Personal Finance (Sec. 3.2)

FUNDAMENTALS OF FINANCE

A Guide for Helping Professionals

Adam J. McKee


SECTION 3.2: Student Loans


This work is licensed under an Open Educational Resource-Quality Master Source (OER-QMS) License.

Open Education Resource--Quality Master Source License


The statistics are clear:  Higher education is one of the most powerful ways to maximize your earning potential.  I say potential because you must align your career with higher paying jobs that compensate you for your education and training if you are to benefit from it.  With that in mind, it is easy to see that higher education is a powerful form of investment.  As an investment, you want to buy low and sell high.  This translates into seeking the best value possible for your education.  Value usually translates into getting a great product at a great price and not paying for “extras” that don’t translate into things you really want to own.  Education is no different.  Why do you want an education?  People used to say to learn.  Most people now are less high minded and more honest.  Today’s student will tell you that they want to make more money by getting a better job.

If that is the case, then we must pay close attention to what employers want to see when they are making hiring and promotion decisions so we don’t overpay for education.  For most helping professionals, all employers care about is that you know what someone with your degree is supposed to know and that you have the degree (often required by law) from a regionally accredited institution.  That basically means that your university is a legitimate school accredited by a legitimate accrediting agency.  You don’t want to spend money on a degree that is accredited by the Association of Really Cool Online Schools.

The bottom line is that most employers (in our career space) don’t care if you got your degree from the University of California or the University of Mississippi or Lincoln County Community College.  The degree is a checkbox for employers that require a particular one.  What really counts past having the degree (and any professional license that your field has to go along with the degree) is that you know your stuff.  You don’t get any extra value by choosing a school with an awesome football team.  If you want the “college experience” of living on a big campus and participating in campus events, then at least be honest with yourself and admit that you are paying a premium for that lifestyle choice.

When it comes to college, you can your investment low and your “profits” high by taking advantage of all of the discounts and “free money” that you can get.  Start talking to the financial aid office very early in the year before you plan to start.  Most of the institutional scholarships (free money) are given away by March for the fall semester that starts in August.  You’ll also want to make sure to complete a FAFSA as early as possible.  You may be stuck in a bad situation because your parents never read this book, and even though they should be paying for your college (according to a magic formula created by the US Government), they can’t afford it.  You’ll want to check into the idea of becoming “independent” according to the financial aid rules.  If you are a “dependent” of your parents, your “need” will be based on their tax returns, not just yours.  If you are independent, then you will base your need on your own tax returns.  The available free money is directly impacted by your “need,” so you will want to do everything to maximize it.

You’ve applied for scholarships.  You’ve filled out a FAFSA and put in for every federal, state and local tuition assistance program you and your financial aid officer can find.  You may still come up short.  The first thing you should do is get a job if you don’t have one.  The “traditional” college experience where you go live on campus and party for five years is for the wealthy.  Pay for as much as you can in cash.   Still, you may not make it.

The Student Loan Crisis

America has moved more and more toward a business model of higher education, and the cost has increased at a rate that makes overall inflation seem to be standing still.  The average U.S. household holds over $50,000 in student loan debt.  When we look at the grand total, we can see why many commentators consider it a crisis: Nationally, Americans hold over $1.3 Trillion in student loan debt (Yes, that is a “T”).

As an absolute last resort, you may be forced to consider taking out a student loan.  As loans go, student loans through the Department of Education are among the best.  Don’t get suckered into taking out private loans that are not really student loans.  The government loans have good interest rates, and being the government, will have the most opportunities available to defer repayment if you need the extra time between graduation and finding a job.  The problem with student loans is that, as your financial aid officer will tell you at least 5,000 times before you graduate, “student loans are a loan and must be repaid.”  When you are just starting your career, you will die under the weight of student loans of you over borrow.  My advice is to borrow the absolute minimum you can and still pay tuition, fees, and books.  And yes, you absolutely need to buy the book and read it!

As a student, a few thousand extra dollars in a “refund check” sounds like an awesome deal.  Cash is great, and that will put some in your pocket.  Get that notion out of your head.  It is stupid and irresponsible.  Your goal is to learn more than the other people that you will be competing with for jobs and promotions.  College isn’t about fun, although that can be a pleasant side effect.  Graduate as soon as you can.  Don’t get suckered into getting a degree in two different fields or taking on a second minor unless you know a particular job will pay you a lot more for the second degree.  If you want extra education, get a master’s degree (that will actually maximize your income).  Keep your eyes on the prize; graduate as soon as you can with as little debt as you can.

So far, I’ve said that debt is bad and that student loans are debt.  Therefore, student loans are bad.  I’ll also reiterate other places that sometimes borrowing money is okay if that money makes you money beyond the cost of borrowing.  Student loans can be like that; if you borrow money to get an education that increases your earning power by $10,000 per year, then it may be a good idea to do so if you have no alternative.  I’ve not provided a hard and fast rule about how much it is okay to borrow, and you may demand one.  So here it goes:  Never under any circumstances borrow more than you can pay back with one year’s salary for the job the degree you are seeking will likely land you.  That means if you are getting a criminal justice degree at my institution, you shouldn’t borrow more than $30,000 under any circumstances.  Remember, that is the absolute maximum.  If you borrow that much, your salary will be “taxed” at 10% for an entire decade just to pay it back!  That money could go a long way toward making your rich.

 

References and Further Reading

You can delve deeper into what makes up your credit score by visiting MyFICO.com.

Dave Ramsey is brutal about taking on student loan debt, as you may have grown to expect:

To understand the difference between the bad debt I preach against and “good debt” that builds cash flows read Rich Dad Poor Dad.  Mr. Kiyosaki thinks that student loan debt is the absolute worst kind of debt because nothing save death and disability can get you out of it.


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