When Student Loans Are Bad Debt

When Student Loans are Bad DebtIn 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)?

This is a tough question because student loans, like a home mortgage, have generally been considered “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 $200K 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 medical 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 an 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 extreme 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 that’s my opinion of how student loans aren’t necessarily good debt. 

But I’d love to hear your take on student loans. Let’s talk in the comments section!


  1. can you give your opinion on the best way to pay back student loan debt once it exists? for example my husband and I both have student loans, together the principle is probably 150k. we have consolidated to the best of our abilities, but we can’t combine his and mine, nor can we combine federal with private. I was thinking it might be worth our while to take out a personal loan (we don’t own a house) in order to get the bills all under one umbrella monthly payment. even though the interest is higher on a personal loan, maybe it’s worth it to do that as opposed to paying the interest on 3 different loans?

    • Mara Strom says

      An umbrella payment isn’t going to help you if it means increasing your interest payment. It doesn’t make sense to pay more money just for the convenience of having fewer payments. Confirm that your interest rates are as low as you can get them, then roll up your sleeves and go crazy on those loans! I recommend setting an audacious goal of paying them off in five years or less. I find that “audacity” is hugely helpful in reaching seemingly impossible financial goals.

    • Also remember that you can deduct the interest payments of most student loans for tax purposes. You cannot deduct the interest of the personal loans you reference.

    • Rivka H. says

      If you have federal student loans, look at getting them consolidated with a lower interest rate through the Dept. of Education (Direct Loans). I’m not sure how much things have changed, but we consolidated ours (hubby and mine together) over 10 years ago to a 3% interest rate.

  2. After looking at all of the debt my wife and I have: Mortgage, HELOC, Car loan, and her student loans, the student loans are at rates insanely higher than what we’re paying for the other 3.

    1.49% interest on the car loan.
    Merging my HELOC into my Mortgage with a Refi and getting a 3.85% interest rate on the subsequent mortgage.

    Her education loans are between 6-9%!!! It’s insane. I’m borrowing extra money against the house at a lower interest rate just to pay off those loans.

  3. Great post. Incurring student loan debt must be weighed very carefully. I went through professional school on a shoe string. It was there, unbeknownst to me at the time, that I learned the skills of being a grant writer. I would nit the library and research any and all scholarships I might be eligible for and present them to my financial aid adviser after I had received my financial package for the year. I do not think he had ever met someone as persistent as I was. We would scrap together several small scholarships and reduce my financial burden substantially.

    Simultaneously I worked three jobs, returned soda cans I collected for $0.05 piece to cover groceries and learned to get through audaciously hard classes without buying one text book (after the first quarter when I spent hundreds of dollars on books I never cracked.)

    After graduating I chose to serve my country in the US Public Health Service. There I got loan deferment for 2-years. Had I known about the USPHS when I was in school I could have applied for a scholarship with a pay-back clause (2-years service for 1-year of scholarship). Regardless I was able to not pay my loans and no interest accrued for 2-years. The day my student loans came due I was able to write one check for the entire amount. Professional school was paid in full. Mind you, this required austere living for the entire time I was in school plus the time after I graduated, working numerous jobs, scraping for scholarships, and not being afraid to serve in the most remote and under-served parts of our country.

    I have gotten additional education since my first degree but I have utilized the G.I Bill for one degree and was accepted in a program where all expenses were paid for the other. Our family is comfortably situated now because of the sacrifices my husband and I made when we were young. I could not imagine raising a family and still being suffocated under student loan debt. In that vein, I toy with completing a PhD but will only do so if it does not impact our family’s financial bottom line.

    • Rivka H. says

      Dana, I did the same thing in my senior year at high school! The counselors office had a book of available scholarships and I applied for every single one that I thought I’d be eligible for.

