Student Loans: Good Debt or Bad Idea?

Are student loans a good way to finance a higher education or is it a life sentence to debt slavery?  Jay Fleischman and I discussed this topic during our initial session of the reborn Debt Podcast.  So it got me to thinking.  Just how expensive is it to take student loans to finance a four year private college education and what is the impact of doing so?

I found a calculator for the cost of higher education over the long term.  Assuming that the annual cost of a single year at a private four  year college is approximately $40,000 per year, the degree will cost you $160,000.00 to obtain.  (Yes, that’s a lot of zeros.)  Now assume that you finance all four years with student loans.  Assuming a annual interest rate of 6.8%, you will repay $220,954.00 for that education at the monthly payment of $1,841.00.

Most places seem to assume an annual starting salary of $35,000.00 for a college graduate.  That means your monthly payment will represent close to 100% of your monthly after tax income.  And that’s before living expenses.  Let’s not forget that the current unemployment rate among recent college graduates is approaching 20%.  So this all assumes you can find a good paying job with a future.

This example also assumes a 10 year repayment term. If you are 23 years old when you graduate, you will be 33 when it is paid off and still completely broke.  No money to buy a car or a house or get married or even move out of mom and dad’s house.  In my day, we had a name for that and it began with a big capital “L”.

Now, if you stretch that payment term out to 20 years, the payment goes down to $1,221.00 a month, better, but it will cost you $293,122.00 over the life of the loan.  That will leave you about $700 a month to live on and you will be 43 when the loan pays off.  Go to 30 years, the payment is $1,043.00, $375,508.00 paid over the life of the loan, and you will live on about $900 a month and be 53 years old when the loan is paid.

Go to grad school and the numbers jump out of sight.  Yes, your income might be higher when you graduate, but proportionately the result is the same.

But wait, there’s more.  Here’s the bad news: Federally insured student loans have no statute of limitations.  That means if you duck out on repayment, they can chase you for their money forever, right into the grave.  You can’t file bankruptcy to discharge the debt and they don’t have to sue you to attach your pay, seize your tax refunds or bank accounts, or any other asset.

Well, you might say, there’s always mom and dad.  They can get parental student loans to pay for my education or borrow against the house.  That’s true, but now you are sucking the life blood out of your parents and maybe keeping them from helping your siblings as well.

Now don’t get me wrong.  Education is never a bad idea.  College, however, isn’t the only way to get an education.  Even tradesmen like plumbers and electricians need to learn their skills somewhere.  And there are many ways to get funding to go to school.  There are employers who will pay for key employees to maintain or develop skills.  The are grants and scholarships.

The secret to education is to have a defined goal, keep your eye on that goal and get the most out of the process so that you will be a success when you finish.  Just don’t go to college because it is the thing to do.  Now get out there and make some money!

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