4/27/2011 11:44 AM ET|
Student loan debt: The hard truth
This is 'good' debt, right? Will you still feel that way when you're still paying it off decades from now?
There really aren't any cheerful numbers regarding student loans. In fact, they're all pretty depressing. Consider: Student loan debt now exceeds credit card debt in the U.S., according to recent Federal Reserve numbers. Roughly two-thirds of college students are borrowing cash, graduating with an average debt of about $24,000, according to the Project on Student Debt. And nearly two out of five student loan borrowers fell behind on payments at some point in the first five years of repayment, according to the Institute for Higher Education Policy.
"A lot of families sign whatever piece of paper is put in front of them, thinking they'll just figure out how to pay it back," says Mark Kantrowitz, the publisher of FinAid.org and FastWeb.com. "They're often surprised by the interest rates when they graduate."
But don't worry. Student loans are "good" debt, right?
Not necessarily. Students and their parents who are contemplating big loans for college need to think seriously about what life will be like after the diploma is in hand. College grads who exit school with $10,000, $50,000 or $100,000 in student loans quickly find all that debt doesn't feel so good after all. I spoke to a few borrowers to see what life is like on the flip side of a student loan.
Lesson No. 1: Like living with your parents? Good. Get used to it.
When it was time for Kelli Space to attend college, she didn't hesitate to enroll at Boston's Northeastern University. "I was in honors classes in high school and all of my friends were going to Princeton or U-Penn or Fordham -- expensive but well-known universities," says Space, now 24. "That was just what I thought you did." Unfortunately, Northeastern isn't cheap, and Kelli graduated with about $200,000 in debt -- money she's not even sure she should have been allowed to borrow. "I was between the ages of 18 and 21," she says. "And I didn't need a co-signer for eight out of 10 of my loans."
At the time, her guidance counselor and financial aid adviser both told her that "people take out loans all the time," that "you're making an investment in yourself." And since neither of her parents had attended college, no one in her family had a clear understanding of what it would be like to borrow that kind of money. Today, Space's loan payment is just under $900 a month -- and will jump to more than $1,600 in November. For now, she can swing the payments, but that's because she lives with her folks -- something she doesn't see changing in the foreseeable future. "I was a sociology major and now I'm an office manager," she says. "So there's not huge room for income growth."
She works overtime when she can and also baby-sits, but it'll be more than two decades before she's debt-free. In the meantime, she's started a website -- twohundredthou.com -- and has managed to raise $10,000 toward her balance. "If I could rewind time, I wouldn't have had such a bad opinion about community college or a state school for at least a year or two," she says. "Or I would've worked for X amount of time beforehand to see what major I wanted. No one was there to make sure that I knew what I was doing."
Lesson No. 2: You'll pay back more than you borrowed. Lots more.
When Heather, now 35, went back to school for her MBA, she had dreams of the great job -- and paycheck -- that would inevitably follow. Instead, she graduated in 2008 in the midst of a recession with more than $75,000 in student loans and a job that doesn't pay what she'd hoped. Now she's on the federal government's income-sensitive repayment plan, and of her nearly $350 monthly payment, exactly $15 goes toward the principal on her loan.
"I'm looking at decades of repayment the way I'm going now," she says. "Basically, with each merit increase I get at work, the money is already promised to Citibank. I see my student loan debt extending years and years because I'm only paying $15 a month on the principal."
In the meantime, Heather watches every penny she spends, and she isn't saving for retirement. And travel? What's that? "All of my money is going toward my bills," she says. "I'm grateful I can pay all my bills, but I have no discretionary income. I think it's ridiculous that because of my student loans, that because I went to school, my life is so restricted now."
Lesson No. 3: You could still be paying off your loans in your 40s.
Stefanie, 27, got her undergrad degree from a small private school in New York to the tune of $100,000 in student loan debt. When she graduated, her finances were rough. "One whole check went to student loans and the other to rent and living expenses," she says. "I learned to do a lot with a little." Since then, falling interest rates have decreased her monthly payment from $1,000 a month to $675, but writing that check is still limiting. "I have peers going to grad school, traveling, and that's not an option for me," she says. "Based on my payment schedule, I will have these paid off in 2031 -- at the age of 47."
When she contemplates how long the debt will be on her plate, she has trouble imagining hitting other milestones -- marrying, buying a house, starting a family -- while she's still paying it down. "I don't feel as if I can afford to do those things, at least to the degree they should be done," she says.