  4. I was young, selfish and VERY dumb and got sucked into federal and private loans. I’d been paying them on and off for 5 years (unemployment and 3 maternity deferments) & I don’t think the principal went down one cent. But in the last year (since reading your story) we’ve been snowballing and 1 (out of 5 between DH and I) is now paid off, another one will be in July and another by the end of the year! Then all I have left is the biggest mistake of my life, ummm, I mean the biggest financial learning experience of my life left, Sallie Mae. Barring any big scary financial setbacks, we should be loan free in less than 3 years 🙂

  5. I have acknowledged the total cost and benefit of my degree and decided it is worthwhile, How do I then determine whether to use all of my savings or take out federal student loans? Is cash king?

    • Rivka H. says

      If you can get federal subsidized loans you might consider taking the loans then paying them off before you graduate.

    • Mara Strom says

      Shifra – I would encourage you to look at other alternatives: Working thru school (and therefore taking a bit longer to finish); applying for scholarships/grants/TA positions; finding a job that will help to pay for your degree; etc.

      I don’t think it has to be an either/or proposition – student loans vs “all my savings”. I think you can find other ways to fund your degree, especially if you are highly motivated, which it sounds like you are!

      That said, if you’re asking what *I* would do, I would not borrow the money. If you don’t want to “risk” your savings, you shouldn’t be willing to run the risk of student loan debt, either.

  6. THANK YOU for being brave enough to mention the future salary vs. cost of education (and loans) issue. So many people are scared to approach that topic. I cringe when I hear of high schoolers going $150K+ into debt to go to the most expensive private undergraduate schools in the US just to choose a major that requires a graduate degree (and therefore more loans) in order to get a job that pays more than $15/hour.

  7. I was blessed with a full ride at at UW-Madison for my MFA. I teach high school and make a nuisance of myself pushing and encouraging the kids to apply for EVERYTHING when it comes to scholarships, grants, you name it. I had a kid get a full ride to MIT last year. I’m with you, the idea of repaying a six-figure loan makes my skin itch, too! It’s competitive, and a ton of work but DOABLE.

  8. We live off of student loans right now (husband is full time student and EXTREMELY limited child care options in the area keep me home during the day) but our plan is to continue living frugally in the first five years after graduation to attempt to pay down our loans faster and not be a slave to them for the rest of our lives!

    • Mara Strom says

      That sounds like a fantastic plan, Chani.

      Have you explored ways you might be able to work from home? If you’re living off student loans, an extra $1000 or $2000 in cash each month would be windfall to you.

  9. A few thoughts…

    Student loans ARE dischargeable in bankruptcy IF you can prove undue hardship. If you can’t prove that, I’d be curious why you feel you shouldn’t have to pay them back. Not a lot of people realize this because the popular media just keep saying over and over again that they’re not dischargeable. It doesn’t happen often (largely because people don’t try) but it is possible when warranted.

    Private student loans aren’t the unmitigated evil they’re held out to be. Generally, it’s better to exhaust your federal options first, but for families with good credit histories, private loans can be cheaper than PLUS loans. And if the federal program goes back to variable rates as has been proposed by the House, private loans will be your only option for locking in today’s low rates. It’s complicated; you need to do your homework. Figure out how much you need to borrow, and how much the balance will have grown to if you don’t make any payments while you’re in school. Figure out what that translates to in terms of a monthly payment after graduation. But I don’t agree they should be avoided at all costs. With that approach, that’d be the end of graduate school and MBA programs for most of us. Federal programs have pretty low borrowing limits, well below the cost of most (and all top tier) graduate programs.

    The best piece of advice I would give most people is that if you need to borrow, then you shouldn’t be going to a private school for undergrad unless they’re offering you a whole bunch of aid. For graduate and professional programs, big name private schools often matter. For undergrad, it rarely makes a big difference and the increase in earnings potential comes largely from the degree itself, not the school. If private school will cause you to borrow more than public, you are not likely to get a good return on your investment. And be practical – think about the career prospects for your major, and the salaries for those jobs. Graduating from NYU with $120k in debt and a degree in journalism is a recipe for poverty!

