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, keep in mind:

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 and living expenses. Don’t risk your retirement or your home. Don’t borrow the money if your plan is to figure it out later.

Separate the question of how you should finance this expense 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 for 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 will 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 we need to protect them from making decisions with lifelong negative consequences. Be the guardrails they need when driving down this unfamiliar road.

Students, keep in mind:

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

Convert the loan amount into the future 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 will 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 exception to this.)

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

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

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’re working (see my next point). Factor this into your calculations.

5. Work during your college years.

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

  • 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 almost certainly 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.

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

Don’t borrow too much and hope that things will work out. That’s a short-sighted strategy that could leave you with a lifetime of regret.

Consider these options to spend less:

  • 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 in 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.

Lastly, 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. Go to college when you’re ready.

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.

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