Congrats! It's time to start paying back your loans!
Every time I talk to a financial planner about saving for the dual goals of retirement and college, she says the same thing: “You can borrow for college, but you can’t borrow for retirement.”
And that’s true, of course. Of course it’s true. You can borrow for college, and no, you’re not going to be able to take out loans for your golden years. But it’s started to bother me that everyone’s so flip about borrowing for college. Because here’s the thing: It’s borrowing. You have to pay it back. And just because you can borrow $50,000 for your undergraduate education (or your child’s) doesn’t mean that you should.
By virtue of what I do, I talk to people all the time who are neck deep in student loan debt. I spoke to a woman a couple of months ago who owes more than $120,000 in student loans. Did she make some poor choices? Sure. But consumers make poor choices all the time, and we forgive them. If this woman had run up $120,000 in credit card debt buying dresses from Banana Republic, she’d be able to declare bankruptcy. As it stands, she’ll be making payments of more than $900 a month for the next 30 years. Good luck to her.
I spoke to another couple recently who has more than $200,000 in student loan debt. That’s more than they owe on the house they own. They pay $1,200 a month now, and their payment will increase to about $1,800 a month in a couple of years, where it will remain for the 30-year payoff term. They’ll be nearing retirement when they’re finally debt free. (Or not, since they’ll have zippy in savings.)
How is it that we can have credit card debt discharged and walk away from a house we purchased under contract, but there’s no way to forgive or reduce crazy student loan debt? My husband tells me that student loan debt is so unshakeable because in the 80s, people were getting expensive MBAs and then declaring bankruptcy to avoid paying for it. That’s no good either, I admit, but surely there’s a better solution than our current system.
The way I see it, there are a few problems here:
- No one is teaching students that borrowing significant money for their college education is going to seriously affect their lives for decades. Without some education in the matter, an 18-year-old has no way of knowing what it’s going to be like to pay back $50,000. Plus interest.
- College is exponentially more expensive than it used to be. Today, a private four-year university averages $26,273 per year. And that doesn’t include books, room or board. (Public four-year university: $7,020 per year, plus expenses.) Sure, you can attend a community college for a few years and then transfer to a more expensive school. How many people do you know who actually did it?
- Parents aren’t saving enough. I mean, people don’t save enough for anything, really. Retirement? What’s that? But a financial adviser friend of mine mentioned recently that his clients have been ditching the college savings first when times get tough. And who’d blame them? According to this really scary chart, if parents want to send their kids to a public college (the cheapest), and they start saving from birth, they should be socking away a minimum of $432 a month. That’s just demoralizing.
What’s the answer, dear readers? Make college more affordable? Educate children about the perils of borrowing the equivalent of a small mortgage to go to school? Force parents to save in a 529 from birth, much like automatic 401(k) enrollment for new employees? All of the above?
Do you have a student loan story to share?
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(Photo from Brady Dillsworth on Flickr.)
My parents did not pay for my post HS education, nor did my husband’s. We both did choose to go with Tech-school instead of traditional college. If it was our choice, we would have probably just started working, but felt immense pressure to ‘go to schooll. Where did that leave us? Now 10yrs post HS my husband will pay $40k if he makes the minimum payment on his loan that has a 20yr term. Luckily the $5k I owed is just 3 months away from being paid off. The worst part is that NEITHER of us is working in the field for which we went to school. The good part? We worked hard, and even without an education we are pulling in close to $90k.
Moral of the story: As parents we can save & save & save for college, but who is to say that our child even wants to go? Who is to say that the tens of thousands of dollars we saved won’t go to a wasted education? It’s not worth it. If an adult child wants to go to college, they need to be vested in it and take the burden of the cost upon themseves.
By: Cassandra on May 27, 2010
at 10:15 am
Thanks for the comment, Cassandra. For some parents, it’s worth it to offer their child the option. That’s a decision that each family needs to make for itself. Everyone needs to be sure, however, that if a child chooses to get a degree, she understands what it means to borrow money to do so. That’s one of the missing pieces.