  10. Elizabeth says

    I went to a small liberal arts school. While tuition was high, I got a lot of need-based aid and only federal loans. I have around 22K in debt, which isn’t small change. At the same time, I would have paid about as much or more out of pocket to attend a public school out of my home state and only slightly less to attend a state school in my home state. So not only was a small school more what I wanted, it was also good financially.
    I also now have income based repayment on the loans I have left, and I honestly can’t recommend IBR enough. You can reapply every year, and it means payments are never more than about 10% of your monthly income, and you can pay more than that if you want. I believe you also get forgiven on whatever isn’t paid back after 25 years (although I haven’t read the fact sheets in awhile and could be wrong).
    I think college is an important investment, both financially and personally, for people who want to go, it’s just important to consider all the factors.

  11. As an adult going back for a second career, I am working enough to pay my tuition with out
    borrowing any money. Fortunately, we can live off one income, even if its tight. I would do almost anything to avoid borrowing money school as I did in my original grad school days when tuitions were so much less than they are now. I pay the price of always being exhausted and taking fewer classes than I would prefer, but so far I’m not mortgaging my future. I know this is not a choice for everyone.

  12. Rochel R says

    One of the smartest things my husband did when he was thinking of going back to school to get a masters degree and do a complete career switch was really compare the cost of the education to earning potential right out of school. We knew that we could not avoid some student loans. He ended up with a 2 year program in accounting, while it starts out with a nice salary range and has lots of growth potential it is not going to earn him the same as a surgeon. But on the other hand, We have friends that went for careers that were earning more right out of school but their student loans monthly payments were 5 times as much as ours was and it really crippled them financially. We were also careful to only take loans in the amounts we absolutely needed, covering tuition and related expenses. We are grateful that our student loans have been manageable, especially as his salary has grown over the last few years.

  13. Rivka H. says

    My husband and I went to a state university and used a combination of family gifts, loans and scholarships to fund our frugal B.S.’s. Now in our professional careers it would not make a difference whether we had gone to a top, private college with top, private tuition – so glad neither of us did! Our loan payments are VERY affordable, and definitely worth it for the field we chose.

  14. Rivka H. says

    Also college is not for everyone!! I encourage everyone to consider the less expensive possiblities of vocational school and other options. If your objective is to get a good job that you enjoy, explore possibilities with a career counselor or other, and get the approporate training or education to pursue it. This is what we are telling our kids already, and encouraging them in hobbies that could eventually lead to a career.

  15. Rivka H. says

    Yet another option to look into when pursuing graduate school is to see whether your employer (or a potential employer) would pay for your tuition. This is how I finished my masters degree, after I started working, with no tution costs for me.

  16. What a timely post! I just made my first payment to Sallie Mae yesterday. My student loans aren’t due yet (I just finished my degree this month) but given that one has already started to accrue interest, I figured I had better start when I can.
    A couple of points I would like to discuss in regards to this topic. I know a lot of high school kids looking into college are interested in the “college experience” and going to expensive undergrad schools to get this – DON’T! That’s when they start racking up those big student loans for courses that they can get much less expensively through a community college or state school. They also may be looking to move away from home which adds in the cost of room and board. I question how much worse they’ll have it when they have to move back in as an adult with their parents because they have so much student loan debt and can’t afford to live on their own. The other thing you mentioned is what degree people are getting and prospective salary. I worry about people who spend so much money on a degree they can’t realistically get a job with.
    That being said, my take on student loans is that they can be a good investment when used appropriately. I got my associate degree in nursing at an inexpensive community college which resulted in no student loans as I worked while going to school and had some family assistance. I lived locally with family during that time until I got my first nursing job. I just did my BSN completion at a state university that accepted all my credits and did result in modest student loans as I went down to part time at work and had some job changes during the time it took me to complete this degree.
    I have contemplated going back for my Master’s and realize that the student loans would be significantly higher. However, I also know that nursing is a very lucrative skilled field that can’t be outsourced and furthering my education in this field will open up new opportunities.

    • Mara Strom says

      Congratulations on graduating, Chana. It sounds like you are making some very smart decisions! Good luck in your career.

