Awhile back I read an article about student loan debt from Yahoo! finance and saved it as an article to re-read and write about. The article starts out with a horror story about a master’s student who had $140,000 in student loans and only managed to find a job paying $35,000. A story like this is strangely reminiscent of the current subprime mortgage mess. A young adult takes out loans despite not having the means to repay them. I imagine the student loan credit market will feel the effects of the subprime disaster. If fully educated adults make poor borrowing decisions, I can only imagine young adults will make even worse borrowing decisions. What follows are my opinions on student loan debt.
Plan your College Financing
Just like any other major purchase, you have to research and plan it out. You have to examine every option. What are the costs of state schools vs. private schools? Are there any scholarships available? What are the financial aid packages? What is the projected starting salary for your intended career? Taking out student loans of $30,000 to $40,000 is most likely one of the top 5 most expensive purchases for your entire life. Make sure you put in the same type of research you would as if you were purchasing a house or car.
The Purpose of Higher Education
The article states that college grads make 60% more than those with a high school diploma. Higher education certainly opens doors in your career that might not be possible otherwise. Higher education is for making career paths available that were previously unavailable. Higher education is not for doing what everyone else is doing. I had numerous friends go to college and return a year later with no idea what they wanted to do. They ended up enrolling in the local community college and finding a career path that made them happy and then attending college with a well thought out career path. It’s unfortunate that going to community college is looked down on in our society when it is the financially sound decision for confused young adults.
Assessing Earnings Potential
Student loans can be smart financial investments. I elected to attend a private institution instead of the local state school. The costs would be significantly greater, which would result in my taking out student loans. I was able to pay off my student loans prior to any interest accumulating and am gainfully employed in a career that I enjoy. I knew prior to committing to student loans that my earnings potential would be significantly increased by attending the private school in my instance.
It is extremely important to weigh the potential of increased earnings with the potential downside of 20-year loan payments. When assessing the decision to attend college and take out student loans, it is crucial to be able to determine the future earnings potential as a result of earning a degree from that institution. This should be strictly a financial decision.
Types of Student Loans
The type of student loan is an important detail when assessing the financial package. I took out Perkins loans for the first three years of college. The fourth year I paid in full what was supposed to be a Stafford loan. Perkins loans do not begin accruing interest until after a grace period, which is post-graduation. My Stafford loans had fees associated with them that were large enough that it made financial sense to pay them off with internship earnings. Most federal loans do not begin accruing interest until after graduation. Private loans, on the other hand, begin accruing interest the minute you incur the debt. A friend of mine was forced to take out private loans, which resulted in large amounts of debt when he graduated. It is extremely important to know when your loans begin accruing interest.
I have put significant thought into graduate degrees. I personally feel that graduate degrees should only be pursued if they are completely necessary to open a new career path or significantly advance your career and increase your salary. Also, I will most likely try to find a company who will pay for a portion of my graduate degree, if not the entire degree. Taking on significant student loans for graduate degrees can push retirement goals back instead of bringing them closer to reality.
I was fortunate enough to be able to pay off my student loans before they started accruing interest. According to this article, others have not been so fortunate. I’m hoping that this subprime mess will be a learning experience for both borrowers and lenders of all kinds of debt. Not only should people only take on mortgages that they can afford, but young adults should not take on student debt that will have negative effects on their personal finances for 20 to 30 years.