Thursday, December 23, 2010

Student Loan Debt

Dave Sedaris once remarked that Sallie Mae sounded like the name of an innocent country cousin, until you had to pay back your student loans, at which time she took on the characteristics of a Mafia enforcer.  Think long and hard before taking on student loan debt.

Financial decisions you make when you are young can cripple you for life.  And increasingly, our society has having fewer and fewer qualms about eating its own young.

Getting young people to take out loans is a brisk business these days.  When I was a kid, no one would lend you money, as you had no means of paying it back.  The idea of issuing credit cards to college students was pretty alien back in 1978.  But as my college career extended well into the 1980's and then 1990's, the folding card tables and "student reps" for the credit card companies became a regular fixture on campus.

In an all-too-typical scenario, students take out credit cards, run them up to the limit, and then hope Mom and Dad will pay them off - or they default on them.  Either way, the student graduates from college with a crappy credit rating (what the student credit card was supposed to "build up") and then has to live with the worst sort of loan terms for the next decade of their life - when they need credit the most.  The credit industry has done its job well, here.

Student loans are a slightly different animal.  The theory behind them is that they allow more students to go to school who ordinarily would not.  The reality is, they allow 18-22 year-olds to sign up for tens of thousands of dollars in debt, at a time in their lives where they least realize the ultimate cost of such debt.

And the bitter reality of student loans is that since most students don't mentally process that they have to pay these back (some "old dude" version of them will do that) they don't think about the overall costs, or the overall costs of their education.  As a result, colleges and universities have been free to raise tuition by 2-3 times the rate of inflation for the last two decades without students making a peep.  Whether Colleges and Universities can keep up this price escalation remains to be seen.

The ultimate problem with student loans is that we are asking young people - the least experienced members of our society, to make one of the most momentous decisions of their lives - perhaps the  most, at a time when they have little in the way to economic reasoning skills.

Many students sign up for student loans on the premise that the increased income they will earn as "college graduates" will more than offset the cost of the education, plus the interest on the loans.  But as adults, we all know that many college graduates will graduate with "junk degrees" even from name-brand universities - degrees that will not land them any sort of job that would ever justify the cost of the education.

For example, a friend of mine graduated with a degree in "Communications" from the S.I. Newhouse School of Communications - a school that cranks out as many graduates every year as there are jobs available in the entire industry.  Clearly, many of the grads are going to end up unemployed or employed in another sector.  What ends up happening is that many go back for advanced degrees in other areas, or they end up learning skills on the job.

Many are questioning whether college is worthwhile at all.  While in most cases, having a college degree will indeed "pay back" over time, others have noted that the increased earning power of working those four years, plus the tuition and expense money, invested over time, could be a wash for some folks, and perhaps a loss for others.  Now note that I am not suggesting that not going to college and being a "slacker" is a better idea.  However, if decide to pursue a career that does not require a four-year college, you could end up making more money over time.

And many young people who traditionally would have gone into trades and earned a good living are being pushed these days to go to college.  Colleges have "dumbed down" as a result, and it is easier to get a degree.  But these same colleges and universities are churning out bewildered graduates who have no idea what to do with their fairly worthless degrees.  Many "bum around" for years before settling into a trade that they could have joined at age 18.  College is not a guarantee of increased income for everyone.

So think hard before you spend $30,000 on Student Loan debt - what are you getting out of this and where is it going?  If you have qualms about going to school or are looking at school as four-year party, then maybe it is not such a good idea - or at least you should re-think it.  And going to a very expensive "name" school, getting a degree in advanced bullshit with a "C" average is sure to be a waste of your (or your parent's) money.  Make sure you are not making a lot of mistakes in how you approach College - as mistakes can be costly.

Here are some ideas for minimizing or eliminating your student loan debts:

First, think about college costs carefully.  State schools offer much reduced tuition for in-State students, which can reduce costs by half or more.  Living at home can save more money, although in many cases, parents want children to move out or children want to live away, oftentimes for the same reasons.  But lodging can be a very large part of the college experience and if you want to avoid a lot of costs down the road, it may be a good idea to swallow your pride and be a "commuting" student.  Besides, living in a dorm or on-campus is full of distractions and bad influences and normative cues - including parties, drug use, and the like.

Second, realize that Student Loan debt is FOREVER - you cannot merely declare bankruptcy to get out from under it, thanks to your elders who wore out that welcome.  So once you take on student loan debt, don't think for a second that later on in life you can just bail on it.

Third, don't borrow more than you NEED.  It is tempting, particularly when you are a graduate student, to borrow more and live a larger lifestyle.   If you are borrowing money for school and at the same time owning  the latest trendy cell phone or designer clothes, bear in mind that you are basically financing those things with student loan debt.  Spend less on your own wants and put the money toward your tuition and books.  Every dollar you save NOW is like $5 you don't have to pay back later.

Fourth, avoid the consolidation loan gambit that they will throw at you upon graduation.  The student loan people make a LOT of money off of this, getting you to refinance and "consolidate" your loans into one low monthly payment.  Like any other "debt consolidation" scheme, all this does is forestall the inevitable and stretch out payments for the rest of your working life.  As a result, you will pay thousands and thousands of dollars in interest - every dollar you borrowed will be $5 to pay back.

Fifth, consider working part-time to pay for college - either in the summer, or during the year.  Many young people get "summer jobs" during college and then use that money to buy consumer goods - video games, beer, drugs, clothes, gadgets, etc.  As I have noted before, many college students live a lifestyle that is better than when they graduate - and have to pay back all these debts.  Small sacrifices you make now will pay off in spades later on.

Unfortunately, all of this advice will fall on deaf ears.  It is like my postings on Marijuana, or the hopped-up Dodge Neon.  Kids want it all NOW, feeling they have been "deprived" of adult pleasures all their lives, and the first merchant to offer it all to them, on easy payment terms, will garner a lion's share of their business.

For many, college offers the tantalizing possibilities of a four-year drug-and-sex party, and an opportunity to live away from home for the first time - all without having to go through the drudgery of getting a "job".  You sign a few pieces of paper, borrow some money, and you're on your way to being a collegian.  The payback on all these loans is not talked about, or forgotten in a wave of drug- and beer- induced stupor.  And besides, once we graduate, we'll all make "the big bucks" and pay it back in no time, right?

Right... Took me a decade to pay it all back, and I borrowed only $36,000 or so.  Kids today are graduating with hundreds of thousands in student loan debt - virtual mortgages on their careers, and their lives.

A special note about "for profit" schools - these types of schools illustrate the "funny money" nature of student loans, and illustrate perhaps why the government shouldn't be in the student loan business in the first place.  These for-profit schools just cut to the chase by getting you to sign up for student loans, taking the money and then handing you a worthless degree in return.  Just avoid these types of "schools" entirely as they are not a real alternative to a College education.