Unlike some of her peers, though, Stefanie would do it all over again. "It's not as if I have significant student loan debt with nothing to show for it," she says. "I have a great job in what can be a very difficult industry, and having this financial responsibility, albeit tough, has made me much wiser when it comes to money."
Three ways to graduate debt-free.
A four-year degree doesn't have to mean two decades of hard-core debt. Here are three strategies for leaving school in the black -- and I don't mean your cap and gown.
Consider living at home during school. Yes, leaving the nest is part of the college experience for many undergrads. But that also comes with a significant cost -- and the occasional sketchy roommate. For Dan, 23, the experience wasn't worth the extra cash. "Financially, I couldn't live on campus without taking on substantial loans, and that wasn't a trade-off I was willing to accept," he says. "Plus, commuting to school cut the price to the point where I was able to attend a private school instead of a state university."
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Supplement your education. You don't have to be in college -- or even physically on campus -- to earn college credits. Dan took College Level Examination Program (CLEP) tests, such as AP exams, community college classes while he was in high school and summer classes when he was in college. "As a result, I was able to complete my undergraduate studies in three years," he says. "That saved a whole year of tuition." Another college grad -- Shawn, now 30 -- took online courses and exams from Thomas Edison State College, based in Trenton, N.J., which charges a low per-credit rate and minimal tuition. "I graduated from TESC in 2007, debt-free, and started my MBA last summer," he says.
Make smart choices. Imagine you're holding two college acceptance letters, and one of them is offering you a full ride. Which one will you choose? Maybe this goes without saying, but I'm saying it anyway: If you're hoping to avoid a several-hundred-dollar payment once a month for the next 10-plus years, you should go for the school that wants to pay you to attend. Having a degree from a top-tier Ivy League university is going to bring you very little joy when you're still living with your parents in your late 30s because you can't afford to rent an apartment.
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Ok, seems like nobody else in the country is willing to tell people what they need to hear, so here goes:
Most people I meet of my generation (I'm 39) are the most financially clueless people I've ever seen and they're raising a generation of financially clueless kids. How should we expect a parent who can't manage their money well enough to keep a roof over their head to teach a teenager about basic budgeting?
Granted, part of the problem is ridiculously high tuition but that is no excuse for anyone getting in over their head on student loans or anything else. For those of you blaming the universities and the government, listen up: IT IS NOT THE RESPONSIBILITY OF THE GOVERNMENT, DEPARTMENT OF EDUCATION, OR ANYONE ELSE TO HELP YOU PAY YOUR BILLS. Parents need to stop stressing about about how far they're going to dip into their retirement funds to pay for junior's college and start pushing teenagers to get a job in high school to begin building a foundation of funds for the school of their choice. If kids are forced to come up with a plan to pay their own way through college instead of relying on mommy and daddy's support, two things will happen: first, they'll be more realistic about selecting their future career paths, and second, they'll have some experience in planning finances that they can call on again in adult life.
I have zero sympathy for anyone complaining about being in debt. You put yourself in that position. YOU decided you wanted that car, YOU decided to buy that house, YOU decided to max out your credit card. Nobody held a gun to your head to sign those forms and even if you knew you couldn't afford it, it wasn't their responsibility to stop you from signing them.
People need to shed this sickening, boorish, American(?) attitude of entitlement and start getting used to the grown-up concept of 'delayed gratification'. I worked my way through two college degrees and survived without the big screen tv, SUV, and latest hand-held electronic gadgets for years while I paid my bills. I paid my $33,000 student loan off a year early AND a $14,000 car loan two years early while making less than $50,000 a year at the time and I pay the balance on my one credit card in full every month.
Anyone can get themselves out of debt, they just have to buckle down and do it. Better yet, don't get yourself into debt if you don't already have a plan to get out.
The cost of education is a huge problem in the US, no doubt about it. Having said that, people need to think for themselves and be responsible. I'm going to come off as an insensitive a-hole I'm sure but the girl in the first situation racked up $200k at a private school for a Sociology major? I don't know a Sociology major that makes more than $30k/year.
At 17, I joined the military...college was the last thing on my mind. I wasn't focus, or knew what I wanted to do for the rest of my life. Fast forward twenty years, and I'm scheduled to retire in June at 37 years old. While in the military, I was able to complete my Masters Degree without a single loan. I will have a pension for the rest of my life (not even 40 years old) , and pay less than four hundred dollars annually for health care. I can't wait to attend my 20 year family reunion, and see all the individuals who told me I was crazy to join the Armed Forces. Life is all about choices.
