Financial Planning Blog

Another week, another newspaper article bemoaning the difficulties facing students with massive college debt--this one in the Wall Street Journal entitled "Students Borrow More than Ever for College-Heavy Debt Loads Mean Many Young People Can't Live Life They Expected". The fact that young people struggle with the burden of student loans for years hardly qualifies for news. Just listen to the Dave Ramsey Show, or watch Suze Orman, and you'll quickly pick up that a common theme among the stressed out, over-leveraged, not-so-young-anymore adults is student debt that is crushing their spirit.

As higher education has become increasingly critical for long term employability and earning potential, it has also become increasingly more expensive. This is especially true if you have your heart set on a degree from a prestigious private university. Although parents generally have 18 years of advance notice to save and get ready, many Americans are not prepared to adequately assist their children in paying for college education. For some families this is a matter of lack of sufficient resources. For others, it is due to a lack of financial planning or the will power to sacrifice and save.

Americans have turned to student loans to compensate for this shortfall in preparation. It has become more common, and more acceptable, to graduate with significant amounts of student debt--not to mention credit card debt. According to the National Postsecondary Student Aid Study, two thirds of college students utilize educational loans, and end up with an average debt of over $23,000 when they are finished. These statistics undoubtedly reflect a combination of many students with a relatively low debt load they can handle, along with a sizable subset of graduates with high levels of debt that will adversely affect their lives for many years.

In a 2008 Sallie Mae study conducted by Gallup, "How America Pays for College", the average total spending on college was over $17,200* per year. Their research showed that 23% of this total was financed by student borrowing, and another 16% was paid for by debt incurred by the parents. Thus, almost 40% of college expense was borrowed money--to be paid for by someone's future earnings. A few of the other significant takeaways from this study were:

• A very high percentage (37% of students, 46% of their parents) did not rule out prospective colleges based on tuition or other costs when making their selection decisions. (Huh? Cost is not a factor in one of the largest expenses you will ever incur? So what, if you can't really afford that expensive private college-it will be a great experience...until you have to eventually pay for it.)
• Post graduation expected income was not a factor for borrowing decisions for 70% of the students and parents. (Huh? The ability to repay a loan is not a factor in a major borrowing decision? So now you have an art history degree, a job at Starbuck's, and $60,000 of student loans you have to repay.)
• When asked about a course of action if student loans were not available, 68% of students who took out loans said they "would have found a way" to attend college without the loans. (Huh? Are you saying the long term burden of college debt was not absolutely necessary, but it just made things easier in the short term? So, if those loans weren't readily accessible you would have chosen a less expensive school, or worked a part-time job, or both?)

Enter Exhibit A--Sarah Kostecki, interviewed earlier this year in the Wall Street Journal ("Student Loans: Default Rates Are Soaring"). Miss Kostecki is 24 years old and a recent graduate of DePaul University with an international studies degree and $685/month payments on $87,000 of student debt. She laments, "It feels like I'm being punished for having gone to school." No, she is not being punished. She is just paying the price for having borrowed beyond her means to purchase something she could not really afford. What were her parents thinking when the family made the decision for Sarah to attend an expensive university that was beyond their means? Were they afraid to admit they could not afford to pay for an elite education? Did Sarah or her parents ever bother to consider what a burden this level of debt would be on a new graduate? Did they consider the alternative of less expensive public universities? And, how hard did Sarah work to help finance her own education?

Student loans, conservatively used, may be an appropriate funding strategy for some students. However, don't let the blessing of a university education become a curse due to the burden of excessive student loan obligations. Carefully assess a graduate's expected ability to handle future monthly payments, and error on the safe side. Better yet, say no to student loan debt, as Dave Ramsey would advise. Bless your children by making the sacrifice to save and assist them in paying for a good education, if possible. More importantly, help them to make responsible decisions on where to go to college, how much is to spend, and how to finance it. Education is something worth sacrificing for--but, is it worth a lifetime of slavery to excessive and unnecessary student loan debt?

*Spending at private colleges and universities averaged about $30,900/year, four year public schools about $16,600/year, and two year community colleges averaged $6,500. These totals were the composite of separate reported funding sources, and may be somewhat overstated. When asked to report total college expenditures, families reported about 15% less.

**In a 2009 update, the percentage of college funds borrowed was significantly less. This apparently was due, at least partially, to changes in methodology.