  17. I couldn’t state it any better. I only wish I had known all of this before going to grad school.

    I’m going to add one tiny thing that is totally un-PC, but here it goes: women need to think even more carefully than men about how much they really want/need to attend graduate or professional school. Once you owe on those, you will be either forced to stay in the workplace if and when you have children whether you want to or not OR you’ll be in a real financial bind. I’m not saying don’t go. But maybe pick a less expensive school. Or go part-time, paying as you go. Or wait until after the kids leave the house to return to grad school.

    I learned this the hard way.

    And IBR is reason enough that my husband says he no longer hates the president. It’s a real help.

    • Mara Strom says

      R- You are absolutely right! If you know you will want to be home with your kids when they are little, then $150K in loans to get a law degree (or whatever) will be a huge burden for your family.

  18. My husband went back to school full-time after we had our first child. Five years later, he had his bachelor’s degree in hand and we were able to pay off the small debt that we had in 4 months, before it ever accrued interest. My husband chose a degree that he calculated would be a good financial return on the investment we were making, then we crammed ourselves into small living quarters. He did all he could at a local community college and then and when his major required more specialized classes, he enrolled in a large state university. We took out one federal loan to have on hand and only used it during the last semester of this five-year venture. You don’t have to go into six-figure (or even five-figure) debt in order to come out of college with a lucrative career.

    There’s a great new book that has just come out by a former secretary of education titled “Is College Worth It?” which challenges the idea that having any degree is a ticket to a better life. My husband was wise beyond his years, I think, when he decided he wanted to go back to school because he did the math and decided which major to enter based on how quickly the salary in that career would enable us to break even after graduation. If you are really looking at school debt as an investment, than be savy – like you would if you were investing in the stock market. Don’t invest in something that will just make you feel good…invest in something that is going to pay you back much more than you paid in.

  19. Rachel A says

    As a just graduated student from a master’s program (as of 1 week ago!), I’m very torn about student loans. My husband and I only have student loan debt, but combined it is quite a huge amount, and most of it is mine. The problem is this: when I was 17 and applying to college, should my parents have told me that no, I shouldn’t shoot for the best school I could possibly get into it? Should I have been told that I should go to community college so that I wouldn’t end up with paying off loans later on? I’m really not so sure. I was fortunate that my parents paid what they could of my tuition, while the rest became my responsibility. It is absolutely true that when I was shown a number in the financial aid package, I had absolutely no concept of what it would mean to pay that back. However, I am in a very niche field, which I was interested in from the beginning when applying to college, and I ended up at a liberal arts school within an ivy-league university, taking classes in my field with some of the best professors in the country. I deeply, deeply value the education and transformative experience I had there. Afterwards though, thinking my major wasn’t exactly practical, I then worked for 3 years in a different field that I hated. I was honestly miserable, and so I ended up back in my original field for my master’s degree. We’ll see where this degree takes me, but I can tell you that I don’t think I could have gotten very far in the job market without this degree. Yes, I had to take out even more loans. Yes, I’m not in the most lucrative field. But I couldn’t see myself functioning for the rest of my life without pursuing the career I really loved, and in order to do that, I needed to take out loans. I don’t know if I’ll look back and think this was foolish. Yes, I could have had a transformative education at any school, and there’s nothing wrong with that. But there was something incredibly special about working toward the best – and accomplishing it. And in the same way, we’re planning on attacking our loans using the Dave Ramsey/snowball method to get out of debt as efficiently as possible. We are going to succeed!

    On the flip side, my husband left an expensive private university to attend a city university that was a bargain. This was quite possibly the best decision he made. He received a great undergraduate education, with a small amount of loans, and his career is so far successful.

    All this to say: It really depends on your personal situation. I do wish someone had made it clearer to me when I was 17 what my loans would actually mean in reality. I had no concept of what that amount of money meant, and maybe it would have changed my decision. But truthfully, now 10 years later, I don’t regret them.

    • Mara Strom says

      That’s an interesting point you make about not “getting” the full weight of responsibility that would come with your loans when you were just 17. I think the proliferation of the student loan industry has contributed to that, combined with the fact that it has become the norm for people to turn to student loans as their first option, rather than last resort.