To make choices about the rest of your life at 18 years old is scary. I'm so happy my parents didn't have the means to pay for my college. I had to depend on myself, and make the decision not only to serve my country, but to have a satisfying career that allowed me to travel around the world and meet a lot of wonderful people.
It is a catch 22. If you think repaying student loans is hard try getting reasonable employment without a degree. At least major in something that gives you a fighting chance.
I've said it before and I will say it again. My generation and those younger were lied to by our teachers and other people in our high schools. A college degree is often times nearly worthless when compared with the debt.
You need to decide what you want to do as a career. If it needs a degree then get one. If it doesn't please don't. 4 Years of experience will mean far more than the degree. I have managed and been friends with many people with worthless degrees. And many of them can't even see it.
You get ahead in live with experience, drive, and who you know. College can help you meet the right people and can give you knownledge which in some cases can be like experience. But unless your career needs a degree or you meet the right people your time in college will add little to your life experience.
Remember how they always talk about how the average earner with a college degree earns more than the average high school grad? Of course what they don't tell you as the degrees get higher you get more focused and driven people.
The average for high school grads and those who dropped out is deflated by those who have no drive and no skills. I know a drop out who makes 6 figures as a district manager for BK. I know loads of sales people and managers who make well above the national salary average with High School or less. And at the same time I know college grads who make the same money in these positions.
Save the debt and don't go to college unless you need to. You can always go back. Not sure what to do with your life? Well take time off or work some jobs in different fields to get a feel for what you want to do. 4 years in the real world often means so much more than a 4 year degree. Especially those who get the pointless degrees like "English". Want to be a writer? Get out and write. The degree will be meaningless when you look for a job as a writer. Sure get an English degree if you want to teach English but for everyone else it is worthless.
Call it what it is. The student loans system has become a money scheme, supported by the government and the leadership of colleges and universities. It keeps money in the pockets of a few and exploites the masses. It's built on the lie that merely a degree entitles a person to higher wages and social statute. This is government at it's worst. We have seen what can happens (Northen Africa and the Middle East) when people pay outrageous amounts of money to get degrees but can't find jobs. It could happen to us.
We need to re-think the whole process of getting an education and what education really means. Education has become no more than big business in this country and around the world, from Europe to Asia. Wisdom does not come merely in the form of reading books. Common sense, a call to serve and a desire to live right are just as important. We've made serious mistakes is this area of education and we need to admit it and takes whatever steps we can to correct the system so that it works for the betterment of humanity.
Wake up world. Thank God the truth is coming out before it's too late. We can, and must, do better!
That is an article that shouldn't have to be written. Unfortunately, it needs to be written and posted every day for kids who think $200K debt to get a degree in sociology (!) is somehow a good thing to do.
Perhaps the problem is with the counselors. Shouldn't one have at least a little bit of sense to be a guidance counselor?
The educational system is to blame for blatantly taking advantage of kids. And the parents are to blame for not knowing any better and allowing their 18 year old kids to get taken advantage and allowing them to get buried in large amounts of debt just because "everyone else is doing it." This acceptance of debt that our society has embraced is absurd and now going to undermine everything.
College debt for most is a bad business decision. Unfortunately, the lack of financial competence in this country has infiltrated society from top to bottom. I don’t understand how we can allow 18 year olds to take on $100k debt, when most don’t even manage their bills (mobile, car) until they get to age 18. Especially when the people giving out these loans are profiting big time from them. It’s not a fair playing field. We need to develop skills, which is more important than having a piece of paper (degree) in hand.
The government needs to overhaul the system, because 2 things are going to happen. #1 - practically an entire generation will now not be able to buy a home in the near future, so say so long to any type of sustained housing recovery/growth. #2 - future generations will choose not to go to college at these costs, thus declining the overall education of the country. This is a recipe for disaster plain and simple.
Accipter – You seem to be happy to fight everyone on this message board. As for “irresponsible” majors, I did not use that word in my post. But since you bring it up, do you believe it is a responsible and well-thought out decision to take on 200k in student loans to major in sociology (like one of the subjects of this article)? Art history? Ancient Greek? Many students I met during college who were majoring in subjects such as these had *no idea* what careers they could apply to their majors. Would you call it wise to have no career plan and huge debt?
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