Are student loans bad? What makes them bad? Does the amount of student loan debt contribute to whether it’s bad or good? If it’s less than $10k, then it’s okay? Or if it’s between $20 and $100k it’s debatable? And anything over $100k is always bad? Or does it depend on what you do with your degree?
The average student loan debt is $19k, the median $17k, of those graduating with a Bachelor’s degree. The debt increases for those with graduate or professional degrees.
Something I find interesting is that everyone tells an 18 year old person “it’s okay to take on student debt for college.” Most people will agree that credit card debt is bad. But almost the same proportion will turn right around and say “student loan debt is good.” So it’s a tough conundrum. You have teachers, parents, coaches, ministers, pretty much all adults telling kids to go to college no matter what. Rarely do find people asking “what do you want to do with your life? Are you sure about college?”
It raises the question, if we shouldn’t as a society have a year or two between college and high school where students can intern or do something else before entering college? Giving them a chance to experiment before having to choose a career.
Personally I think student loans are not bad loans. They give opportunities to people who otherwise wouldn’t go to college. But I do believe that they are potentially ruining many young people’s opportunities because the burden of the debt is becoming rapidly oppressive. That people are running up 6 figure debt like no tomorrow. They aren’t counseled beforehand, nor are student loans even explained.
People think subprime lending, crazy mortgages are bad? Well here you have 18 year olds signing up for $100k debt not ever realizing they will be paying $1200/month for 10 years right after graduating!
Personally I took out loans, but in all my years as both an undergraduate and graduate student, and my DH’s current loans, did we ever see a repayment schedule. We never saw what it will cost us to pay back on a repayment schedule, at least with a mortgage you know your monthly note! We never saw what the interest will be, at least with a mortgage they do tell you what you will be paying over 30 years.
Truth is we don’t even know what bank holds my DH’s student loans. They were given through the school and we weren’t even allowed to pick a bank with no fees. So we’re hoping when they come due we get a letter in the mail telling us what we owe, repayment terms, and fees. And we’re nearly 30. I like personal finance, and I’ve tried calling the financial aid office, but the only answer I get is “the details will be mailed to you at the appropriate time.” Implying that the loan is going to be sold to who knows where when he finishes and at that time we’ll figure it out. If I’m struggling to figure it out, how can you reasonably expect an 18 year old to fully understand the repercussions of their actions?
I think more than mortgages, wait until the student loan crap hits the fan as people who are unemployed can’t pay back their loans.
28 responses so far ↓
1 SP // Mar 9, 2009 at 9:11 am
I do think they can be dangerous and what you say is true–most 18 year olds have no clue what it means. Even if they see a schedule saying it will be $400/mo, they don’t have a concept of what that will be. I guess this is where parents (should, but often don’t) come in to help guide students to only take out an appropriate amount.
It is really strange that you haven’t seen the terms. I always saw terms, knew the origination fee, rates, etc. And when sold, they details can’t be changed.
2 D // Mar 9, 2009 at 9:24 am
I have been paying on a $10,000 loan now for over 7 years. Yet, I still owe 7,000 on it. That is what disgusts me about it….I feel like the principle never goes down. It is through Sallie Mae…they are suppose to be the “friendly” bank for loaning student loan. I think they are the “sucker” bank. I just don’t see how I still owe this much after that long of paying on it. My payment is $80 a month. I just can’t wait for this one to be gone.
3 JoeP // Mar 9, 2009 at 9:32 am
I think it is parents’ duty to help fund college for their kids, if that is what they want to do. I don’t necessarily mean fund completely, but come up with some sort of plan to ensure their children get adequate education to meet their (children) goals.
All kinds of options: parents fund 100%, parents fund partial, parents match funds, 529′s, loan in some capacity, pay for performance, financial aid, scholarships.
If there was a choice between a top-notch school that puts my kids in debt for a dozen years despite my financial help, or a lower cost school, I’d push for the latter.
4 LivingAlmostLarge // Mar 9, 2009 at 10:22 am
SP, it was just a subsidized stafford loan for $8500/year for the past three years. We haven’t taken it out this year, but that’s it for us. It’s really strange. The university says it’s likely because it’s not through sallie mae, but going to be sold or something. I know it’s a 10 year repayment and 6.8% fixed rate because it’s a stafford loan but nothing else right now.
D, you could prepay the student loan. But I think, it should come after you rid yourself of other debt like car loans, credit cards, etc.
