Student loans will be the cause of the next financial meltdown and consumer crisis in the United States. My greatest concern is that very few borrowers over the past decade understand the potential ramifications of the student loan debt they are taking out. The disclosures aren’t near accurate enough to describe what you’re getting into and there is no immediate pain when your Student Financial Aid Counselor helps you sign the forms to your own bondage, (I mean… student loans)
Here’s the problem: Sure it’s great to have a college degree and the education many receive is invaluable and starts many people on a great footing into the workplace. But a college degree doesn’t GUARANTEE a future job, or even a good job. When you buy a car or a house or even a mattress, you weigh the product you’re receiving against the value you perceive and comparison shop the product against others in the marketplace to find the best deal. Very rarely is this done when picking colleges. Students pick colleges based on where their friends go, degree programs, how nice the campus looks, and how far away the school is from Mom & Dad, etc. with no regard to the price of the school or the costs associated with attending college. They think that a 20% scholarship to go to an expensive prestigious private university to study some obscure degree program will immediately land them that dream job when they get out of school 4 years later. The reality is that less than half of adults under 25 years old are working in a career path that matches their degree and many graduate school and spend 12-24 months just looking for work.
Now that the student is out of school life starts to happen. Since 1995 the number of loans that enter into default rate exceed 20%, higher than the default rate of mortgages, credit cards, car loans, and payday loans. Unlike car loans, mortgages, and credit cards there is nothing the student can sell to help pay down the debt. In addition, student loans cannot be included in a bankruptcy. It is easier to discharge debt from gambling, drug use, or a vacation than it is to get rid of debt from college, and if the loans go unpaid the government can garnish your wages, tax returns, and social security until the loans are repaid. Also, most student loans require a parental co-signer which means as the payments go unpaid because you couldn’t find a job in your field, your parent is on the hook for the loan and their credit will be tarnished as a result. These are just some of the financial ways that student loan debt can impact you.
In addition to the financial impact their are some other material ramifications of too much student loan debt. According to a study done by Nellie Mae, debt accumulated during undergrad school caused 46% of borrowers to postpone or forego grad school. In the same study 42% of borrowers delayed purchasing a home and 28% delayed starting a family. In 2007 a study by the National Bureau of Economic Research found that high amounts of student loan debt caused workers to choose higher paying jobs in fields that they weren’t passionate about just to make ends meet, while being miserable in their occupation. Significant debt also increases stress and depression as well as other psychological issues including the potential for suicide. Worst yet is when you find Mr. or Mrs. Right and combine their student loan debt with yours your student loan payments increase the likelihood that you won’t be able to save for your children’s college putting them in the same financial mess you’re in.
There is a way to pay for a great college education without borrowing a dime. It’s probably the least popular option available, but trust me, the 28 year old version of you will thank me.
1. Do your homework on the school/degree program/and pricing.
Don’t just pick a degree program because it sounds good or because you think you might be interested in it. College needs to be viewed as an investment in your future. If it’s going to cost you $50,000 to get a $28,000/year teaching job its probably a bad investment. Look for the alternatives to get the same degree for less money. The prestige of the school plays a limited role in your ability to get a job. As an employer I look for the knowledge you learned at school, not the name on the piece of paper they gave you on graduation day.
2. JUCO isn’t a bad thing.
Junior college is probably the most cost effective way to knock out all of your core studies courses for a 4 year degree program. The average JUCO is $30/credit hour and many have cheaper rates than that for students that graduated from high school in the same community. For 60 credit hours, the average amount of general studies hours for most degree programs, a JUCO will cost around $1,800 over a 2 year period. Compare that to a typical private school to take the same English courses and you would spend $21,000. It’s a no-brainer. Just make sure your JUCO hours will transfer to the final 4 year school you want to graduate from.
3. What’s the point in going to college?
The average college student spends 36 hours/week playing video games, drinking beer, and going to parties and another 70 hours sleeping. If your intent in going to college is to play around, socialize, and sleep, then I think you can do it for a whole lot less money. If your purpose in going to college is to gain knowledge to apply towards your future, then treat it as such. I’m not saying don’t have fun, and I’m certainly not saying those are bad things to do while in college. You have to recognize that if you’re taking out student loans to pay for school that those loans are going to stick with you for the next 10-20 years and they are helping fund a brief 4 years of partying.
4. Get a J.O.B.
Mama always said there’s a good place to go when you need some money and it’s spelled W.O.R.K. It’s really simple math here. A part time job paying $9/hour working 20 hours/week =$180/week. Don’t worry, this still leaves you with 16 hours for partying. $180/week x 50 weeks = $9,000. If you attended a JUCO for your first 60 hours of school it would cost you $1,800 for your tuition. (That’s $1,800 spread out over 4-6 semesters depending on how many hours you take per semester.) Let’s assume it takes you 4 semesters to complete 60 credit hours of your basic studies like English, History, Biology, Computer Science, Math, etc. With your part time job you will have earned $18,000 and only spent $1,800 on school tuition. You have plenty left to buy yourself some nice things for your frugality and easily have $14,000 in savings to apply towards your transfer school. If you keep working just those 20 hours/week, you’ll again earn $18,000 + your $14,000 in savings and have $32,000 to apply to your final 60 hours of undergraduate tuition which at an average private school will cost about $21,000. This leaves you with $11,000 for living expenses and some fun and also keeps you graduating college 100% debt free.
As a side benefit to these steps, you will have valuable work experience to put on your resume` besides beer-pong champion and top kill count on Modern Warfare, helping you get a job that much faster. You’ll also have a valuable education that you paid for with cash and are able to move on to bigger and better things in your financial life, like helping make sure you can pay for your kids college and retire with dignity.
Do you wish you had done things differently in choosing how you paid for college? Leave your thoughts in the comments