is 100000 in student loans a mistake

Is $100,000 in Student Debt a Good Idea?

Michael Lux Blog, Strategy, Student Loans 0 Comments

As the price of education has skyrocketed, the use of student loans has similarly grown.  At present, Americans owe over $1.4 trillion on their student loans.  With so much debt being generated each year, many people mistakenly reach the conclusion that the loans are standard practice and necessary.

As more and more students rack up six-figures of student loan debt, we are long overdue to ask an important question… is it a good idea to borrower $100,000 or more to pay for school?

The Price Tag Doesn’t Represent the Value of Education

Students at a good school with a big price tag might think that student loans are the only way to getting the diploma.  This mentality is very dangerous for two reasons.  First, many students attending that school may have been awarded large scholarships.  The students without scholarships are essentially subsidizing the education of the scholarship recipients.  Second, many students at the school may have the benefit of parents or family funding their education.  Most people are hesitant to share with the world that mom and dad are footing the bill for college.

These factors combine to make it appear that a large price tag is justified and that opting for large student loans is a reasonable option.  This is a terrible way to look at things.  A school might be excellent value at $10,000 per year, but at $30,000 per year, it could be a huge mistake.

Too Many Borrowing Options

One of the dangers with student loans is that they are incredibly easy to acquire.  College financial aid offices are experts at helping students find the money for school.  Lenders see student loans as an excellent investment.  Unlike credit card debt or mortgage debt, it is almost impossible for a borrower get bankruptcy relief on their student loans.  Additionally, many young borrowers don’t carefully review loan agreements.  They are more inclined to agree to lender friendly terms like high interest rates or penalties for missed payments.

With colleges eager to help students find loans to pay for school, and lenders eager to provide funding, students are on their own when it comes to evaluating whether or not borrowing is a good idea.

The Value Of College Has Changed

A generation ago, student debt was considered “good debt” because college was almost always a good investment.  Students with any degree were usually able to find jobs that afforded them the opportunity to quickly pay off debt.

Today, the price of education has grown so dramatically that not all schools and programs are able to justify the lofty costs.  For-profit schools are notoriously overpriced and offer little value to students, but they are not the only culprits.  Many other more reputable schools have programs that may be excellent, but the cost of attendance is so high relative to expected income that it ends up being a bad investment.

Making things even more complicated is the fact that getting a college degree has arguably never been more important.  The necessity of education combined with the “good debt” fallacy can result in some ill-advised borrowing decisions.  Because of these factors, many well intentioned and trustworthy people, such as parents and guidance counselors, offer some bad advice on the merits of large debt.  As a result, student loan horror stories are becoming far too common.

Smart Borrowing 101

Evaluating college options requires taking a close look not just at the school, but at the major/area of study in question.  A school could have an excellent engineering program and provide graduates with great jobs, but their English Department might have lousy job placement numbers.

In order to borrow responsibly, students must closely examine the salary that they can reasonably expect at graduation.  If some graduates get large salaries, but most others end up with lessor paying jobs, the average salary might not even be a fair projection of future earnings.  A careful review is essential.

A good rule of thumb is that total borrowing should not exceed the expected starting salary.  If graduates on average are finding six-figure jobs, $100,000 in student debt might be a good idea.  If the starting salary at graduation looks more like $50k, then a mountain of student debt should be avoided.

Make Sure College Is A Smart Investment

Analyzing the cost of school for four years is hard enough.  Projecting what a salary at graduation will look like is even harder.

Fortunately, the analysis is pretty simple at a lot of schools and for a lot of majors.  Some programs easily justify the bill while others are clearly not worth the cost.  If you find yourself considering a school on the borderline, it might be prudent to look at some other options to see if there is a route where the money is clearly well spent.

Prospective students who take the time to make smart choices will spend a lifetime reaping the benefits.  In some cases it means passing on a “dream school”, but the tough decisions made now will avoid student loan nightmares in the future.