Student loans may provide instant gratification, but borrowers should weigh the costs to benefits before accumulating such debt.
Sir Claus Moser once said that “education costs money, but so does ignorance.” When Sir Claus delivered this line 22 years ago, he might not have anticipated that the cost of college tuition between 1982 and 2007 would increase 437 percent while household incomes would only increase 145 percent. Or, that the average tuition at a state university would increase 15 percent between 2008 and 2010.
You may not remember, but 2008 was not exactly a banner year for the U.S. economy. Nor was 2009. Or 2010. In fact, you could say that the median household income during that timeframe pretty much dropped off a cliff. And yet, public universities hiked their rates 15 percent in just those few short years.
Economically speaking, colleges were absolutely making the right call (for themselves, that is) in raising tuition rates, because students have been flocking to colleges in droves during the current downturn. College enrollments recently reached record levels, and one factor drives these trends more than any other: the availability of student loans.
When in Doubt, Return to School
When the economy tanks, and you find yourself unemployed or underemployed, it is only natural to begin looking for new avenues and new opportunities. Many people think of going back to school as a means to weather the storm. Without readily available student loans, this would not be an option for most, as the costs of school plus everyday living expenses would be too much of a burden for a full-time student.
Student loans allow greater access to education by eliminating much of this burden… or possibly just deferring it to a later date. Most students have easy access to over $20,000 in federally subsidized student loans every year, and many are able to draw on private loans for even more.
Forever a Student
Although student loans can be of great assistance to help you finish that degree, there are several issues to keep in mind before you are seduced by the lure of easy money.
First, it is incredibly easy to accumulate much more student loan debt than you initially anticipated. One of the great features of student loans is also one of the most dangerous: in-school deferment. As long as you are a student, you are not required to make payments on your loans (although the interest on most loans continues to accrue the whole time you’re in school). While you’re working toward your degree, this is a fantastic deal. Student loans are literally free money. The government gives you money each semester to pay tuition and living expenses, and never asks for a penny in return, so long as you remain a student.
Even though students know that they must repay their loans at some point in the future, people are notorious for choosing instant gratification in spite of the long-term consequences. We often believe we’ll land such lucrative jobs upon completing school that repaying our loans will be a breeze, and therefore fail to give a second thought to the massive amounts of debt we are accumulating. For a small slice of professions, that may be true, but don’t count on your philosophy degree to help pay off $100,000 in student loans. Trust me, I majored in philosophy as an undergraduate and I accumulated a veritable mountain of student loan debt throughout my life, so I speak from experience.
Unfortunately, too many colleges are complicit in their students’ unnecessary accumulation of excess debt. Schools need money, and they know that student loan proceeds are just about the most secure revenue stream imaginable. The government always pays and, even better, it pays the tuition directly to the school before any excess goes to the student. For-profit colleges have come under fire in recent months for claims that they have essentially made millions in profits off the delayed financial misery of their often unemployable students. However, traditional colleges and universities often act similarly, despite their not-for-profit status.
The Danger of the Variable Rate
The second issue of which to be mindful is that student loan interest rates are typically variable, which could lead to problems down the road. Student loan interest rates have been in the news a lot recently, as the rate for federal loans was set to double this summer until Congress and President Obama acted to keep federal loans at 3.4 percent for one more year, a move that was also supported by Mitt Romney.
But the fact remains that interest rates are at historic lows right now, and if it takes you more than a few years to repay your loans, it’s inevitable that your rate will rise at some point. Making payments on a $100,000 loan at 3.4 percent is far different than making payments on the same loan at 6.8 percent—and could cause severe financial distress for many families when the rates go up.
Paying Back In Full
Finally, student loans are almost always your responsibility until they are paid back in full. Student loans aren’t like a home mortgage or car loan, where there is some collateral securing the loan that can be sold if you can’t make the payment. Student loans, like credit card debt, are unsecured. However, unlike credit card debt, student loan debt is typically not dischargeable in bankruptcy, meaning that there is almost no escaping your student loans, no matter what you do.
Are student loans bad? Not necessarily, but far too many borrowers take on loan debt without thinking through the consequences. Student loans are enticing because they offer instant gratification and no downside for many years in the future. It is imperative, however, that you do some soul-searching prior to taking on excess debt, and decide whether the benefit you gain from the education will indeed outweigh its cost. iBi