable by bankruptcy. So, it really is almost a -- you know, almost form of indenture d servitude at some level. You really do have to pay that debt back.

ROMANS: Yes, you sure do.

OK. I want to talk a little bit about the earlier end of the education system, because before you can get to all of this debt and going to college, you have to get through the public school system. Earlier this week, President Obama met with a group of early education program teachers and teacher training at a community college in North Carolina and he was stressing the link between early education and success later in life.

This is what he told those folks. He said, "How well we do as a country is going to depend on how well we train our young people and it starts early." Nic, you were at Harvard talking to early childhood education experts this week. What are folks talking about there in this new era of budget tightening, about the importance of spending money on the front end?

KRISTOF: Well, I think one point everybody makes is that there are no quick fixes in education. But the point that comes up over and over is that if you want to get more people in college, if you want to get more people graduating from high school, then the solutions aren't necessarily in the high schools or even in the middle schools, but they may be in early childhood education. That that is the area where you get the most bang for the buck when you work with 4-year-olds, for example, so that they don't start off behind the starting line.

ROMANS: You know, it's so interesting because one of the statistics from the Department of Ed is that a child who lives in poverty will have maybe 3,000 words, 4,000 words by the age of 3, by grade three rather. A child who is middle-class will have 12,000 words. I mean, that gap is huge if you don't address it.

KRISTOF: And it's not just an issue with fairness, although that is indeed part of it. But it's also a broader question of these are investments and there's some education by James Heckman, the Nobel Prize-winning economist who has argued this that investing in early childhood education pays for itself -- you know, lower health expenses, fewer people on public support, less crime, this kind of thing.

And, boy --

ROMANS: Well, that's a political argument that starts to get really difficult right now, because there are some people that say investment, other people say it's unnecessary spending, that's a nanny state. That really -- I mean, that is the way the political discourse is going.

KRISTOF: Yes. And, you know, frankly, until recently the data was somewhat ambiguous on some of these. But now, we're getting more and more data that is really good. Kids who are, you know, randomly assigned to early childhood education and those who aren't, and those who do so much better, so much better life outcomes that I think -- you know, the question is not can we afford this, but can we afford not to do it?

ROMANS: So, Sal, you are kind of make a career trying to close the achievement gap. And, you know, by tutoring, you know, that's one of the things you guys do. But the gap is widening in the country between the haves and the have-nots. I want to show you a chart comparing family income to academic availability and scores.

In all these categories -- reading, math, general knowledge, school readiness -- rose with income. And research shows by age 10, that gap can still exist. How do you bridge it?

KHAN: Yes, I think -- I mean, I agree with what has been mentioned, but there's a reality that regardless of what we do, there is that gap, and I think, unfortunately, right now, in a traditional model, that gap just persists and students are just pushed ahead with their age groups.

And what we need is ways for students, whether they're in first grade or eighth grade or they're 17, that they can actually remediate and fill up those gaps instead of just being pushed forward. And they're huge.

You know, you just look at the number of students who are entering college have to take not even college algebra but have to take remedial math, which kind of tells you that they really learned nothing or learn very little since sixth or seventh grade . So, these gaps just keep building, building, building.

So, part of the solution -- once again, I don't think there's one big solution here -- but part of it is to allow once a student is in sixth grade, seventh grade, eighth grade, to remediate and not necessarily have to keep being pushed forward so that they end up in college while still not having learned math.

ROMANS: All right. Sal Khan, nice to see you again. Nic Kristof, you two, have a great weekend, everybody.

All right. Saving for your retirement or your child's college tuition? It's a decision many parents have to make, but should they? That's next.

(COMMERCIAL BREAK)

ROMANS: So, I'm the proud mom of three little boys. I affectionately call them my three little cost centers, that's because I have to raise each of them until the age of 18. It's going to cost an estimated $227,000. That's not my number, that's the USDA. And it doesn't include paying for college. That will set you back at least another $20,000 per year for a four-year degree.

Now, add into that equation, a down economy and it might feel like the perfect storm. But it doesn't have to as long as you have a plan, time is your best friend here, by the way.

Here now with me is Carmen Wong Ulrich. She's the author of "The Real Cost of Living."

What shall we do first when it comes to saying money? I always feel, Carmen, like I'm not saving enough. I'm terrified I'm not saving enough.

