The Perils of Student Loan Debt

Borrowing too much money to pay for college can get you into lifelong financial trouble.* Don’t do it. This simple command is true for both parents and students.

Parents:

1. Don’t borrow more than you can confidently repay.

Be realistic about what you can afford to re-pay over a 10-year term within the framework of your current income, living expenses, and target retirement date. Don’t risk your retirement or your home. Don’t borrow any money if your plan is to figure out later how to repay it.

Separate the question of how you should finance paying for your kid’s college from the question of how much you can afford to borrow, if anything. Just because you can take out a home equity, PLUS, or 401K loan, doesn’t mean you should.

2. Don’t co-sign loans with your children.

That’s a clear signal that you’re both over-borrowing. It could risk the financial security of both of you, hurt your credit scores, and create future family conflict around these outstanding debts.

3. Your teenage children do not understand their future financial obligations when taking out student loans.

Taking on future debts is too abstract and unfamiliar for teenagers to fully grasp, and they will make poor financial decisions if left to their own judgment. Yes, teenagers have minds of their own and may not respond well to parental guidance, but protect them from making decisions with lifelong negative consequences. Be the guardrails they need when driving down this unfamiliar road. Don’t let them over-borrow.

Students:

1. You won’t fully grasp the loan commitments you’re making so proceed carefully.

Convert the loan amount into the future monthly loan payment (assuming a 10-year term). That’s more understandable and you can then compare that to a realistic guess about your potential future income.

2. You’ll owe more than you borrowed.

Your loans will accrue interest while you are in college and when you begin repayment that unpaid interest is added on to the loan balance. Factor this into your calculations. (“Subsidized” Stafford loans are the lone exception to this.)

3. Don’t borrow more than the federal student loan (i.e., “Stafford”) maximum amounts.

For most students, this is ~$30,000 of debt. This should be affordable to repay in most circumstances and if not, you’ll be eligible for an income-dependent repayment plan which will serve as a safety valve for this debt.

Any private student loan borrowing beyond this is risky, ineligible for income-dependent repayment, and a signal that you’re getting in too deep. Don’t do it.

4. Don’t assume you’ll graduate in four years.

There is a good chance it will take closer to six years to complete your degree, particularly if you work. (See my next point.)

5. Work during your college years.

Get a job. You’ll need the money and it will:

• reduce your debt

• leave you with less idle time to spend money you don’t have

• motivate you to graduate as quickly as you can

• prepare you for your post-college working life

6. A bankruptcy filing won’t help.

Student loan debt rarely can be discharged in a bankruptcy proceeding. The NY Times has a good summary of the challenges that borrowers face and how we got to this point.

7. The college financial aid office is not your friend.

Don’t take the money that the college aid office is offering you in the form of loans. They’re not your “advisor” and they’re not looking out for your interests. Their goal is to get you to attend their school. Remember, they’re not on the hook for your loans — you are.

8. Curb your spending.

There can be a lot of social spending pressure while in college. You must learn to resist or you’ll find yourself even further in debt when you finish.

What if you cannot afford the college you had in mind?

Don’t over-borrow and hope that things will work out. It could leave you with a lifetime of regret. Consider these options:

• Attend your state university, instead of a private college.

• Attend a state college, instead of your flagship state university.

• Begin at a community college and take courses whose credits transfer to a four-year college.

• Live at home instead of a dorm.

• Study part-time and work full-time.

• Study full-time and work part-time.

• Take a gap year and work and save as much money as you can.

Any of these choices will put you in the mainstream of most American students and families.

Is college for you and is now the right time?

College is not for everyone. Don’t fall for the trap that everyone must go to college and do so right after high school. If you’re not sure, start with a low-cost community college class or a free online class. Or, go to work and then start college when you’re ready, you’ve saved enough money, and you’re focused on what you want to study.

The worst outcome is to over-borrow and exit college with a burdensome debt that will remain a ball and chain that you drag around for many years. Don’t do it.

 * Paying for graduate school is a whole different can of worms. Read more about financing graduate school here.