There’s a common belief that student loan is “good debt” because it’s an investment in the future. A degree, people say, will result in higher earning power later in life.
College is a great thing. Most days, I wish I could go back to college. But truth of the matter is that the cost of college—or more accurately, the volume of student loan debt that students are collecting—has become one of our nation’s greatest crises. The average senior has more than $29,000 in debt, with seven in 10 seniors owing something when they graduate.
While it’s true that people with college degrees will earn more in the workforce, this should not be an invitation to take on tens of thousands—or even hundreds of thousands—of dollars in debt.
If you are burdened with student loan debt early in your life, it could create a negative domino effect, impacting every financial decision you make.
The pattern often goes like this:
- Young person graduates with tens of thousands of dollars in student loans
- Young person starting out in the workforce doesn’t earn much, so they use credit cards to help get by
- Young person racks up credit card debt on top of student loan debt
- Young person, now saddled with two kinds of debt, wants to buy home. But he/she struggles to save for down payment and has imperfect credit
- Young person purchases home with less-than-favorable terms. (Interest-only, high interest rate, etc.)
- Mortgage turns into a burden as well
- Young person is unable to begin saving for retirement, costing them potentially hundreds of thousands of dollars in savings.
So, in summary, if you have lots of student loans early in your life, you may find yourself behind the financial eight ball for years, and you may never truly recover.
The burden of student loan can have other ripple effects as well. If you have student loans, you may be less willing or able to take a low-paying, entry level job in your field. Thus, many young people are finding it hard to gain the necessary experience even though they have the right education.
If you have student loans, you may find it hard to make ends meet in the the geographic area you want to live. Imagine trying to pay your rent in New York or San Francisco when you have tens of thousands of dollars of debt to pay off.
So what’s the solution? College isn’t cheap, after all.
I don’t like to get political on this blog, but I do feel that heavier investment in public education is an important part of the equation. Also, I believe parents should play a larger role in funding their children’s education so they start off on the right foot. Paying into a 529 plan or pre-paid college trust are great ideas and often offer tax benefits to parents and grandparents.
Aside from that, students can make some choices to ensure that student loan debt doesn’t cripple them for years. Here are some key things to consider.
- Look for value, not prestige – The most expensive colleges are not necessarily the best. U.S. News and World Report publishes a helpful list of the colleges that offer the best overall value for the money. Public universities, in general,
- Stay close to home – Students may want to travel 3,000 miles away to attend school, but it’s almost always cheaper to stay in state. Example: Tuition for a new engineering student at the University of Michigan is $7,030 per semester if they are from in-state. Out-of-state students, however, will pay $20,314 per semester. In other words, it’s almost triple the cost if you’re not from Michigan.
- Consider a community college – When you go to college, there’s a pretty good chance that your first two years will be spent taking a bunch of required courses. It’s not until your junior and senior years that you begin taking the bulk of courses in your major. So why not take the required courses at a community college for considerably less money? Then you can transfer to a major university after two years. Your degree will count just the same.
- Learn to live on less – It’s hard when you’re young and there is pressure to go out to eat, drink, travel and party. But it’s important for young people to be frugal early on when they are not earning a lot of money and paying off loans. You won’t miss that $9 martini when you’re 37 and still struggling to make ends meet.
What’s your strategy for ensuring that student loan debt doesn’t make you go broke?