CARMEN WONG ULRICH, AUTHOR, "THE REAL COST OF LIVING": First of all, you are justified to be terrified, because it's really, really scary. I've got one of my own, just one, and I'm a little scared.

But here's what helps us feel better. You don't have to save up for all of it. I don't want anyone to save up for all of it. If you can imagine the six figures for a four-year private college education. You have three kids, it's not just possible.

ROMANS: I can't do that. I mean, I really can't do that.

ULRICH: Exactly. So, when you first just understand that you should not have to and you don't have to pay for all of it, that helps you with your planning.

Borrow a third or plan on borrowing a third. Plan on -- which will keep your borrowing costs down by the way.

ROMANS: Your kid is doing that borrowing, right?

ULRICH: Your kid is doing that borrowing. Also, you can go for scholarship and grants for a third and then you can save up for a third.

Now, if you keep the borrowing to a third, too, that keeps you from doing what unfortunately a lot of folks have done, which is borrow just to get the degree and borrow way too much especially in comparison with what the entry-level jobs are paying.

ROMANS: You said no to your child -- I mean, one of the things is you don't want to borrow more money than that child is going to ever earn in the first few years out, right?

(CROSSTALK)

ULRICH: We love our kids, right? But not every kid is set for a four-year private institution. You do have to think of it as an investment. You have to think of it in reality terms -- how real is the prospect that this child is going to take this degree and run with it and go gangbusters, and make it really worthwhile? Do they need a little bit more time? Can they start with a community college for a couple years until they figure out what they want to do?

So, know your child. Know what the expectations are, and talk with them what their expectations are.

ROMANS: I really love you bringing this up, because it's really -- it's a popular conversation now to say mostly among people who have degrees, that the degree isn't worth it. I think the degree is worth it.

ULRICH: It absolutely is worth it.

ROMANS: And I think the debt is a good debt if you are not stupid about it.

ULRICH: Listen, this is the scariest thing I'm hearing right now which terrifies me. Young people saying, the college degree is not worth it, because I'm unemployed.

Listen, across board if you look at the data, this country is going to require a college degree. Like a high school degree, you really absolutely need the degree. But what are you going to do with it and how are you going to pay for it is really the important question. You got to tackle that, don't take out so many loans.

ROMANS: What is the number one mistake that parents make?

ULRICH: Parents make a couple of big mistakes and one of them is that assumption, I got to save for the whole thing, not planning right in terms of which school you're going to go to, not spending the amount of time researching the school.

I know a lot of kids and I was this kid who said, I was going there, end of story, right ? But I figured out a way to pay for it.

But you have to have a conversation about what other places can we go, what scholarships and grants can we get, spend the time researching. Go to Finaid.org for scholarships and grants.

ROMANS: That's a really good spot.

ULRICH: Tons of information, and 529, what you're going to save and you want to grow the money for while, go to savingforcollege.com, free 529 site where you can go in and compare all of them and their fees and start saving as soon as you can.

ROMANS: And FinAid has a really interesting rule of thumb, too. Mark Kantrowitz over there. He says, "Do not borrow more for college than the kid expects to earn in the first year working."

So, think about it -- a social worker, 25 grand, or an engineer that makes 80 grand, you can have a different kind of debt load.

ULRICH: Well, it can really help you plan in terms of where you're going to go because if you are thinking about 25 grand, that actually won't even buy one year at a private school. You've got to plan it out and work it together as a family for this goal.

ROMANS: You need to go to a state school. You need to go to two years of a community college before you go to a state school, or you need to be working along the way and working for it more.

ULRICH: And work along with it and pay for it.

ROMANS: What do kids and parents need to be aware of when you're talking about student loans?

ULRICH: Here's the thing: the best -- know what the best, the golden standard student loans, right, federal subsidized. Please, when I talked to parents and they don't realize the that there's all these differences, subsidized means that the government will pay the interest while you are in school so the loan doesn't grow.

Too many kids get out. They have forbearance or deferment and they don't pay the loans for ages, and they suddenly say, oh, 20 and now it's 40, what happened? A subsidized loan prevents that from happening.

Now, federal unsubsidized is the next tier down, because federal loans give you the flexibility to not have to pay if you're unemployed and different ways, income repayment plan, but private loans are dangerous and very expensive. ROMANS: And the minute you drop out, that good debt becomes bad debt, so it has to be --

ULRICH: You have to keep at it.

ROMANS: You have to keep your eye on the ball.

