In Tuesday’s post about credit card debt, Melissa asked:
What is your take on other loans- like college loans, or once you’re done with college and have higher education loans (masters, doctorate)?
I started to answer her, but then decided the question deserved its own post.
This is a tough question because student loans, like a home mortgage, are generally accepted as “good debt”.
The reason for this is that higher education is an investment in your future. A person with a BA earns an average of 9 times more, over their lifetime, than a person without a BA. Last I checked, that difference worked out to be about $1 million over the course of their career.
Let’s say you borrow $100,000 to get a degree, which then enables you to go on and earn $1 million more than you would have without that degree. That’s a ten-fold return on your investment, which – on the face of it – seems like a pretty smart move.
Over the last 20 years, however, the student loan industry has grown extremely aggressive. Private loan companies are lending more money than ever, but at higher rates with worse terms.
Federal loan programs have also been significantly expanded. But did you know that federally-backed loans can never be bankrupted? Even in the worst case scenario, you can lose your house, your car, and your livelihood… but Sallie Mae will still get her money back!
These changes have happened in tandem with the meteoric rise in tuition costs. It is very difficult for the average middle class family to afford four years of college for one child – let alone multiple children.
And forget about advanced degrees.
I don’t have a single friend who is a physician who didn’t take out student loans, and usually in the six figure range. While $150K in student loans makes my skin itch, my friends who have become surgeons or emergency room physicians can reasonably pay that off. In fact, if they get aggressive, they can probably pay them off in just a year or two. (“Aggressive” means that they keep living like they are broke students until they pay off those loans completely.)
But what about the social workers, therapists, teachers, etc. who also have $150K in student loans — for their BA and maybe their MA — but will earn nowhere near what a surgeon earns? How are they going to pay off those loans?
And of course, that’s assuming they can find a job. The first student loan repayment is due six months after school ends, so if this social worker/therapist/teacher hasn’t found a job in that timeframe, the “investment” in their future suddenly becomes a albatross around their neck.
For the typical frum family with several children in yeshiva / dayschool, the question of student loans takes on added weight. Given the tuition costs of primary and secondary education, most families aren’t able to afford to simultaneously save for their children’s higher education.
To get a four-year degree, these children often decide to take out six figure loans (and possibly more for advanced degrees), which typically starts coming due right around the time they are getting married and having children. Before they know it, their own children are in school, and they are facing the double-edged sword of tuition bills and student loan repayments.
Unless they have a truly exceptional income, and can manage to live a very modest lifestyle, this becomes an impossible situation.
My bottom line, therefore, is that student loans should be approached with caution and skepticism.
One should constantly assess their risk and return on investment.
One should explore every conceivable option to fund their degree before availing themselves of student loans.
One should avoid private student loans at all costs.
And above all else, one should error on the side of caution.
At least in my opinion.
I’d love to hear your take on student loans. Let’s talk in the comments section!