The Good
In the finance world, so many talking heads view both mortgages and student loans as “good debt”.
Do you do a happy dance when you have to pay your student loan each month? Do you smile in appreciation when you see your student loan balance and thank heaven every day that your student loan debt was used to pay for your higher education? No? But come on now. Student loans are good debt. You really shouldn’t mind it at all say the finance people on TV. Ha! If they think it’s so great, maybe they can make your student loan payment.
Financial gurus count student loans as good debt because, like mortgages, student loans are intended to be used to increase your knowledge, and in turn give you skills that increase your marketability and ability to earn money. Mortgages are also considered good debt because over time, real estate increases its value. Both are considered to have a good ROI, or return on investment. In contrast, “bad debt” does not have a ROI. Credit card debt, car loans, personal loans and pay day loans, are all loans against depreciating assets.
The Bad
The assumption of course, is that 1) You graduate and obtain a degree, 2) that degree is applicable in the marketplace, and 3) that degree did not come at so high of a cost that the financial burden does not outweigh the benefits.
Currently, the National Center for Education Statistics (NCES) reports that only 40% of college students go on to graduate within 4 years. Bachelor degree attainment rises to 60% within 6 years of enrollment. To assume that you will obtain your degree when you start college is foolhardy at least. So many people have student loans without the benefit of higher income to pay them off when they fail to complete their degree.
Secondly, even if a person completes a degree program, that degree must be marketable in order to increase income and therefore have an ROI. A 4 year degree in underwater basket weaving really won’t do you much good, even if you spent $100,000 and 6 years to obtain that degree. Even if you do complete the degree, unfortunately there are lawyers who fail to pass the bar exam and medical students who fail to pass their boards. It happens. More than we would like to think.
Speaking of expensive degrees, there is a whole range of prices between schools that offer the same degree. Just because you borrowed more for that degree does not mean you will be paid more on graduation. There is no sliding scale on pay rate based on the amount borrowed.
The Ugly
Unfortunately, it gets worse. People assume that student loan lenders are virtuous because they are lending money for a virtuous cause. Federal student loan interest rates are set by the government, so in this current low interest rate market student loans can range from 4.5%-7.6%. Unfortunately, private student loans have a lot more variability in interest rate based on the applicant’s credit score, and can go as high as 15%. That’s a credit card interest rate! Private loans are also not dischargeable in cases of disability, and not eligible for the Federal Student Loan Forgiveness Program.
Even more lecherous? There are private institutions that offer degree programs that it turns out the degree is not worth the paper it is written on. We have friends that have taken out hundreds of thousands of dollarsin student loans and have nothing to show for it. All the debt, no degree. WOW.
Today, student loan debt is around 1.7 trillion dollars. That’s trillion with a T. Of that debt, one in ten borrowers is in default. As a result of this debt burden, home ownership has decreased, and some people are putting off having children or having them at all. Student loan burdens also are to blame for failing to fund retirement and reach other financial goals. Borrowers burdened with student loans are not free to spend money in the marketplace, which spending drives the economy.
So student loans are “good debt”, huh?
We at Never a Debtor are determined to educate the public about student loans, and provide hope for those climbing their way out of debt as provide information on how to avoid this plague.
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