Why You Should NOT Take Out Student Loans for College

Smart Money Debate - Why You Should Not Take Out Student Loans to Pay for College

Welcome to the 5th Smart Money Debate at ReadyForZero! To see the other side of this debate, read Dominique’s post: Why You Should Take Out Student Loans for College. And then let us know which argument was more convincing!

This post is written by Kelli Space, a student loan advocate and personal finance enthusiast who writes about her own student loan experience at twohundredthou.com. She is also the co-founder of Zero Bound, an online platform that aims to help students and alumni pay off their student loans through sponsored volunteering. She has a BA in Sociology from Northeastern University and believes more (affordable) education is in her near future.

Why you should not take out student loans to pay for collegeLast year, student loan debt surpassed credit card debt.1 This year, student loan debt topped $1 trillion dollars.2 While this says a lot about the emphasis Americans are placing on education, the high cost of college suggests it may be time to question the return on investment of your college degree.

Full disclosure: I believe in education. The power of being informed runs deep and has a profound impact on society through scientific advancements, international discussions, cultural understanding, and even in ways one can’t anticipate. Learning should never cease.

However, is “attending college” the only way to continue to learn? It certainly looks great on a resume, but is it the only way to gauge one’s ability to complete tasks or capacity to answer a question? I don’t have the answer to that, but what I can address is the amount of money students are borrowing to obtain their degrees. College costs money. And, when colleges are being run like businesses, the students are the consumers. They have the freedom of choice.

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To that end, here are my reasons why borrowing money for school might not be the best idea:

No Proof of Ability to Pay the Money Back

Private loans are lent by banks, and banks have one job – to make money. When they lend money, it is because they will make even more money back in interest. Further, student loan debt cannot be discharged in bankruptcy except in cases of extreme hardship and, even if a borrower defaults, the government guarantees the loans and will ensure the bank is paid back.

This means banks have no reason to qualify their borrowers based on anything other than their need.

As a borrower, however, you have every reason to consider how much you’re borrowing and how much money you will probably earn. Do you think you’ll be able to pay your loans off in a reasonable amount of time without serious sacrifice on your part? Even so, while the government might guarantee these private loans, nothing guarantees that you will graduate with a job.

“Thank God I Have Student Loan Debt!”

…said no one.

College has indeed made it possible to achieve personal and social greatness. Some people are indirectly grateful for their debt because it took them places, and made the impossible possible – but there is a tipping point that has been disregarded and that’s what we need to evaluate.

Account for Change

Borrowing money is a serious, unwavering commitment. What if something changes? Similar to not being able to guarantee that you’ll have a job – what if you want to change your major to something less lucrative (but more fulfilling)? What if you have to take a leave of absence from school? These “what-ifs”, and more, are absolutely something to consider.

Many, many students are paying back their loans for 20, 25, or 30 years into the future. Heck, as of July 2012, nearly 16% of people over the age of 50 are carrying student loan debt3, and they went to school when it was cheap. To be fair, many of them might be carrying debt on behalf of their children as they could have cosigned the loans. But, 16% of $1 trillion is $160 billion. Actually, this leads to another issue: putting your parents in a weird, debt-owing spot when they have their own retirement to worry about!

Other Options

Again, education is important. And largely it does require sacrifice from many students and families as the cost is quickly rising ($50K a year!?) Some of these sacrifices though, when combined, could put you ahead of the game.

For instance, working throughout high school, and perhaps for a year between high school and college, may help you save a good chunk of your future tuition. Maybe that year off can also help you gain some perspective in terms of your future – career, location, et al. Imagine starting college armed with $10K? You’re welcome, Mom & Dad. Volunteering and/or interning in addition to your job may aid in giving you valuable insight to what your interests might be, and what you’d like your future to look like. At least you’ll know what you are working toward from that point!

“Cheap” (pshhhh) college for a year or two can help to keep you on track while you work, save, and/or volunteer. Taking a few mandatory courses at community college for a fraction of the cost than that of a 4-year school will also wind up saving you future money, if you do end up having to borrow for school.

I borrowed quite a lot of money for my Bachelor’s degree, and know how it feels to be in life-halting debt, so I may sound a bit biased. On the contrary I do think borrowing for college is necessary a lot of the time considering the high cost of these institutions – perhaps not $200K worth, but the average debt load is just about 10% of that, at $25K. This is still a lot of money, but can be quite manageable depending on your salary. If you work at a not-for-profit or in certain urban areas, you may also be able to have your federal loans forgiven after a certain period of time, and bear in mind that federal loans are far more flexible than private loans.

Never stop learning. The internet has been a great tool for exactly that – and libraries, museums, and meeting groups exist for the same purpose. Exploring your interests and forming educated opinions are part of what has propelled our society into advancement. We’re counting on our future generations to worry less about debt and more about making this world a much better place.

To see the other side of this debate, read Dominique’s post: Why You Should Take Out Student Loans for College.

