Question

There is currently an increasing debate on the value of secondary education when compared to the rising costs of student debt. How would you use the theory learned in this week's lecture to support/reject a decision to accept student debt in the pursuit of a degree?

Answer 1

Background -

• Student loan debt is now the second highest consumer debt category – behind only mortgage debt – and higher than both credit cards and auto loans.
• There are more than 44 million borrowers who collectively owe $1.5 trillion in student loan debt in the U.S. alone.
• Over the past 40 years, the average price of college has more than doubled when taking inflation into account.
• Costs increased by roughly 25.3% at private colleges and about 29.8% at public colleges.
• Still, earning a college degree remains a strong investment.
• Research has also found that the burden of student debt hinders innovation and entrepreneurship, a core component of the economic prowess of the United States.

What caused the College tuition to skyrocket?

• Declining public funds have caused college tuition to skyrocket, leaving many families either with insurmountable student loan debt or unable to afford a higher education altogether.

The Hidden Cost of Student Loan Debt

• The threat of massive debt also looms over students during the process of selecting a college and major—and often prevents lower-income students from pursuing the highest-value degrees.
• This means that the most selective, prestigious institutions are also the ones that require taking on the most debt.
• The artificial limiting of choice also happens when students are picking a major. The recent trend of “differential pricing,” in which tuition costs are dictated by a student’s field of study, has had a noticeable effect on enrollment demographics in popular and high-employment fields.
• Once again, the prospect of taking on more debt can scare off the very students who could benefit the most from an in-demand degree.
• The student loan crisis is a double-edged sword. For those who graduate in debt, it may take decades to realize the value of their degree. For those who try to minimize debt by choosing a less selective college, a lower-demand major or a full-time job during school, that degree may be less valuable to them after graduation (and take longer to achieve).
• The student loan bubble is unquestionably a crisis. No single funder, college or organization will solve it, and it won’t happen overnight. But by working together, the public, private and higher education sectors can continue to reduce the high cost of student loan debt.

Knowing why student loans are bad (or good) can prepare you for the financial impact that this type of debt brings.

What makes debt good?

• What is good debt, exactly? It’s about borrowing money for something that will appreciate or increase in value and make your loan worth the investment in time and money.
• Basically, good debt will allow you to “be thankful for what debt has allowed you to have,” she told Student Loan Hero.

What makes debt bad?

• Bad debt is borrowing money to pay for something that diminishes or drops in value over time.

Are student loans bad or good?

• In the good debt vs. bad debt debate, student loans fall into a gray area.
• They can be considered good debt because the money you’re borrowing to attend school is your ticket to earning a degree and getting hired at a well-paying job. That debt should pay itself off over time with a lucrative career in place.
• Student loans may be the hardest type of debt to narrow down to simply “good” or “bad,” since everyone’s financial and lending needs may differ. Instead, let’s consider both the benefits and drawbacks to student loans.

Why student loans can be good -

• Student loans allow you to pursue a college education without having to pay for your entire tuition in full. With a college degree, you improve your chances of finding well-paying, stable employment.
• Some federal loans are subsidized. If you qualify, you’ll have your interest paid during select periods of time.
• Interest rates on federal loans are currently lower than most other lending products, and the interest is tax-deductible.
• Federal student loans come with a variety of repayment plans (Standard, Graduated, Extended, Income-Driven, etc.) that can make your loan payments easier to align with your budget.
• With timely, disciplined payments, student loans can add positively to your credit history and score

Why student loans can be bad -

• Even though a college education can improve your chances at gainful employment, there are no guarantees.
• Entry-level workers fresh out of college also may not earn enough to comfortably afford their loan repayments.
• Plus, the high amount of debt compared to a lower salary can produce a skewed debt-to-income ratio, which can hurt your credit.
• Student loan debt can lead to delinquency and even default, which can ruin your credit score and prevent you from getting approved for other types of credit.

A few Solutions -

• Before signing the dotted line, consider your field and income potential.
• Try to estimate your monthly payments and how they may impact your future budget.
• By knowing the key details upfront, it may be easier to decide how much, if any, you’re willing to borrow for college.
• Before pursuing student loans, find free money for college by taking advantage of grants and scholarships.
• The most surefire way to make student loans into good debt is by having enough money on hand to pay down the majority of your interest before it accrues — but if that was the case, there wouldn’t be much of a reason to take out a loan in the first place.
• Borrowing money for student loans may be unavoidable, but by managing your debt carefully, you can shift it from bad to good.