For the first time in history, the total extant student loan debt has exceeded the total extant credit card debt. This was inevitable as more students go to college, and more of them borrow more money in order to go.
Although it may be statistically meaningless, I think it is fitting compare the two, because student loans and credit cards are dangerous for the same basic reason: unlike car loans or mortgages, these lines of credit are handed out to youngsters without any regimented plan to pay them back. It is easy to be suckered into a huge and eternal debt without having any idea how much and for how long you will be paying.
This, I believe, is the one reform we really need in the student loan system: making a college loan more like a car loan or mortgage and less like a credit card balance, requiring a sit-down meeting detailing how much you should borrow, how much you can safely borrow, how to pay the remainder of your bill without loans, and then how much you will be paying back and when. A college loan should require as much explicit planning as any other loan of comparable size. Right now, it is up to us to apply that level of rigor and discipline ourselves.
Is the news as bad as it sounds? The article itself points out that economists don't necessarily consider the growing debt burden a bad thing. Growing debt isn't always bad: we wouldn't consider it a bad thing if we saw an increase in new mortgage debt or car loan debt; it would instead be seen as a sign of economic recovery. Student loan debt and credit card debt are different, however, since they are more fluid forms of debt and often used to dig very big holes, especially in bad economic times.
Among the sunny-but-not-so-sunny news, the article also reports that borrowers are leaving college with an average debt of $24,000. That's actually not bad at all: with a median full-time salary of 55,700 for college graduates, you can kill a $24,000 loan in less than 10 years by forking over only about 7% of your take-home pay. This assumes, of course, that you get a full-time job upon leaving college.
The problem, however, is that this is just the average. There's a long tail out there, where people end up with baffling and crippling debts approaching or even exceeding $100,000. The loans so big they make the news, the loans that leave us wondering how someone can even borrow that much money for a single college degree.
Part of the reason for huge debts is that loans can insulate us from the cost of things. If you can borrow as much as you want, then you can go to a private or out-of-state college where tuition is far more than $7K a year. If you can borrow as much as you want, then you can forget about summer jobs or work-study and pay the entire tuition bill on credit. And nobody will be there to tell you that these are stupid things to do, either.
Here is some advice I give students who are considering college loans:
- Only take out federal loans, e.g. Stafford and Perkins loans. Never take private loans.
You may object that federal loans have a borrowing limit. Yes they do, for your own safety: that's a maximum safe borrowing limit, and that's really as much as you should borrow. If you need to borrow more, the solution is don't.
You may further object that it's not enough money to pay for college. This is also true, because you're not supposed to finance a college education entirely on credit. That is a very bad thing to do. If you're broke, you pay for college by taking out loans, by working, and by making affordable choices.
- Compute how much you can borrow and comfortably pay back in 10 years on a typical salary. When you choose a major, figure what type of job you are likely to get with your degree, determine the average salary from the occupational outlook handbook (or Google, I hear they have an Internet now,) and use a take-home-pay calculator to find out what you expect to make per month.
Allegedly, you can manage to fork over 15% of this paycheck to pay off your student loans, although in my experience that's pretty harsh living. Compute 5%, 10% and 15% of your expected paycheck, open a mortgage calculator (If you have a Mac, open Numbers and click on the "Mortgage" template) and dick around with different loan amounts, interest rates and monthly payments.
I once ran the numbers, and concluded that you can comfortably borrow a total within 1-2 times your expected annual take-home pay, although I didn't account for the effect of inflation. Arguably the federal borrowing limits should keep you from overborrowing, but it's essential to work out the numbers on your own.
If you cannot compute any of these things, do not borrow money for college, or for anything else.
- Don't turn down an educational opportunity because you don't want to take out a loan.
Nobody wants to take out a loan. Nobody wants to walk out of school tens of thousands of dollars in debt. But if you fall behind in school and have to choose between dropping out and borrowing $10K, the loan is probably a much better choice.
Sure, you say, that's obvious, but how about this one? Suppose you have the opportunity to jump into a 4+1 program, stay in college one extra year, and walk out with a master's degree. This costs you an extra $10K in tuition, along with the replacement cost of not working, and the cost of living. Do you take out a loan?
The wrong answer is "sure, why not." The other wrong answer is "no." What you must do instead is pull out the calculator and think about it. Don't walk away from a good deal because you can't pay in cash up front.
- Always walk into college with a tentative plan for your future.
You never know where college will take you, but you should always know in detail at least one place it could take you. When you choose a major, know where it can drop you when you leave; learn the odds of getting the kind of career you want. You need some general idea what you expect to earn before you borrow any large amount of money, or buy any very expensive thing.
I must go teach now, so I'll stop here. Back in 90 minutes!