Carmen, thank you. Nice to see you.

ULRICH: Thank you.

ROMANS: Have a great weekend, Carmen.

ULRICH: You, too.

ROMANS: The top five mistakes you're making right now that are costing you thousands of dollars. Not attending that boring open enrollment seminar is one of them.

(COMMERCIAL BREAK)

ROMANS: There are five big mistakes that could be costing you thousands of dollars right now. Number one: not refinancing your mortgage if you can. Number two: not budgeting. Number three: not maxing out and rebalancing periodically that 401(k).

Also, not appealing your property taxes. Do you know that most people who appeal do get money back? It's on average something like $1,400 a year.

And you get one shot a year to get this one right -- not paying attention to your health care open enrollment period.

Andrew Rubin is V.P. of clinical affairs and affiliate at NYU's Langone Medical Center. He's also the host of a very great program, "Dr. Radio" on Sirius XM.

OK, now, here's my question. I just went to open enrollment seminar, and the way I see it, I'm going to be paying more.

ANDREW RUBIN, NYU LANGONE MEDICAL CENTER: Absolutely. Anyone who gets insurance directly through their employer or even directly through their insurance, you know, company individually, will be paying more -- just assume it may look the same, but assume it's not the same.

ROMANS: And it's different for everybody. I mean, I sit there and they can't give you any specificity because every individual, you know, pattern of consumption of health care is different.

I mean, we look at premiums for employer-sponsored family health coverage -- I mean, just look at this. I mean, what part of it that the employer takes care of and what part you take care of, you're taking more and more of the cost on.

RUBIN: Absolutely. I get hundreds of questions on my radio show, but there's always a central theme here. It's always the employer shifting more of the increasing costs on to the employee. And there are steps you can take as the individual or as a family to make sure you're picking the right plan.

The steps are all the same but the insurance products that are being offered are all different.

ROMANS: Before we talk about the steps, I want to talk about the insurance products, because what it seems to me is that the push is towards health savings accounts. This is different than those flexible spending accounts.

RUBIN: Correct.

ROMANS: Health savings accounts versus a compilation of PPOs and HMOs, companies are trying to get you consumer-directed health care.

RUBIN: That's what it's called.

ROMANS: Explain that to me. Explain it.

RUBIN: That's the big buzz word this year. We also have talked about it in previous years during open enrolment season. It's high deductible plan.

Basically what your employer is doing is saying, we're going to give you health insurance, but we're going to give you a plan with a high deductible and we're going to give you a little bit of cash that you can invest in your own on a health savings account. And the health savings account differs from a flexible spending account in that the money rolls over every year and you can use that towards health care expenses.

But there's a catch. You're paying the first dollars of your health savings consumer directed plan yourself.

ROMANS: OK. So talk about some of the things when you're making these choices that you need to think about, because, I mean, people sit down, they do the math, and this is what I mean, about it. It's a big money mistake. You choose incorrectly, it's costing you hundreds or thousands of dollars that year.

RUBIN: Well, maybe those mistakes about it -- employers want to put you in a high consumer-directed plan with a health savings account kicker for --

ROMANS: Right.

RUBIN: -- money because it's cheaper for them, because on average, most employees don't hit their deductible every year. So, if your employers done the math, they're going to be spending most of the money out on your own.

So, what you really want to do is make sure you add up your expenses from the previous year. That's always the first thing you should do. Your individual expenses and your family's expenses. And to the best you can, try and predict the following years. Do I have any surgeries coming up? Are my kids getting older? Am I getting older? Do I run the risk of getting sick?

And more often than not, if the answer to any of those questions is maybe, then the dollars you're going to save with a lower premium and a consumer-directed plan far outweigh what you're going to actually end up spending on your own if you pick that plan.

ROMANS: So, in general, if you're young and single and healthy, you think about the consumer directed plan, you might be putting money into an act that's going to be able to carry over every year.

RUBIN: Absolutely.

ROMANS: If you have a family or an underlying medical condition, or a lot of prescriptions that you need, you might need to go to a more traditional PPO.

RUBIN: You just got it right.

These plans are for younger, healthier people. And I will tell you, they are also for people who can't afford the PPO option. They're more expensive for employers.

Now, each employer will weigh the price differently. So, you have to -- again, look at the premium that you're going to be paying for yourself or your family. But your PPO will always be more money.

