The student loan myth – a shortcut to indebtedness

By Dr Daleen Smal | Personal Finance

Oct 21

Were you told that going to college or university will open doors and make your future bright; that you must get a degree and then get a good job?

After doing that did you perhaps discover that you did not find that great a job, that you did not get the big pay cheque?

Perhaps you went to college and have not obtained a career in any of the fields you have studied in or been unable to pay off the loans at all.

Maybe you did find a job, but you are up to your eyeballs in student loan debt and your life is close to being completely destroyed.

There are cases where people finished college and started to pay off student debt, ultimately went bankrupt and are now in retirement and still required to repay student loan debt even if they can barely manage to buy food.

Remember that a “student loan” cannot be discharged in bankruptcy.

Even if you take a credit card or personal loan and use that for education purposes, it will be deemed as a “student loan”.

Senator Elizabeth Warren, a Harvard Law School professor, said: “Student loan debt collectors have power that would make a mobster envious.”

According to a survey by American Student Assistance, 73% of college graduates are not investing for retirement or making other investments because of their student loan debt.

About a third said that they don’t get married due to their student loan debt, and 43% said that student loan debt is preventing them from starting a family.

When asked, very few borrowers had a firm understanding of how hard student loans would be to pay back.

So why do people call student loans “good” debt?

They look at the results that you may get from the debt. “Good” debt is debt you take on to “invest in your future” or create “future value”. Something “good” may come from it. But, just because there is the possibility of something good coming from it, doesn’t make the debt itself good.

Ask the multitudes of people sinking under the burden of student loans if that is “good” debt.

Debt is debt.

You have to repay each and every form of debt with dollars from your earnings.

You still pay interest on it, whether “good” or “bad”. You still give your wealth away to someone else when you have debt, whether “good” or “bad”.

Do you know someone burdened by student or mortgage debt who can’t seem to get their head above water?

There is a remarkable similarity between debt and body fat – both are easy to accumulate, and both are hard to eliminate.

Do we talk about “good” body fat and “bad” body fat? Why on earth do we then want to talk about “good” debt and “bad” debt?

Why don’t we rather call debt what it really is – debt is risky. When you take on debt, you take on risk. Yes, some debt is riskier, but debt always has risk associated with it.

Do you agree that when you hear the word “risk”, you will be inclined to put more thought into your decisions? Am I right?

Risk actually means that there is a chance that things won’t work out well for you. Risk means that you have to figure out what will happen if things don’t work out the way you planned.

Do you agree that this is an important consideration?

What can go wrong in your life?

Let us see. You may lose your job and not be able to find another one for months. You need to sell your house or car but nobody wants to buy it. You get your expensive college degree and can only find a job in the local fast food store. A tornado or flood or fire destroys your house and you have no or insufficient insurance.

What else can you think of that can go wrong in your life?

The point is, many things can go wrong and you need to think through how that will impact your life. Life is never perfect, so don’t brush this risk aside.

Think carefully about the risks you are taking on when you borrow money.

To borrow money seems like the easiest choice but it is not. This myth about “good” debt sucks people in and then sinks them in a devastating way.

Did the “good” debt lie suck you in?

Living debt-free is the best long-term choice you can make. Life is so much easier without debt. If you have debt, the key is to pay it off as fast as you can so that you can live truly free.

Nathan W Morris said: “Every time you borrow money, you are robbing your future self.”

Be aware of all the pitfalls regarding student loans.

There is no cap on how much your monthly payment should be or what interest rate you are charged.

The interest rates on student loans are much higher than on most other types of loans.

If you don’t pay, your wages and any benefits, including unemployment benefits, may be garnished.

There is no cap on how much you eventually repay.

Perhaps you have borrowed $15,000 years ago, and with negotiated temporary reduced payments or deferments due to some unfortunate events in your life, your loan will keep on growing larger and larger while you are postponing payments or paying smaller amounts. After you have recovered from whatever financial hardship you suffered, your loan will be even more unmanageable than it was before and perhaps by then you still owe $250,000.

Did this happen to someone you know?

There is a Yiddish Proverb that says: “Interest on debts grow without rain.”

You have to compare financial offers for education purposes and read the fine print carefully. Make sure you understand the terms and conditions of the loan and repayment requirements.

If you have to borrow, borrow the bare minimum and don’t accept the full amount offered.

Work part-time to cover your costs. Start making repayments on any loans while you are still in college to reduce the total amount you will have to repay.

Research the cost of attending college.

Compare the cost of the big state school in your area, the smaller state school in your neighbourhood and the private, smaller, more intimate colleges. You are going to college for education and knowledge, not for a great time or being the best dressed or partying the most. Find out how you can obtain and expand your knowledge for the lowest cost.

If you have children, consider these costs for them or tell them to do the research themselves so they know what they are getting into.

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The best ways to go to college is by paying cash or by finding a scholarship. Yes, it means you have to study hard and get good grades but that is a much better choice than remaining poor and in debt for the rest of your life.

My advice is to stay away from student loans and avoid them like the plague.

If you haven’t saved any money for college, you need to get resourceful in getting cash to go to college. Sell whatever you can to get cash. Work part-time. Teach English classes. Get creative in making money to pay cash for your tuition.

If you as parent would like your child to go to college, start investing the day your child is born. Put your funds in tax-free investments.

If you invest in a tax-free account for 18 years, your child will be able to go to almost any college. If you start by investing $160 per month and increase it annually by 3% for 18 years in a tax-free investment account at 10% return per annum, you should have about $115,800 in your account by the time your child goes to college.

This should cover a degree at college and your child can work part-time to pay his way, and in doing so, learn good habits as a bonus.

I sincerely hope that I have shed some light on this topic and that you now have a better understanding of just how risky student loans are.

There is no shortcut to wealth, but there is a shortcut to indebtedness. Avoid this shortcut and stay on the tried and true path.