Weighing the Student Loan Decision

With college and high school graduation season in high gear, the media has picked up on a thread that I wasn’t hearing about a couple of years ago: that many people have taken out a level of student loans that are so high, they are basically not serviceable. The NY Times had an article yesterday about a young woman who obtained over $100,000 in loans for an undergraduate degree from NYU in regious and women’s studies. The loans included a $40,000 private loan from Citibank that required no documentation (no doc loans, remind you of the mortgage binge) after Sallie Mae had turned the woman down for more borrowing.  In the comment section, a lot was made of her choice of majors and the lack of marketability, but I think the reality is that all majors are vulnerable to layoffs, lower than anticipated wages and so on.  Here’s what I have recommended to many people facing the student loan decision (although most people who approach me are contemplating grad school):

–Think seriously about the pathway you want to take – does it involve grad school with a professional degree like medical school, law school, or an MBA? If so, think about the trade-offs of going to a well-known or private school for grad school instead of undergrad.  Although most young people will want to go the best school they can get into, the terminal degree usually determines the ease of hiring, notability, etc…

–Work out a realistic post graduation budget and see how a large loan payment can (or can’t fit in) — For most students, the thought of an abstract tens of thousands of dollars of loans is not really tangible, whereas a future payment of $800 per month (every month) for 10 years becomes more concrete.

–Contemplate pathways and how these intersect with reality from a hiring standpoint — the biggest problem I see is that most people are too optimistic about their post-graduation salaries, both immediately and 10-years in the future. Unfortunately, the days of steady, uninterrupted employment and annual raises are behind us and most professions contend with volatility and lack of security.

–Explore options to reduce your loan debt — including public service or other special programs that help to forgive loans.  In addition, for many students there is a choice between a public or a private institution, or the ability to attend community college for one year or to finish in 3 to 3 1/2 years.  My personal view is that the college experience is important (living away from family for 4 years), but I don’t see enough discussion of alternative pathways.

Finally, if someone is genuinely not suited for college, my view is they shouldn’t be pushed to attend, but should be allowed to explore various trade and apprentice programs that may be more suited to their skills.

shared at this week’s Carnival of Personal Finance