      • Rachel A says

        Yes. I don’t think there was any question about it – I was just going to take out loans, like so many other people. Whose responsibility is it to teach about what taking out loans really means? I don’t think it’s just a parent’s responsibility. High school math teachers? Guidance counselors? By the time a student arrives at college, it’s too late for the Financial Aid office to explain it – the “damage” has been done.

  20. Another thing to consider with student debt is that many loans require a co-signer, especially undergraduate loans. I went to a private school, which was mostly paid for by federal loans taken out by both me and my parents, and we are co-signers on eachother’s loans. While I am able to make my own loan payments without difficulty, last year my parents hit some financial troubles and were unable to make their loan payments, which became my responsibility (my credit would be affected if the loans were delinquent for too long). This was an extremely difficult situation for many reasons, but also became a financial burden as I was now making two monthly loan payments. Fortunately, these loans had very forgiving terms, and we were eventually able to work out a comfortable payment plan.

    My advice to anybody considering student loans is to think about the financial risks for all of those involved. I also know of many children who have exposed their parents to risk for defaulting on their student loans, and I would have given anything to avoid the emotional and financial pain I endured with my family.

    • Mara Strom says

      Anon – My heart breaks for your story. It sounds complicated and painful. I hope that you will be able to work thru both pieces of the equation – financial and emotional. Thank for the warning about co-signing loans: a very important piece of advice!

  21. Here are a few tips:
    if you/your child is a competitive student, think about applying to a public institution’s honors college/program instead of a private school. The price difference is huge, and the education will be great.

    Instead of going to a private school for four years, think about going to a public school for two, then transferring to a private, and save 50 percent.

    Or do what Dave Ramsey suggests – go rock bottom cheap for an undergrad degree. Why do kids “have to” go away to any school? There is no shame in living at home and commuting! Someone in our shul did just that. He just graduated and is now off to medical school!

  22. I think that this is a tough issue and I have learned a lot about this over the years – but those years were after I already had student loans out. I was lucky and unlucky in this regard. I graduated form an Ivy League University with under 20K in loans and my husband had $0 in loans due to good planning and financial need.

    The bigger issue with college is that I feel that most 18yr olds are just not prepared for the financial reality. The parents need to plan and prepare and make tough decisions. My parents sent me off to my first day of college without a plan about how to pay. I registered for classes and was hit with the big shock that I was expected have cash or a credit card -0 yet my parents had told me nothing at all, so there I was in the financial aid office basically begging. Luckily, I was blessed with some lovely people in the office who really walked me through everything and busted their buns to get me some aid and loans and work study.

    I also worked about 20-30hrs/week (library, school offices, I babysat for everyone and anyone and I was an RA so I had a free room) while taking at least 18 credits per semester. I graduated a year early with a dual degree. I did this because I could not afford to stay another year.

    I got lucky that I was able to graduate with such a low loan amount, and it was paid off in 5-6 years. I am already drilling into my kids head that it is state university or a full scholarship. But my main goal is to have an open relationship with them regarding money and being honest with them so they will not get the surprise I had.

    So – some student loans are fine, but we all need to be realistic. And that can be hard when you are 18 years old.

  23. Michelle says

    What was your college experience Mara? Did you eschew a fancy private school for a state school? Did you avoid school loans to pay for it?

  24. Sorry if this is a repeat, because I didn’t read all 40-something comments from before.

    For those considering going back for a degree or who got a late start like I did (I started college at 23, not 18)… Community college! Definitely community college! I spent the first 2 years at a New Jersey community college and just graduated with an Associates. This enabled me to completely BYPASS general ed requirements at a 4 year university, meaning that 100% of my credits were accepted and no loss of money. Community college cost me $12,000 for 60 credits, whereas my (state) university will cost me $25,000 for the remaining 60 credits to graduate. I also got financial aid for my associates, but that aside, I still saved $12,000 by going to community college first.

    I think the biggest thing with student loans is trying to avoid taking out living loans. Loans for tuition is one thing, but borrowing money to live on is entirely another. Take less credits and work full time (that’s what I did in community college, so 60 credits took me 3 years).

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