The Student Loan Myth

For the past generation or so, lenders and financial gurus have been promoting the myth that all student loan debt should be considered Good Debt. Student loan debt is said to be good because it is debt accrued in the pursuit of an education, which is an asset that will (ideally) product more money. The theory goes that you will take out student loans, get your degree, and then get a job earning so much money that paying those loans back will be a piece of cake.

To some extent this isn’t bad thinking. An education is certainly an asset that will increase your earning power. However, the problem is that people have bought into this myth so entirely that they are coming out of even community colleges with hundreds of thousands in debt. Many people have bought into the notion of student loan debt being so good that they are even using student loans to pay everyday expenses, in addition to tuition and books. They’re getting apartments in the nicer complexes on student loans. They’re using student loans to finance entertainment and spring break trips. “Heck,” they think, “It’s student loan debt. It’s all good.”

Many people are financing educations at schools they couldn’t possibly hope to afford any other way. While there’s nothing wrong with wanting to get a degree from a prestigious university, you have to ask yourself if it’s worth it. In some fields like medicine and law, where you get the degree matters. And those fields will likely earn you enough money that paying the loans back will be feasible. But in many fields it doesn’t really matter at all. The cost of an education at an “affordable” state school is rising faster than the pace of inflation. That alone will set you back for years. Go to a private school for that degree in philosophy, rack up the debt in pursuit of a degree that won’t earn you any money, and you will be in the hole for the rest of your life.

Student loan debt isn’t good debt when it crushes all of your other hopes and dreams. When you’re so busy trying to make loan payments that you can’t afford a house, car, children, or even a pizza, you’re in trouble. And that’s just where some people who bought into the “all student loan debt is good debt” find themselves these days. Jobs are hard to come by. High paying jobs even more so. Student loans are some of the most forgiving in terms of repayment schedules, interest rates, and being willing to defer payments for a while, but even the most forgiving won’t wait forever to get their money back.

So while some student loan debt isn’t bad, you have to make sure you’re not crossing that threshold where good goes bad. What can you do?

Go to a college you can afford by taking on a moderate amount of debt: That may mean a state school, or going to community college for two years while you work to save up extra money. If it really matters where you get your degree, got to a cheaper school while you’re an undergrad and save the big loans for your graduate work. Graduate work will give you more earning power and is thus, “better debt” than that taken on for undergraduate work.

Work while you’re in school: A lot of kids still work while in school, but many don’t. Even a part time job can help offset some expenses. If you work full time during summer vacation and breaks, you can earn even more. Yes, it’s complicated and hard to juggle school and work (but it’s just as hard to juggle work and the rest of your life once you’re out of school), and it may mean reducing your course load and taking longer to graduate, but it’s better than owing hundreds of thousands of dollars when you get out.

Look for money that doesn’t have to be paid back: Instead of going straight for the loans, look for scholarships, grants, or work study programs. That kind of assistance doesn’t have to be paid back and there are programs for almost every field of study. Even small scholarships can help if you can string enough of them together. Too many people run straight for the loan officer instead of looking for other options first.

Get educated: Before you take out a loan, read all of the fine print and understand all the terms of the loan. Know when it has to be paid back and what your total payments will be. Understand how interest is calculated and what happens if you hit a rough patch and can’t make payments. Know everything you can about how that loan will affect your future before you sign. Too many people take out loans not understanding the full impact they will have on all the other things they want to do in life.

Live cheap: You want to live in the nice apartment complex and drive nice cars. And why not? Many people today (whether in school or not) have lifestyle expectations that are way out of whack with their means. When you’re in college and racking up student loans, this is not the time to blow it all on a lifestyle. This is the time to hunker down and make that money stretch as far as possible so you have to take out less and, eventually, pay back less. Live on campus, eat on campus or cook in your own kitchen, skip the expensive cell phones and gadgets, don’t take expensive spring break trips, wear old clothes, buy used books, and find any other way you can to live cheaply. You can pay for a lifestyle later when you’re earning the big bucks.

There’s always the military: Do your four-year hitch in the service and you can get on the GI Bill. Let Uncle Sam pay for your education in exchange for serving your country.

