In my last few columns I have discussed step 2 of Dave Ramsey's Seven Baby Steps (see http://www.daveramsey.com/new/baby-steps/), and last time I made the case that it's actually possibly to get through school without student loans. This week I will continue on that theme in answer to the question, “what's wrong with student loans?” Two principles I would like to discuss are (1) student loans, like any debt, can take the place of creativity and sacrifice, and (2) students loans for most people are NOT easy to pay off.
Simply put, students loans make it too easy. That may not sound like a bad thing, but it is bad when you're trading short-term ease for long-term pain (refer to principle number 2). There's nothing wrong with being a starving student living in a small apartment getting around in an old car. In fact, learning financial discipline and sacrifice as a student will prepare your character to handle prosperity in the future.
For some people the only possible way to get an education might be to take out a minimal loan and use it for the bare necessities. However, few of us have that kind of discipline. If you need $5000 to cover the bare necessities, why not take out $5500 and eat out a little more often? Why not take out $7500 and live in a little nicer apartment? Why not take out $10,000 and buy a big-screen TV and nice couch? Someone I talked to recently admitted that he spent more student loan money on CD's and stereo equipment (you can tell he went to school a few years ago) than he did on his education.
The second principle is that student loans are NOT easy to pay off. The average university student graduates with around $20,000 in debt. Starting salaries vary widely by profession and location, but somewhere around $45,000 is probably somewhere in the middle of the range for a bachelor degree. That might sound like decent money, but a typical one-income family will have trouble finding extra money for student loan payments after taxes and the many other expenses of life.
If the average student loan is $20,000, and a typical interest rate is around 6%, here are some examples of how long it would take to pay it off. $150/month: 18 years. $250/month: 8 years. $750/month: 2.5 years. $1000/month: almost 2 years. You might think that 2 years doesn't sound too bad, but even if you could spare $1000/month right out of college (not very likely), think of what else you could do with that $1000/month.
You could save for a $24,000 down payment on a house, you could buy a nice vehicle, or my personal favorite, you could invest it for 2 years. If you invested at a 10% return (if you starting investing a year ago, your return would have been more like 50-80%), it would become $26,500 in 2 years. If you just left that $26,500 in investments at 10%/year (the average stock market return over a long period of time) and did no other investing for the rest of your life, you would be a millionaire when you retire in 40 years ($1.2 million to be exact).
Are those extra comforts while attending school worth $1.2 million? I'll leave that up to you to decide.
If you have any questions or topics you want me to address, please email me!
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