JoeP, I think that it depends on your child. At least from observing my nieces and nephews. Some kids due to circumstances need more financial help perhaps because they are as able to get scholarships or aid. Others are well extra gifted. And yet others need care for their life. Thus I will try to be fair, but life isn’t always fair. Plus some kids are better off going to get a trade degree if they so desire.
5 JoeP // Mar 9, 2009 at 11:19 am
Obviously, circumstances will dictate what options to entertain, and whether or not college is even in a child’s future. That is why I listed those options, which can be combined as needed. We will do our best to avoid student loans, and have already taken steps to fund college by means of 529′s. Our house will be paid off before the first year of college, so that will free up some money. And our definition of “the best college we can afford” is the school that we can pay for without student loans, or with very manageable student loans.
6 LivingAlmostLarge // Mar 9, 2009 at 9:19 pm
Yep, I think that it really depends. I used to think 100% college if they get A and B, and 75% for C. But I also realize it depends on the child’s ability.
My sister had 3 kids and one has ADHD. Because of that he went to a private school from k-12 while the other two went public. He had tutors and extra help. Same with college, he went to a private, small university, the other two went to the cheaper, bigger public university.
I think you want to be fair and help but circumstances wreck the best laid plans.
7 fengshui // Mar 9, 2009 at 9:30 pm
I wouldn’t have been able to obtain a master’s degree without student loans. My parents contributed ZERO dollars to my education, not even for food or supplies…. that was the way it was. My parents thought that once you turn 18, you’re on you’re own…. So… Although I plan to pay for my children’s education. I have “about” $25k in student loans for 2 AS, 1 BS, 1 MS degrees. Not “too bad” in my opinion….
8 Kristy // Mar 10, 2009 at 7:47 am
I don’t think student loans are bad. But kids need to realize what they will be paying back when they are finished…whether its the parents, guidance counselors, whoever helping them through the process. I graduated almost 10 years ago with $15,000 in student loans. I am still paying them off, but the rate is super low.
9 LAL // Mar 10, 2009 at 9:13 pm
I think we need to talk more with 18 year olds about the cost of the loans they are signing up for. It’s getting outrageous and how many 18 year olds really know better?
10 JoeP // Mar 11, 2009 at 3:56 pm
LAL, I’d say it starts long before 18! We’ve started teaching our kids about loans and interest years ago. Hopefully, they will grow to better understand basic money management concepts.
11 fengshui // Mar 11, 2009 at 10:28 pm
I wonder if this is being discussed in HS economics classes?
12 LivingAlmostLarge // Mar 12, 2009 at 9:41 pm
JoeP, good point. BUT I’ve heard from MANY people in 6 figures student loan debt, their parents encouraged them because it’s for “Education”. It’s to go to the best school possible. Or to be X, Y, Z.
Fengshui, I doubt it.
13 fengshui // Mar 12, 2009 at 10:32 pm
I would cut myself off at $50k for student loans…. I just couldn’t justify having more loans than that…… But that is “my” comfort level…. Many people get scared with only $5-10k in loans. I have about $25k, and it worries me, but it was worth it. I just interviewed for a position with a starting salary of $90k
14 LAL // Mar 14, 2009 at 4:56 pm
I don’t know what my cutoff would be. I think it depends on what the loans are for.
16 Jim L. // Mar 16, 2009 at 8:45 am
Great Article! My wife and I racked up nearly $90,000 in student loans (6 years for me, 4 years for her.) If you think about it, it’s only $9,000 per student per year, which isn’t bad for a quality education. The problem comes in payment. For example, our loans had an origination fee of a total of around $20,000! That’s instant profit for some of the private loans we received. This is hidden in the “low-interest” the loans claim. For us, this $90,000 debt equates to nearly $800 in school loans. Thank goodness we both got decent jobs out of school or we would be struggling. Please share in our story at http://www.switchtoriches.com. Included are other ways we were led to believe the debt we took was good debt, and ways we are managing our finances now!
17 LivingAlmostLarge // Mar 16, 2009 at 9:59 am
Jim, sounds like an interesting way to look at it. $9k/year for education. Put that way it doesn’t sound so bad.
18 Tim // Mar 16, 2009 at 2:07 pm
The education that I received in exchange for my student loans actually managed to teach me how bad student loans turn out for the students in the end! In the US society perceives a “need” for higher education, which drives demand. We’re told that we “need” a 4 year degree to do jobs that have never required it in the past (everything from being a restaurant manager to a secretary now “require” degrees for some reason when all you really need is a little experience and the ability to use Word/Excel). As this demand is so high, it’s very price-insensitive (inelastic to use the term my education gave me). Essentially, this allows schools to continue increasing price as the student will take out loans to cover the difference because they “need” the education. Without the loans, students would be much more price-sensitive and this would drive colleges to cut costs to lower prices. In the end the ability to get the student loan creates the situation where the loan is necessary in a negative cycle.