Choose a degree with earning potential: I don’t care how interested you are in philosophy, general liberal arts, or family and child development, those degrees aren’t money makers. If you’re taking on tons of debt that you need to pay back, you need a degree that will earn you money. That may mean majoring in science, computers, medicine, law, business, or some other emerging field that has high earning potential. Minor in your fun interests, but major in something that pays well.

Finish school: One of the most useless things you can do is to incur a ton of loan debt and then not finish the degree. Not only are you stuck paying on the debt, you don’t have the earning power to pay back the loans. Make sure you want to go to college in the first place and then, once you’re there, finish the program.

Student loan debt can be good, but too much of a good thing can derail the rest of your future. It’s fine to take on some student loan debt and it can be a useful tool to help you reach your aspirations. Just don’t let it get out of control. Paying off loans into your forties or fifties puts your other financial goals like retirement, saving for your own kids’ college, and buying a home in jeopardy. You want an education, not a dream-crushing debt load.

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7 Responses to The Student Loan Myth

  1. Jeff says:

    From personal experience, joining the military in order to pay for college is a bad deal. In fact, I was told this during the first day of basic training (I didn’t join for college). Think about it this way, if you go in debt and go to college, then after college you work like a dog and live as frugally as possible (much like military life), you will come out financially ahead.

    The military isn’t a job. It’s a way of life. It will rip you from your family and friends. It is an entirely different culture and it will, for better or worse, change you as a person. I loved my time in the military and I have no regrets. However, any of my friends will tell you that I am a far different person than I was 10 years ago.

  2. Tom says:

    I believe the student loan “craze” was driven by the same process that caused the housing bubble. Student loans, just like home mortgages, were pooled, sliced and diced and sold off to every big investor and his brother. This led to lower student loan interest rates, which then justified higher prices for “education” because there are always many people who only worry about the monthly payment and not the total cost. Possibly as a result of this, the cost of higher education has been growing faster than inflation. I suspect we can thank the “financial engineers” and their securitization” processes for playing a big role in this.

  3. Could be true, but where’s the math? What if the present value of a Stanford education, compounded by the additional earning potential over 50+ years that it can provide, more than makes up for the student loan discount of choosing a lesser school?

    Not sure that it’s true, but the choice (in general) is really a math question.

  4. Offended Philosophy Grad says:

    What’s with beating up on philosophy majors as an example? Why not pick “forensics,” “interior design” or other “fad” majors? Studies show that philosophy majors make more after 10 years than Information Technology Majors:

  5. Jennifer says:

    Student loan debt is said to be good because it is debt accrued in the pursuit of an education, which is an asset that will (ideally) product more money. The theory goes that you will take out student loans, get your degree, and then get a job earning so much money that paying those loans back will be a piece of cake. If you have just graduated and found your first job, you need to save every penny in order to manage the monthly payments for several student loans you possess, you have both the private and federal loans, then, the best available way of saving money for you is student loans consolidation being a great option to save hundreds of dollars.

  6. bentonlife says:

    I agree with the bulk of what this article says. Think about when you get paid up front for a job you still have to do in the future. It’s great getting the money, but the effort of doing the job 2 months later, when the money’s been spent and you aren’t seeing any rewards, always makes the job so much more tedious. Similar thing here. You have the qualification, but spend how many years still dealing with the repercussions of the debt. And as far as women go, and I’ve seen it happen all to often, you end up married and bringing up kids, and not even doing that job! Your points on working while studying, and living frugally do actually make a difference. People see these as small things compared to the size of the loan, but added up month on month over the duration of your degree, make a substantial difference. My daughter had a lot of teasing from “friends” about the fact that she had a part-time job, didn’t take spring break trips and believe it or not, even that she didn’t have an android, but used a basic net10 phone (which I might add, gave her more connectivity and minutes at a far lower rate than some of the others). She is now qualified and owes probably 1/3 of what these friends owe! My only disagreement on this article is that one should choose a “money making” degree, and not something you may be interested in. These are the people who are more likely to have a higher drop out rate or never use their degree. You can earn all the money you like, but if you hate the job, you won’t be happy and will probably ditch it sooner or later anyhow. People usually make a success out of something they are passionate about, regardless of how lucrative it is-or isn’t!

  7. ndakapiwam says:

    You give very sound advice. I could not agree with you more. I know from experience that student loans can be tough to pay off even with a good job. I wish somebody had advised me back then before I just went ahead borrowing without giving a thought to how it would impact my life in future.

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