From childhood in many homes it is drilled into millions of impressionable young minds: “You will go to a good university. It is the pathway to almost everything that is good in life. We’ll get the money for it by borrowing.”
So millions of young people, many with little understanding of what they’re doing and even less understanding of the long-term financial consequences of their actions, take student loans—-lots of them. This youthful debt, sanctioned and endorsed by parents, college and political officials, often leads to decades of misery. And, in some cases, it is the cause of bankruptcy.
It can all start with lots of red ink at the beginning of one’s adult life. Seven out of ten seniors who graduated from public or private colleges last year had a student loan debt of $28,400, according to credit card industry numbers. This represents a two percent increase from the year before.
“Save for mortgages, student loans constitute the largest component of household debt for Americans. As of June 30, 2014, total outstanding student loan balances disclosed on credit reports stood at $1.12 trillion, the Federal Reserve Bank of New York reported in August,” according to WalletHub.com. “The latest figure represents an increase of $7 billion from the first quarter and $124 billion from a year ago.”
Going deep into debt to pay for a college degree is not a layup. Indeed, many graduates entering the labor market are realizing that a college degree doesn’t guarantee financial security. It may even lead to the opposite—-years of worry.
The problem is widespread and serious when one considers that most young people who graduate from college are unlikely to earn a lot of money in their 20s. This is a time when one is just getting a foothold in a profession, usually starting at the bottom.
First, let me stipulate I certainly believe that higher education, over the long term, can lead to greater career earning power and sometimes a happier life for many. But, for millions of young graduates student debt can be an albatross that takes decades to pay off.
Second, I believe the problem of student debt is part of a bigger problem that we have written about here many times: The lack of personal finance education. It can be a problem of both the parents, who often egg on their kids to take out loans, and the young people, who misunderstand the consequences of loans.
These loans seem harmless; debts that will always pay off big in the future with good paying jobs and that won’t have to be re-paid for years. They are usually offered at below market interest rates and, the same as with a mortgage, are usually tax deductible. They are pushed by college administrators who are often looking out for the interests of the institutions they serve, not the long-term interests of their customers, students. The latter will be gone in four or five years, then saddled with possibly decades of red ink.
“It’s an absolute disgrace how kids are being taken advantage of in these loans,” a financial advisor I respect has repeatedly complained to me. Yet, there are ways to avoid them or at least limit the debt damage.
Third, I remember when I was attending two universities in the 1970s. I went at night and—despite being implored by university officials to take student loans “even if I didn’t need them”—-was able to work full-time during the day. I lived at home and was able to complete my undergraduate and graduate work in four years without running up any debt.
That was a good thing since, right after college, I went into small-market radio. I was making very little money after I graduated. And, like many people of my generation, I had some periods of unemployment in my 30s.
By contrast, my best friend in college took tons of student loans and obtained an MBA. He is a very sensible person, not usually given to overspending and had a good career although, like me, he also had some periods of joblessness. However, it took him some 25 years to pay off his student loans. They were an incredible drain on his financial life.
Fourth, I count myself as lucky to have avoided the plague of student loans. I think they should still be available, but greatly restricted and come with warnings, the same as the ones on cigarette boxes (“Warning: Student loans can wreck your finances. Use them carefully. The colleges, the banks and the pols don’t worry about you. You must take care of yourself by understanding the consequences of debt.”).
Before anyone takes them, he or she should be required to demonstrate minimum financial competency. When you go for a mortgage you have to show that you will be able to manage this huge loan that often takes people decades to retire. When the mortgage review process is sloppy or non-existent, you get what we had in the 2008 market meltdown—-millions of people, who never should have received mortgages, all at once defaulted. That nearly caused a depression.
Could the same thing happen, in the next recession, with millions of student loans?
Fifth, financial education is vital in avoiding the problem of bad student loans. Many of the problems we write about here come from a lack of it. That leads to the question how so many people graduate from high school and even a university knowing so little about money? Isn’t it important?
Again, pre-university students should be educated in how to save for college and general financial education. They should discuss these issues with their parents. They should both come up with an action plan for building up the biggest college nest egg possible and using the smallest amount of debt possible.
They should also consider various options: Having the young person work part or all of a summer vacation to build up college savings. Also, why is it necessary to finish a college education in four years? How about five or six years? And yes, how about working in the day and going to college at night.
Finally, I know the latter—-working during the day and going to college at night—seems radical; it requires a young person to grow up at an early age. But, for some families, it could be the best thing.
I speak from experience. I hate to confess this but it is the truth: I never realized how hard my parents worked and what outrageous taxes they paid until I started working full-time in college. I developed a new respect and love for my marvelous padres (May they rest in heaven. Good news, Dad, your beloved Giants won the World Series again!). I learned the value of working at multiple things and having to manage my life. Most of all, I left college without one cent of student loans.
Not a bad deal.