Are student loans considered a “bubble”? By bubble, I mean the same bubble that burst back in 2000 when those tech stocks that didn’t actually make any money were trading at 1000’s of times their value. By bubble, I mean the same bubble that burst 6 years ago when the housing meltdown and subprime lending almost sent our country (and possibly world) into complete disarray. If anything we as a human race have shown that we are resilient to just about anything thrown at us. Sure we have had historically low interest rates for several years now, but for those of us with sub-4% mortgage rates, should we really be complaining? The only difference now is that I throw all of my money into the stock market rather than letting it sit in a bank accounts, or tied up in low yielding bonds. But I’m serious when I ask the question about student loans, because it seems to me that is the next big bubble that could burst. I wish they had spent more time in college teaching us about these proverbial bubbles, and just how much damage they can do to an economy. Let me present you with two different examples so you can see just what I mean about this student loan bubble that is getting larger and more dangerous every day.
I have a friend, let’s call him John, that went to a reputable college for his undergrad and graduate degree. He actually went to the same school for both. This school was a no-frills commuter college, but well respected in the area he lives. He was fortunate to have his parents pay for most of his undergraduate degree, to the point that he was able to make up the difference with part-time work while going to school. He graduated debt-free. He immediately began working with his profession upon graduation, and his employer at the time offered to pay 75% of his schooling if he went back for his MBA. To John this was a no-brainer, he would make himself more marketable, while at the same time only having to cover 25% of the cost of tuition. John didn’t stay with his employer all the way through his degree so he ended up having to repay them a portion of the tuition they covered, but when all was said and done, John owed $30,000 in student loans for a degree that would’ve cost him about $65,000 overall. Due to moving out of his parents home, buying a car, and additional life expenses, that $30,000 was fully financed with loans as he didn’t have much discretionary income left over. Today John makes about $150,000 a year (yes, I’m jealous too!) and is debt free. He was able to accelerate his student loan payments and get them paid off very quickly, which is especially good for him since his income is well above the allowed threshold for writing off the interest on those loans.
I have another friend, let’s call her Jane. Jane is actually a PhD, and coincidentally she is about the same age as John. They both graduated with their bachelors around the same time, and John received his MBA only shortly before Jane received her PhD. Jane is in the health profession, and has a very respectable position, but it’s also one she could have received with a Master’s degree, but certainly career progression is easier with a PhD. Today Jane makes about $60,000 annually, much less than John, but they aren’t competing with each other by any means. Jane financed most of her schooling with student loans, and it’s less common in her profession to work while going to school, which means she didn’t have the benefit of an employer picking up some or all of the tab. Today, Jane has accumulated over $200,000 in student loans. Quite a difference, especially when compared to their salaries. Let’s say John still had his original loan amount, he would have a student loan debt to income ratio of 20% ($30k divided by $150k). Whereas Jane has a ratio of 333% ($200k divided by $60k). Can you see the disparity now???
John was more than willing to take out loans because he knew the return on his investment would be immediate, and would more than pay off over his career. Jane, while happy with her job, probably will be unable to pay off her loans until the tail end of her career. As she applies for a car or house loan she will have a constant reminder of these student loans, she will have monthly payment for the next 30 years at least. Jane simply borrowed a lot of money for a career that doesn’t carry the same return on investment. This begs the question, if education is an investment then why are more people not treating it that way? If you asked 100 random people whether or not they think education is a type of investment I am willing to bet that at least 95% say yes…and they wouldn’t be wrong. This is precisely why the people that are financing $50,000 a year to get a Literary Arts degree are going to be very disappointed when they graduate. Learning can be fun, and it’s not all about money, but should you really be borrowing money that you will never be able to pay back? Education is an investment and it needs to be treated like one. If you intend on borrowing money then make sure you understand how many years it’s going to take to finish school what your total debt amount will be, and the average salary for your profession. Those three pieces of data should allow you to quickly calculate your return on investment.
If you plan on taking out student loans, or if you already have, then please pay attention to some of my advice. First, you don’t need to attend an ivy league school to get a top notch education. Those are great schools if you plan on running for Congress one day, otherwise it’s perfectly acceptable to go to an in-state school that will give you a break on your tuition. Second, you may love the football team at one school and all your friends may be attending there, but if another nearby college is offering you more scholarship money then you should factor that into the equation. Before you take out a single loan please consider the average salary for your career! If you never plan on making over $50,000 per year then it’s probably wise not to borrow $50,000 for every year you are trying to earn your degree. Go to community college on the cheap, spend a couple years there earning stellar grades, and then transfer to a more prestigious university. Undergraduate programs at large universities are notoriously a rip-off and over hyped. A good community college can net you a good education for less money, and provide a stepping stone to a university of your choice.
My advice is to borrow as little as possible! Student loans are the one type of debt that even bankruptcy cannot get rid of. That means once you owe the money you are on the hook to pay it off until you die! With the rising cost of education, increasing student loan debt ($1.4 trillion and climbing), and the continuous lack of employment options for recent college graduates, this is a glaringly obvious recipe for the next “bubble burst”!