There are currently 40 million people with student loans in the US alone. This is more than the entire population of Australia. And of these, 7 million are in default. Tuition is up 500% since 1999 and wages during that same time period are only up 10% (Huffington Post). The math just doesn’t add up.
The goal of college is clear. To gain a skill set that provides value to the world that results in a career that has market demand and generates income to provide financial independence consistent with your personal needs and lifestyle goals.
But don’t we all deserve a college education? We were saying the same thing about home ownership prior to 2008, unfortunately it is the wrong question. The question is not whether or not we deserve a college education, the question is whether the investment worth the cost. And in many cases it is. But before you make the leap, make sure you understand what you are getting into. Here are 7 things you need to know about student loans:
1) Student Loans are not cleared in Bankruptcy
Colleges know this. They are getting paid one way or another. Either you are paying, and if you can’t, the government guarantees the loan and the general public pay which causes the economy to suffer. Therefore, colleges aren’t shy about increasing their tuition rates and banks are pretty cool with loaning the money. Consider another way. Work through college. How about a 2 + 2 program (2 years at a community college + 2 years at a state school). Apply for every scholarship you can get your hands on. The goal is to get through debt-free. The secondary goal, with absolutely as little debt as humanly possible.
2) 4 Year Degrees aren’t 4 Years Anymore
The US Department of Education reported that only 59% of those who started in 2007 received an undergraduate degree by 2013. Yes, your math is right. That is 6 years to get a 4-year degree. And yes, that is only 6/10 students who ultimately got a degree. Focus and get a 4-year degree in 4 years. Better yet, do it in 3. That is one less year of interest and one more year of income. Many high schools offer college credits. Consider summers. Yes, that means no 3 credits for boogie boarding in the French Riviera for the summer, but remember the goal. If you do this right, you can go to Europe whenever you want.
3) Hardship Deferral
Banks make it is easy to defer student loans. The reason is simple. The longer it takes you to repay the loan, the more interest they earn. You may find yourself in a spot where it is the only option. But the problem doesn’t go away, you just kick it down the curb. And when you confront it again, it has grown (see point #6 below). Dig in. Pick up odd jobs. Sell stuff that you don’t use. Sacrifice now to win later.
4) Full Cost
Calculate the full cost of your education: tuition, food, books, living, spontaneous spring break in Cabo and a beer pong set. The whole deal. And don’t forget the one everyone forgets … the cost of interest. If you are getting a student loan, getting money you don’t have now will cost you money in the form of interest. In the US today, the average family spends 35% on interest. Add taxes on top of that, and there is little left over for life.
5) The Purpose
Don’t lose sight of why you are in college. Yes, it is fun. Socializing and learning to live independently is a big part of the experience. But the real point is to gain a skill set that provides value to the world that results in a career that has market demand and generates income to provide financial independence consistent with your personal needs and lifestyle goals. Know the market value of the skill set you will gain in college. It makes zero financial sense to go into debt 200K from a private school to gain a 30K/year job after receiving your diploma. There isn’t an amortization table that stretches out that far to make that math work.
6) Interest is very un-Oola
When I graduated, student loan repayment terms were 7-10 years. Now, you can get loan repayment terms from 12-30 years. That is insane. The interest over time is ridiculous and the financial fatigue you will feel after making almost zero principle progress after making faithful payments for 10 years on a 30 year loan is defeating. The current average student loan debt is approximately $35,000. At 6% interest over 30 years you will pay back $75,543. That is $40,543 in interest. Worse yet, if you had invested the $210/month you have been paying in student loans in a mutual fund yielding 9%, you would have built up an investment account of $384,000 at the term of the loan.
7) College Isn’t for Everyone
Unfortunately, regarding college in the US today, we follow the herd without questioning the “why” or “how much.” College has become the natural step from one education level to the next. Many look at the first year of college as simply the 13th grade. We don’t even think. We just naturally sign up and send our kids on. And why would we. College is easy. Applying is easy and loans are even easier. Where once college solicitation and acceptance letters were a family badge of honor, now has turned into an impressive junk mail collection. I have my second child going to college next year. We have daily letters and calls courting her application. What she sees as an honor, I see as little more than a cold call sales pitch. College isn’t for everyone. In fact, the marketplace eventually won’t support it and the increased incomes will go to skills and trades. Some of, in fact most of, the wealthiest people I personally know have no formal education, just a clear vision of the life they want and ridiculous drive, discipline and persistence. Make sure college is part of your path before you follow the herd.
I am a fan of a college education. My wife and I both received degrees. My oldest son has a degree. And my oldest daughter is enrolled next year. College is a big decision. As with all big decisions, take the time to study and discuss the financial aspects of receiving a college education. If this is done, college will be the blessing and opportunity it is designed to be, and not a financial curse.