Image by Shane Global

  1. Source: Student loans surpass auto, credit card debt – Washington Post, March 2012 []
  2. Source: Student Loan Debt Tops $1 Trillion – Wall Street Journal, March 2012 []
  3. Source: Nearly 16% of Post-50s Are Carrying Student Loan Debt – Huffington Post, July 2012 []

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  • http://clubthrifty.com/ Greg@ClubThrifty

    I think, if at all possible, students should avoid borrowing money to pay for school. They can work part time, save up during the summer, or use money from a college fund. Living in the dorms and eating in the cafeteria can also save on expenses. However, the reality is that it is tough to get through school without some sort of loans. The less you have, the better.

    I would also add that students should look at attending schools that are in their budget rather than schools that may look pretty but are extremely expensive. The fact is that few employers actually care about where you went to school. They just want to know that you have the degrees necessary and that you can do the work.

    • Guest

      I would also add that students should look at attending schools that are in their budget rather than schools that may look pretty, but are extremely expensive. The fact is that few employers actually care about where you went to school. They just want to know that you have the degrees necessary and that you can do the work.

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      You’re right, as usual, Greg! While it is definitely necessary sometimes to take out student loans, the best way to ensure you don’t get overburdened with debt is to minimize the total balance as much as possible and to make sure you have a plan for paying it off.

  • Amy @ Pelican on Money

    Ben, I loved reading your post about why you should not take out student loans. I think that taking out a student loan all depends upon your situation. There are many people that cannot go to school without some financial help and that helps comes in the form of student loans. I had a couple friends that went to college and they tried to work and go to school the same time. It worked fine for a while, but when they started working on more complex assignments for class, they were not able to hold a full-time job and go to school full-time. They ended up having to quit work in order to complete their studies and get good grades. Unfortunately, in today’s society it’s really a gamble whether or not you will be able to find a decent job to pay for your schooling what you graduated. If you’re careful and manage your student loans correctly, while you are going to school you should be in good shape. The other thing to keep in mind is that you cannot be overly selective about what position or job you take right out of college. Just find a job and start working on paying your loans and other bills, while you look for your preferred job. Everyone has different needs and what works for one person may or may not work for everyone else, but as with any other financial matter it takes diligence to keep everything on track.

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      Amy, I agree with you. There are many factors that combine to make this a complicated and very personal decision. (And in fact, the post was not written by me but by Kelli Space) I too saw how hard it was for some of my classmates to work many hours per week while also trying to attend school and get all their homework assignments done. I think the best approach is to try to minimize your student loans but not shy away from getting them if it’s what you need in order to get that degree.

  • joe

    Having an entrepreneurial mind i f I could go back in time I would definitely have avoided college to begin with. Education is important but it is an investment and investments are calculated risks. Are you going to get a good ROI on your degree? Or are you better off taking that money and investing in a business of your own?

    Personally I would have invested in a business of my own. My thoughts however were that by investing in my education I would make more money and save to open my own business a few years down the road. Now I’m looking at a 30 year payoff on my loans and I’m not able to fulfill my dream of starting a business because I have no spare money!

    http://www.eliminatemyloans.com

  • http://www.facebook.com/profile.php?id=704355471 Kate Scarlett

    My thoughts on this subject are quite radical but perhaps a big problem requires a big change in order to solve it? The problem with the student loan issue is not so much HOW college is being financed or even who is providing the financing (at least not completely.) The real problem is how freely these loans are given out by the government! If we are going to become a socialist country with increasing governmental control in every aspect of our lives then how come they aren’t taking a stand against frivolous and useless college degrees which are financed on the backs of taxpayers who are not guaranteed that the loans will EVER be paid back?? Too many of these graduates who are drowning in loans are also holding frivolous degrees which have no practical application in the real world.

    (I can’t even believe that I’m about to type this next part but I am simply trying to illustrate my point.)

    To deal with this whole student loan issue I believe that the government should take a page from the Affordable Care Act and have a panel to “approve” a student’s intended major BEFORE they (the goverment) approves the loans to pay for it! If a student wishes to go to law school after receiving their undergraduate degree then perhaps said panel should take a look at that and decide if there’s an over-saturation of lawyers and refuse the loans on the basis that this law student will not be able to get a job as a lawyer and therefore will not be able to make enough money to pay back those loans. This method may seem harsh, but it could be the best way to avoid unemployed or underemployed college graduates who have multiple degrees and zero job prospects in which to use their degrees.

    You cannot get a mortgage without collateral nor can you get a personal loan or a credit card so why should student loan debt be any different? The answer is not bankruptcy or “forgiveness” of these loans the answer is to take loans for the right reasons not on flights of fancy!

  • Charlotte Medina

    Some may think it’s a good idea to take a college loan, but really.. there’s never a guarantee you will be able to pay back. It’s a very tricky option. A good thing may be to think this through during your sophomore and junior years when you have some time to save up, and get a part-time job. This is a very motivating article, wish more high schoolers would have seen it, thank you!