The student loan debt statistics cited by the Federal Reserve referred to 2011 graduates. It did not consider those who borrowed for college, but did not obtain a degree. However, a 2011 study by the Institute for Higher Education Policy found that “58 percent of the 1.8 million borrowers whose student loans began to be due in 2005 hadn’t received a degree. Some 59 percent of them were delinquent on their loans or had already defaulted, compared with 38 percent of college graduates.”
The problem here is fairly obvious. Absent a degree, the prospects both for employment and enough income to make payments are diminished. A 2010 study by the Education Department found that among Americans aged 25-34, the unemployment rate was twice as high for college dropouts compared to those who obtained a degree. They also determined that graduates earned 37 percent more than dropouts. “Graduating with a lot of debt can be daunting. Having a lot of debt and not graduating is even more daunting,” says Lauren Asher, president of the Institute for College Access and Success.
Most families and students already know that college costs a lot of money. In a perfect world, scholarships and family trust funds could make obtaining a higher education a simple proposition: enroll, pay the tuition, earn the grades, and get the diploma. The reality, according to Ms. Asher, is “…loans have become a necessity for more and more students who, a generation ago, might have gotten through college without any loans. What we’ve seen is college costs outpacing both family incomes and available grant aid for a generation.”
Strategies for financing—and completing—a college education
With these financial realities in mind, it may be prudent to consider a variety of strategies, in both selecting a degree program and deciding how to pay for it.
Start slow, sort it out, pay as you go. How many 18-year-olds know what they want to be when they grow up? A Kansas State University FAQ web page declares, “Approximately 70 percent of college students will change their major at least once during the course of their academic journey.” WikiAnswers puts the number at 80 percent, and adds “… On average, college students change their major three times over the course of their college career.”
Given the high likelihood of a change in career interest, it might be prudent to begin a college education slowly, maybe even part time. As much as college is promoted as a ticket to a better life, it’s not for everyone. Spending (or borrowing) a lot of money to change your mind two or three times, then drop out, is a bad financial decision with a long shelf life—you could be paying for not getting a degree for the rest of your life. Consider taking prerequisite classes at your local community college, exploring different fields, and allowing your interests and habits to mature.
Pay from savings first, borrow last. The default funding model for students (and their parents) is to complete a Free Application for Federal Student Aid (FAFSA) each year, and find out how much student aid is available. Whatever costs aren’t covered by grants or scholarships will be paid from individual savings or by borrowing.
As mentioned earlier, student loans are easy to procure, and the terms of repayment are favorable. These factors might induce students to take loans, and hold off on using any personal savings. But if you have money saved for college, it might be wise to pay as much as possible out-of-pocket for the first few years until the student has demonstrated an aptitude and interest for completing a degree program. Once a career path is established, and savings are exhausted, then consider borrowing. Remember: borrowing only makes sense if it results in a degree.
This approach not only minimizes the financial cost of dropping out, but also provides reasonable evidence that the loans will be a good investment in your financial future.
Finish as a full-time student, even if you have to borrow more. Once you have a clear educational objective, the sooner you complete your studies the better. A 2011 report from Complete College America, found that “Less than a quarter of part-time students complete a bachelor’s degree within eight years, compared to more than 60% of full-time students.” The conclusion: “Time is the enemy of college completion. The longer it takes, the more life gets in the way of success.”
Taking more time to complete your studies exacts an opportunity cost. The sooner you graduate, the sooner you enter the job market, the sooner you begin reaping the financial benefits of a college degree—and the sooner you can cut loose the financial anchor of student loan debt. There may be good reasons to make a four-year degree program last eight years, but almost none of those reasons are financially sound.
If any of this information resonates with your personal circumstances, it should be obvious that executing these strategies will require some careful and frequent assessments of your financial affairs. The broad idea behind student loans has been, “Don’t worry about the cost, just get the degree. Your lifetime of increased earnings will allow you to figure out how to pay for it after you graduate.”
That idea is no longer valid. Poorly structured student loan debt has the potential to impose a lifelong drag on your financial progress. Before you enroll, have a plan.
Elozor Preil is Managing Director at Wealth Advisory Group and Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). He can be reached at [email protected] See www.wagroupllc.com/epreil for full disclosures and disclaimers. Guardian, its subsidiaries, agents or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.
By Elozor M. Preil