As for Sallie Mae, under no circumstances should you ever deal with this “company”. If your loans are through the school they are likely either through Sallie or one of their subsidiaries or they will be bought by one after graduation. Refinance right before you graduate with a non-Sallie affiliated company. They are an outgrowth of the federal government and are immune to any of the laws that regulate other loan firms or even regular businesses and they act like it. I’ve heard/experienced stories ranging from intimidation and threats to simply “accidentally” applying your payments to the lowest-interest loan in your portfolio while interest compoundeds your higher-interest loans.
19 LivingAlmostLarge // Mar 16, 2009 at 2:51 pm
Tim for once I agree, that right now society is driving everyone to get a bachelor’s degree. Secretaries, retail managers, you can’t get promoted or into management without a degree! The thing is nowadays everyone requires a degree. So students are put at the school’s mercy.
I had no idea about sallie mae. I might have to refinance my DH’s loans. I don’t know who it’s with though.
20 Funny about Money // Mar 17, 2009 at 9:17 am
People used to say that the cost of a college education was about what a new car costs. Given that a car depreciates in value and a college degree supposedly opens the door to higher earnings, clearly it’s better to rack up student loan debt than not to go to school.
On the other hand, college tuition has climbed so high that you could buy three nice Toyotas for the cost of a bachelor’s and a master’s. When students come out of school $90,000 or $100,000 in debt (or more!), I think you have to question the value received.
Trouble with student loans is coming not only because people are unemployed, but because even in good times most college graduates are underemployed. As Tim points out, a college degree will get you a job that used to be open to people with high-school diplomas. You shouldn’t need a bachelor’s degree to wait tables, answer phones, or sell books at Borders. Jobs that await too many college graduates are poorly paid and mind-numbing. And they’re jobs that will not fund payments on high five-figure loans.
21 Jim L. // Mar 17, 2009 at 9:45 am
(see previous comment above).
Funny About Money is definitely right. Fortunately, though, my wife and I were lucky to receive the employment we did after school. As stated previously, our college debt is costing us nearly $800 per month. Our salary minus this $800 would still be more than we would be making if we didn’t have a college degree. In 9 years, about $300 will be knocked off (hopefully earlier!), and in 15 years or so the rest will be paid for. I would hope that my debt is closer to the higher end of the spectrum.
Where the college graduate wins out is the race for long-term wealth!
22 LivingAlmostLarge // Mar 17, 2009 at 7:53 pm
Funny I agree that a lot of jobs now require BS degrees for what? Nothing really.
Jim, the problem is a motivated person I bet could do better than a highly educated one. There are many entraprenuers who do better than doctors, lawyers, etc. It’s person dependent.
The problem is now you need a degree no matter what you do, even if what you do didn’t require a degree before.
24 Stephanie PTY // Mar 18, 2009 at 10:29 am
I wish someone had introduced me to the idea of “too much” student debt at the time I was applying. I figured whatever I had to pay to make my dream career come true, was worth the price tag, and I would “make it work” somehow. Yeah… ok… but that’s what you say when you’re 17 and signing the paperwork with no help.
Now I’ve got $42,000 in student loans for a bachelors, and the career I’m both interested in and good at pays a median of $35,000/year.
I don’t regret anything – my journey through college was strange and took odd turns and I’m glad I did it. But I wish there had been someone to make me stop and understand what was going on when it started.
25 Jim L. // Mar 18, 2009 at 3:35 pm
Stephanie, I completely agree. I wish my student debt was lower. However, college prepared me for more than what my major offered me. I received so much more personal skills that truly affect my day-to-day life that I would now consider priceless.
26 LAL // Mar 18, 2009 at 6:43 pm
I think Stephanie hit it on the head. How many 17/18/19 year olds have someone talking and sitting with them before they signed onto debt?
Jim, I agree college was more than the major. It was fun, I made a lot of very close lifelong friends.
Carnival of Personal Finance#196: Music Edition - Mar 16, 2009
Moments of Fame « Funny about Money - Mar 17, 2009
LivingAlmostLarge » Weekly Roundup and Carnivals - Mar 20, 2009
The Best of the Best in Money and Personal Finance - Inaugural Edition - Apr 5, 2009
Leave a Comment