By: Kate Ashford on May 27, 2010
at 10:31 am
Quick factcheck: you can’t quite just “walk away” from a mortgage.
First, you have to turn over your house to the bank. In the case of student loans, the bank can’t demand your college degree. Not sure what they’d do with it, anyway.
Secondly–and this process varies from state to state, and loan type to loan type–the bank can obtain a deficiency judgment against the borrower for the loss suffered by the lender after auctioning off the subject property. This isn’t been common practice yet, but with borrowers who can afford to pay their debt, but are just choosing not to, they better start doing some due diligence on whether they have a non-recourse note, or they could be in for a nasty surprise!
By: Lenny on May 27, 2010
at 11:33 am
Hi, Lenny. Solid point, and I didn’t mean to suggest that walking away from a house is easy or without consequences. But it IS possible, whereas student loans are nearly impossible to shake, even in bankruptcy. And I’m not saying that people should be able to borrow for school and then somehow get out of paying back their loans, either. But some people make big mistakes. They rack up thousands in credit card debt. Or they buy a house they really can’t afford. And in those cases, there are ways to bottom out and start over. Your credit score will suffer, obviously, but you can try again, hopefully as a wiser consumer. Once someone screws up and takes on too much student loan debt, they’re pretty much sunk for the next three decades.
By: Kate Ashford on May 27, 2010
at 12:02 pm
Hmmm.
1. Take cash advance on credit card
2. Make big student loan payment
3. Declare bankruptcy
4. Lather, rinse, repeat
If you ignore the risk of getting tossed in jail for fraud, it could work!
By: Lenny on May 27, 2010
at 3:11 pm
Kate,
As an advisor, I admit I have said that “you can’t borrow for retirement”. Typically though, what would need to be saved from birth to 18 to pre-fund an education is more than many can afford to do and still save for other goals. My concern is that we’re shifting away from undergraduate degrees being the “minimum” towards masters degrees being the minimum. When my wife went to college to become a teach in 1995, she didn’t have a choice of just getting her undergrad degree, but only a 5 year masters combined program. This could only make future situations worse. Combine that with competition we are already seeing from an educated India and Asia, and those who don’t go to school will fall even farther behind. What I hope we will see over time is competition from online schools putting downward pressure on “traditional” schools so that fewer and fewer people need to graduate with mountains of debt.
By: Russell Dunkin on May 28, 2010
at 9:07 am
Russell, so true. The amount you’d have to save to cover a college education in full is overwhelming. But it’s possible to make a dent. Ask any kid if he’d rather have $15,000 or $0, and he’s going to choose $15,000. And the earlier you start, the less you have to save per month to make that happen. I think so many people put this off for the first 5 to 10 years of their kids’ lives, and it makes such a (negative) difference.
By: Kate Ashford on May 28, 2010
at 9:15 am
Great points. I met with a young couple today who want to start saving at least someone now. Given their large student loan debt, I can understand why.
By: Russell on June 1, 2010
at 9:21 pm
I’m 33 and only this year paying off my student loans. (I’m tremendously excited.) I went to a good private school with a “need-blind” admission policy, which means you were accepted regardless of your ability to pay and were offered financial assistance in the form of loans and grants to pay for your education.
It’s important that the student feel some investment in his/her education, and taking on loans is one good way for that to happen. But at the same time, $10,000 means a lot less to an enormous university than it does to a student who may be paying off the money $100/month. It’s heartening to see that some universities have recognized this and shifted the balance to rely less on loans and more on grants.
That said, it’s only a fortunate few schools that can afford to do that. The problems you identify, Kate, are right on target. I was a smart kid, but even so it’s hard to wrap your head around $50K in loans at 19 years old.
By: dan on June 1, 2010
at 10:24 am
Dan, so true. And I consider myself a smart kid as well, but when I got my graduate degree, I wasn’t terribly smart about my student loans, either. I’ll be paying those off until I’m about 45.
By: Kate Ashford on June 1, 2010
at 10:32 am
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