ROMANS: And a lot of people are sitting there and they're looking at their spouse or partner's plan, where they work and they're trying to figure out which one -- which one is the best one.

I want to talk about prescriptions. What do you need to keep an eye on for prescriptions?

RUBIN: Big changes this year. So, again, passing costs on to employees. A lot of employers are changing their formulary. That means they're pushing people into generic drugs. So, the way they do that is a drug. If you're taking a drug every month, it is possible that that drug which used to be covered with a $20 co-pay may fall into what's considered a non-covered drug in the formulary, which means the same drug you've been having covered for so often, for so long, may no longer be covered unless you get the generic.

So, you want to go to your employer benefit department and get a copy. If you're taking drugs and get a copy of the formulary to make sure your drug is still on it.

ROMANS: Do you agree with my assessment, that it is a very painful four weeks every year, but it is so important to your family's finances?

RUBIN: You know, as you say, this is a very expensive time of year for a lot of people, picking this plan. And you want to get it right. It's worth the time and effort you put into it to choose the right plan.

ROMANS: And if they have, you know, a health cost estimator, you know, through the company that you're working with, you should do it. Use all the tools they give you.

RUBIN: One of my favorite things -- go to your insurance Web site and you can put in what it's going to cost you to go to the doctor.

ROMANS: All right. Thanks so much, Andrew Rubin, as usual. Really enlightening stuff. Thanks, Andrew.

OK. How about an associate's degree with that high school diploma and a shot of a job in a lucrative field all at the same time? We're going to take you to the halls of a high school doing just that, next.

(COMMERCIAL BREAK)

ROMANS: How would you like an associate's degree with that high school diploma? Welcome to P-TECH. It's part high school, part college, with a dash of career experience. Not only will students there earn a high school diploma. They can earn an associate's degree in technology all for free.

It's a collaboration of the New York Board of Ed, two universities and IBM. IBM supplies career mentors in science and technology to shape these minds, prepare these young people for a knowledge-based economy. Last week, the students met their IBM mentors for the very first time and we tagged along.

(BEGIN VIDEOTAPE)

BRIGETTE LUBOA, P-TECH STUDENT: In this economy, a college scholarship can help save a lot of money.

I'm a computer geek. I'm always on the computer 24/7. My mom read about P-TECH and I saw what the program was about, like you have two free years of college, an associate's degree and I was like -- oh, my goodness, why not?

(INAUDIBLE)

MICHELLE MEDINA, IBM EMPLOYEE AND P-TECH MENTOR: I've been with IBM for 12 years. It was my first meeting with Brigette. I was really impressed.

She is extremely bright. She is intro speculative. She's creative. She's very mature.

RASHID FERROD DAVIS, FOUNDING PRINCIPAL, P-TECH: To being here today is that every single ninth grader, 104, paired with a mentor from IBM is absolutely incredible. I wanted to make sure that early in the school year, as the students are transitioning from middle school to high school, that context was set for industry by coming face-to-face with someone who works in the industry and that way they can say, well, this is why math is important. This is why science is important. This is why I need to study and actually get good grades and actually get the associate degrees.

LUBOA: Every one of my friends are going for regular high school and having teenager experiences. I'm here working for my life.

MEDINA: You almost have to be living under rock not to know that there are some challenges in the economy and that, you know, the job market is a concern.

I hope to give her a glimpse into the business world, into a global economy.

LUBOA: I trust her to guide me through this whole years of me being here in P-TECH, because if we didn't have a mentor, we wouldn't be able to, like, get out there and exactly know what to do.

(END VIDEOTAPE)

ROMANS: And P-TECH is hearing praise from the White House. President Obama talked up the school at a town hall meeting on jobs for its focus on technology and also its open admissions process. There's no test or minimum GPA required to get in. School is for those who want to learn technology, get a degree, later on get a job. Expect to see more of this type of school.

Earlier this month, Chicago Mayor Rahm Emanuel announced that his city will be developing the very same concept for Chicago public schools, as well.

It's all about finding solutions in a difficult economy, and we want to hear your ideas. Find us on Facebook or Twitter @CNNBottomLine. Find me @ChristineRomans.

And many of the money questions we cover every week, you're going to find in my new book, "How to Speak Money." I've written it with my friend, Ali Velshi. And it's in bookstores, November 8th. Or you can order at Amazon.com right now.

Back now to CNN SATURDAY for the latest stories making news. Have a great weekend, everybody.