Education is a good thing. I strongly believe that individuals should pursue educational opportunities at all times, and that a population of educated individuals is beneficial to society. So why am I negative on student loan debt? Haven't we already established that it is "good" debt, and an investment in your future?
The problem I have with student loan debt is that it is often entered into blindly. We are encouraged to go to college, and then often post-graduate programs, in order to increase our employment potential and obtain our dream job. If we have to take out loans in order to accomplish those goals, so be it. However, when a student takes out too much in student loan debt, he or she loses freedom and becomes bound by the obligation to pay the debt. It becomes more difficult to take time off work to travel, or visit with loved ones, or move into a career that pays a large personal dividend but a small salary.
I am not against student loans. I have a loan that I pay every month, and when I do it reminds me of the value of my well-rounded education and amazing college experience. Nor do I believe students should only take out loans for majors with "economic value." My Sociology major taught me how to research, write, and most importantly how to look at the world critically, a skill I use in business every day. I know a finance major who is now a veterinarian, an geology major now a Chief Investment Officer, and a philosophy major now a CEO. College should be about learning and exploring, and the more engaged you are in your classes the more you will get out of school.
That being said, education is expensive. And while the benefit side of the cost-benefit analysis is nebulous and not entirely monetary, there is a break-even point. One example is specialized master degree programs. I recently met a student preparing to apply to post-graduate programs in physical therapy. She expects a starting salary of approximately $70,000 a year and does not anticipate much salary growth throughout her career. She talked about the schools to which she is applying, and how the programs rank. Then she told me the cost. She would need a $250,000 student loan to attend her top school. She know it's a lot, but it is for her dream job helping people, and she would complete the program as a doctor of physical therapy. That's a worthy investment, right?
I immediately pulled out my phone and started crunching numbers (yes, I am a nerd and actually have a financial calculator on my phone). At today's rates, she would owe over $2,200 every month for 15 years! At $70,000, she would be paying more than HALF her take home salary every month in student loans, leaving her only $2,000 a month on which to live. She may love her job, but is she willing to take a vow of poverty for it?
I know many others who have found themselves in an indentured servitude situation. One earns $60,000 a year and pays $1,600 each month in student loans. Another is a lawyer with $200,000 in student loans who didn't pass the bar the first time, and took several months afterwards to find a job. Add an additional $30,000 in credit card debt to his loan.
At least those stories are people who enjoy their jobs and love their work. There are others who spend hundreds of thousands of dollars to learn that they do not want to be a lawyer, a doctor, or an investment banker.
Is paying that much for an education worth it? Sometimes it is. No one can value the worth of education and experience, but you can put a price to it. A great resource for estimating the cost of your loan is the calculator at FinAid.org. It will break down your monthly payments, and also calculate the future salary you need to earn to keep those payments to 10% of your gross income. In the physical therapist's case, it is an annual salary of $266,305.20.
Most financial institutions will only loan you money if your debt-to-income ratio is less than 36%. Substantial student loan debt makes it difficult to qualify for a mortgage or even a car loan. And while the amounts I quoted may look like a typical mortgage amount, be forewarned that the interest rates differ significantly. Right now you can get a 15-year fixed mortgage for 3%, while a 15-year student loan will cost you more than twice that at 6.8%! I find it infuriating and unfair that student loan rates are this high at a time when interest rates are effectively zero. Another disadvantage to student loans over other loans is that student loans are extremely difficult to discharge through bankruptcy, especially within the first five years of payments. You can relieve the burden of a mortgage, medical debt, and credit card debt much easier than student loan debt. Like any other loan, make sure you are comfortable with your future payments before you enter into it, even if you lose your job or drop to a one-income family.
Now for the good news. Student loans can allow you to make a significant investment in yourself and put you on the path towards your dream career. Your education is something that no one can ever take away from you, and learning how to think and learn is invaluable. Choose your education and its cost wisely, and no one will be able to indenture you.
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