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The Danger In Student Loans - The Dollar Stretcher
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The Danger In Student Loans

Back in June 2010 total student loan debt surpassed total credit card debt (USA Today). The total was over $850 Billion.

If you're a regular reader you know that we have a strong dislike for debt around here. I've seen debt derail a lot of families over the years and hate to see it happen to others.

I understand the argument for taking on student loans. I have two kids in college. We all want to see our kids succeed. And, we're willing to 'invest' in their futures.

But, as a former financial planner I need to point out a few truths about student loans.

First, the lender is not your friend. Don't trust them. Just because you qualify for a loan doesn't mean that you should take it. The lender is only worried about getting paid back with interest. How much you struggle to make those payments doesn't concern him. The fact that the feds are backing student loans (just like they did so many mortgages that are now in default) makes the loans safe for him.

The loans are also safe for the lender because it's almost impossible for you to walk away from them. Student loans aren't eliminated even in bankruptcy. If you fall behind they can collect from your tax refund or your paycheck (US Dept. of Education). About the only way to not repay a student loan is to die. (not surprisingly, we don't think that's a very good strategy)

Second, the 'invest in your kids' argument is only partially correct. When you invest you look for something that will pay interest or increase in value. Investing is all about returns. You wouldn't invest in a company that had a poor forecast. You carefully estimate how your investment is likely to fare.

Recognize that you're not investing in "education" or even "your child's education." You're investing in your child plus a specific school and a specific degree.

How much effort did you put into studying your child's school or what degree they're getting? You may be investing $40 or $50k in this school and degree. What are the prospects for your student after graduation? Way too many of them are getting degrees in fields that have little or no demand. Not to upset anyone, but many soft majors (things like "___ studies") have little demand outside the university. Just recently I fielded a question from a mom who's two students got degrees in "art history" and "rhetoric." Now they can't find jobs in those fields.

Thoroughly investigate the school, too. Is a degree from a private school worth the extra cost? What about online schools? They offer much lower costs. But, you'll want to make sure that a degree from your school is recognized as valuable by prospective employers.

It's time that parents and students realize that 'education' is not necessarily valuable in a monetary sense all by itself. Employers are willing to pay for specific skills and are unwilling to pay for others. Don't make an 'investment' that has little or no chance of returning your money.

Third, students need to be cautious about how much debt they take on. The average is in the $25k range (finaid.org). The quick rule of thumb is that total student loans and credit card debt should not be more than their annual take-home pay after the student leaves college. We'll skip the math, but that would mean that they're paying about 10% of their income in debt repayment. Most budgets will get tight if more than 10% is going to debt repayment. Especially for young people who are thinking of buying newer vehicles, setting up homes and dreaming of exotic vacations. None of those things will be possible if debt is taking more than 10% of income.

Which brings us to another warning. Too many students either don't get the post grad job offer that they were expecting or drop out before getting the degree. The number of underemployed young people is pretty disheartening. Especially if they have large student loans. It's one thing to leave college and take a lower paying job. It's much worse if a quarter of your income is going to repay student loans.

Finally, don't discount the dropout rate. About 3 in 4 students pursue education beyond high school. But less than half get a degree within 6 years of HS graduation (NY Times). That's a lot of student loans with a zero investment return.

Don't get me wrong. I'm not against college education. And, in certain circumstances it makes sense to borrow some money to get through school. But, I am against borrowing money stupidly.

Just because a college will accept you, they offer a degree subject you like and someone else is willing to lend you money is no reason to borrow it. I'd call that borrowing stupidly.

Remember that the college and lender are not responsible for you finishing a degree. They're also not responsible for you finding a job after graduation. And, they're most certainly not responsible for repaying your student loans. Those responsibilities fall squarely on your shoulders. You're wise to recognize that before you agree to borrow their money.

Keep on Stretching those Dollars!

Gary

 

 

Comments

 

The Danger In Student Loans – The Dollar Stretcher | Investing said:

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August 14, 2011 2:46 AM
 

Reducing College Expenses | Debt Cancellation said:

Pingback from  Reducing College Expenses | Debt Cancellation

March 20, 2012 3:03 PM

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About Gary

For more than 25 years, Gary Foreman has worked to manage money effectively. Prior to starting The Dollar Stretcher, he was a financial planner and purchasing manager. While helping clients manage their hard earned money as a financial planner, he applied commonsense, time-tested techniques during the turbulent 1980’s. The experience convinced him that you didn’t need to hit the lottery to accumulate significant wealth. Following that, Gary had an opportunity to learn more about how to get the best value for a dollar spent in the corporate world. As the Purchasing Manager for a computer manufacturer, he was responsible for supervising over $10 million in annual purchases. Gary began The Dollar Stretcher website <www.TheDollarStretcher.com> and newsletters in April 1996. Over 300,000 readers benefit from the time and money saving ideas presented in The Dollar Stretcher newsletters each week. His mission is to help people "Live Better for Less". He also provides private label newsletters for companies wishing to provide money saving information for their clients and/or prospects. Gary lives in Florida along with his wife of thirty years and their two children. Much of his time is spent working with the men's ministry of his church. One of their ongoing projects is the "Holy Smoke BBQ" which sells bbq on Friday nights with the profits going to support local foster kids and orphans. When he has a free moment you’ll find him restoring a Checker station wagon nicknamed “Two Ton” or cruising in a '65 Impala SS Convertible with doo-wops playing in the background.

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Gary is a former financial planner and purchasing manager who edits The Dollar Stretcher website <www.stretcher.com> and newsletters. You can follow Gary on Twitter.com/gary_foreman
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