Student loans have an obvious benefit: if money is short, student loans allow you to go to school and get the degree you need to advance your career. But risks also come with taking a student loan, some obvious, some less obvious.
The most obvious risk is that you won’t finish the degree program for which you are taking the loan, and you then end up leaving the school without anything to show for except some uncomfortably large debts.
Another risk, equally obvious, is that you take the loan, finish the degree program, but then have a degree that’s not marketable, that doesn’t get you the job you want and doesn’t increase your pay enough to offset the debt you are now having to pay off.
The way to minimize both these risks is to do your homework before enrolling in a degree program, making sure that students attending the program have a good rate of success in actually finishing it, and additionally making sure that students who finish it have good job prospects upon completion.
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Schools vary enormously in the tuitions they charge (compare our cost index, which shows that colleges and universities can charge anywhere from $1,400 to $51,000 for tuition and fees for full-time students for the year—and everything in between!).
Note that these amounts don’t include housing, food, transportation, and other living expenses. Thus your student loans may also have to cover living expenses if being a full-time student prevents you from holding the type of job that would ordinarily allow you to cover them.
Consequently, if student debt could be a problem for you, it’s safest to choose a school that has low tuition costs and allows you to live in an area where the cost of living is low.
Less obvious risks also come with taking a student loan. There’s an old proverb that says “the debtor is slave to the lender.” Debt can turn you into a slave to the banks that provide your student loan. Many students who take out educational loans are young and have never had any major debt. Taking a student loan changes all that, removing a sizable chunk from your paycheck each month once you have to start paying off the loan.
The average student loan, across all ages in the United States, is now (in 2014) about $25,000 and that number is rising. The average student loan for American students who graduated in 2013 is over $35,000 (ref). That’s not quite a home mortgage, but it’s a sizable debt nonetheless.
Another less obvious risk that you face in taking out a student loan goes by the fancy sounding word “non-dischargeable.” Let’s say you are overwhelmed by debt. One way out of it is to declare personal bankruptcy, which cancels your debts. But a non-dischargeable debt is one that you can never get rid of, not by declaring bankruptcy, not by doing anything except paying it off or dropping dead (literally).
The fine print on student loans commits you to paying off the loan regardless of the hardships you may face in life. Student loans are non-dischargeable. You cannot get rid of these debts. They will follow you for the rest of your life until you pay them off.
It’s worth stepping back and asking why student loans have become such a big issue and problem for students. Believe it or not, back in the 1960s, it was not uncommon for students to work over the summer and earn enough to cover a substantial portion of their school expenses during the year.
All that changed with the Higher Education Act of 1965 (reauthorized many times since). By allowing students to take out big loans, schools were incentivized to raise their tuitions (after all, students could now pay for the increase). This led to a vicious circle, in which schools kept raising their prices and the government kept raising the amount of money it would loan to students.
This is why inflation in the cost of higher education runs at twice the rate of inflation for ordinary consumer products. The following diagram illustrates this point:
Note that even housing and medical costs, which are subject to high inflation, still do not rise nearly as much as the cost of higher education.
If one is inclined to cynicism, one might think that student loans are a racket in which the Federal government, in collusion with colleges and universities, has arranged to increase the profits of schools at students’ expense. While we at TheBestSchools.org doubt that there is a real conspiracy here, the effect, however, is substantially the same.
Schools keep raising their tuitions and fees. The government keeps raising the amount it is willing to loan to students. And the average debt of students keeps mushrooming, with total student debt in the United States now hitting $1.2 trillion. As Forbes puts it, this level of debt is crippling students, their parents, and the economy.
Bottom line: You want to think very carefully about taking out a student loan. Make sure that the expected return on the education and degree that the loan is supposed to secure is big enough. It needs not only to cover the debt but also to substantially improve your career and life. In taking a student loan, you are buying an education. Make sure you are getting a good deal.