myth exposed

Putting an End to the “Good Debt” Fairy Tale

Michael Lux Best Of, Blog, Student Loans 0 Comments

Student loans and to a certain extent mortgages have long been referred to as “good debt”.  Credit card debt and auto loans were considered to be the proverbial “bad debt”.  If there is once thing we have learned from the sub-prime mortgage crisis and student loan crisis, it is that debt is debt… there is no good or bad.

Debt is simply an obligation to pay money owed.  It doesn’t matter whether you are paying $500 a month to Sallie Mae or Visa.  Either way, its money you don’t have because it belongs to someone else.

The “Good Debt” Myth Origins

A common sales pitch for student loans and college in general has always been that you are investing in yourself.  For a long time there was some validity to this theory.  College degrees meant that you had higher earning potential.  Just one generation ago, college cost significantly less than it does today.  At that time, almost all students got a great return on their investment.

Changing Finances

Because the cost of an education, even when adjusted for inflation, is triple what it was just 30 years ago, the “investment” is now significantly more expensive.  Additionally, the expected yield on this investment is now substantially less (especially for certain majors).  Many college grads are unemployed, and many more are underemployed.  They do not have higher incomes, instead they have onerous student loan debt.

Another harsh reality is the fact that not all college students will become graduates.  More than a third of first-year full-time college students will not earn their degree within six years.  Repaying student loans can be incredibly difficult with a degree.  The students who don’t earn their degree will have a very tough time dealing with student debt.

The Lesson

College is very expensive.  The more you spend does not mean the more you will make.  In my personal experience college was the best decision I could make for myself.  I went to a state school and studied engineering.  Almost all of my tuition was paid for through scholarships, and my housing expenses were paid for because I worked as a resident adviser.  When I graduated I got an engineering job with the government that offered high pay and great benefits.

Unfortunately, I was not happy.  I went to law school.  This time I went to an expensive private school.  Even though I worked full time during my legal studies, I still incurred a great deal of debt.  As a licensed attorney I now make significantly less than I did before I went to law school.  The difference is that I love the work I do and would gladly continue what I am doing for the next 30 years.

I share this all to illustrate a point.  Return on investment for a college education is not what it once was.  That does not mean you should not go to college.  It just means that you need to really think it through.  The last thing you want is to be stuck in a job you hate while suffering a lifetime of indentured servitude to Sallie Mae.

Parents and families now need to invest a great deal of time into planning and paying for college.  It might lead to some upsetting conversations, but it definitely beats a lifetime of unaffordable debt.

The Bottom Line

Don’t go to college because you think it will magically enhance your income.  Figure out what you want to learn, what its worth on the job market, and whether or not it will get you a job you want.  Then ask yourself if the debt you are about to get yourself into is worth it.  The days of student loans being good debt have long since passed.