Two Examples of Going Blindly into Student Debt

One of the great ironies of student debt is that it is so closely tied to getting an education… yet very few people with student loans are educated about how this form of debt really works. Weird!

Young people are going to college to learn and grow yet in many cases they are oblivious to the debt they are taking on in the process.

Here is a quote from an article titled Student loans: Lessons learned, choosing a major, and overcoming regrets  on the web site of KTAR, The Voice of Arizona.

‘’Kasey was proud, hopeful, and ready to begin her dream career. But unfortunately for Kasey, things weren’t exactly what they seemed.

What Kasey didn’t know was that she had borrowed nearly $80,000 for her degree. She didn’t realize that interest accrued while she was in school either, which came as quite as a surprise. Upon graduation, the interest on Kasey’s student loans capitalized, leaving her just under $100,000 in debt. And, even after making over $17,000 in payments over the last three years, Kasey still owes around $95,000.”

Student loans are too dangerous a form of debt to ignore like this. The dollars are so big and it is so easy to borrow the money that you can’t go into this process uneducated. And I’m willing to bet that the vast majority of people are borrowing on student loans with the same blindness that this quote reveals.

Here is another quote along the same lines from the article.

“Also like Kasey, Richard wasn’t fully aware how much he was borrowing at the time.

“I realized I spent too much while trying to gather all my separate loans together for my consolidation,” says Richard. “To be perfectly honest, I really didn’t have ANY idea that I had amassed six figures in school loans. When I got my MINIMUM monthly payment quote from Nelnet, I couldn’t believe what I had done.”

Richard blames his high debt load on a handful of factors that he didn’t recognize until it was far too late.”

Parents, if you have decided that debt is OK for your child, at least encourage (or force) them into becoming an expert in how student loans really work and how they will be paid back. Think how sad it would be to turn the pride and accomplishment of college into pain and suffering after college if they are allowed to go blindly into a huge debt mess.

And if you are in school now and borrowing money, make a commitment not to be ignorant about how student debt works. Don’t be the person a writer quotes for their article in the future about the ever growing student loan mess.

If you are going to go to school to get an education, don’t neglect the education about the debt. Better yet don’t borrow. :-)

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The wisdom of paying student loans off quickly

I write in this blog that saving money and paying for college is wise. I talk about the downsides and risks of using student loans to pay for college for yourself or for your child. I talk about the financial dependency and mental drag created by signing up to student debt for 20 or 30 years.

If you already have student loans, or plan to use them, I try to persuade you to pay them off very quickly. I believe that’s the wise path to financial freedom in life. It’s not for everyone, or for every situation, but paying the debt off quickly after graduating is much better than staying in debt for 20 or 30 years.

I’m a Financial Guy

My perspective on money and debt comes partly from how I make a living: providing accounting and financial consulting services. I’ve seen what happens when the financial side of a person’s business (or their personal life) has been neglected. I’ve seen how debt can destroy a company and put everyone involved in the company into deep and lasting financial trouble.

But I’m just like everyone else out there. I have borrowed money to buy cars.  I’ve borrowed money to buy houses.  I’ve borrowed money to go on vacation.  I’ve used credit cards when I didn’t have the money to pay for something.  I’ve done all of that in my life.

But I always had that uncomfortable, nagging feeling deep inside that I wasn’t being smart or wise while doing it. I even took out my own version of a student loan.

Philip Borrows Money to Finish School

The student loan crisis that is brewing today was in its infancy when I went to college. I graduated in 1983 from a small school – Lamar University – in my hometown of Beaumont Texas. I don’t think I had even heard of a student loan back then.

Annual tuition was a fraction of what it is today (although it felt like a lot at the time). My Dad paid for my tuition and books.

In my last year of school I borrowed about $15,000 from my Mom so I could pour on the gas for my final year of college. I wanted to take 21 hours so I could finish school and get out and start working as an accountant. I wanted the loan in order to take the maximum class load possible and not have to work during that time. I was married and my daughter had just arrived into the world. We were broke and I was excited about getting into my new career so I could crank my income up.

My Mom supported my goal of getting through college but she was not really a fan of loaning money to family (she was definitely right about that). I poured on the gas, went to school full-time and got my BBA in Accounting. I went to work for a local CPA firm and my career was off and running.

Now came the time for me to start paying my “student loan” back. How well did I do paying it off you ask? Crappy. I did a horrible job.

Sometimes I made a regular monthly payment… sometimes I didn’t. I justified it at the time based on my financial situation as a young father and husband. I remember always feeling bad about it though. In hindsight, I wish I would have been stronger in that regard and accepted my responsibility to pay it back in a more honorable way.

I eventually paid it off in a lump sum in 1998. I basically let that loan sit around in a somewhat neglected state for 15 years.  If it would have been a student loan of today, there would have been loads of interest tacked onto the principal balance. Who knows how much that balance would have grown to over the years. I would have been caught in the same trap that so many people are caught in today. I basically got off easy because my Mom cut me some slack (thank you Mom). :-)

Your Plan

If you are a parent, I encourage you to begin planning for how you will pay for college if that is a part of their future.

I also think it would be wise to start teaching them the wisdom and value of paying any student loans off quickly upon graduation. (I have definitely learned that lesson.)

I hope you will give that some serious consideration as college time approaches.

Beware the bad advice out there about managing your student loans

I fully recognize and respect the different views people have on student loans and the use of debt in general. But sometimes I read someone’s advice to those of you with student loans and it makes me cringe.

Advice, that in my opinion, is misguided and naïve (at best).

Marilyn Kennedy Melia wrote an article at bankrate.com that caught my attention. It provides some really bad advice about managing your student debt.

I’ll provide some quotes from that article then provide my perspective on why it makes no sense.

“It’s not the balance, it’s the monthly payment.

While grads may obsess about how much and how long they’ll pay for college, “I don’t believe lenders really give a hoot about your total balance,” says Paul Baumbach, financial planner in Newark, Del.

Lenders focus primarily on how much income goes toward debt payments, says Charles Chedester, president of the Iowa Association of Mortgage Brokers.”

So a financial planner says “Lenders don’t give a hoot about your total balance”

What? So if you have $1,000 of student loans that’s the same as $150,000?

Then the president of an association of mortgage bankers says home lenders only look at your monthly payments. Even if your monthly student loan payments go on for 15, 20, 30 years or more?

How much debt you have makes a huge difference in the quality of your financial life. Staying in debt forever is a terrible plan. Don’t focus on how low you can make your student loan payment. That only keeps you in debt longer.

The bankers are perfectly OK if you keep yourself in debt forever. It’s up to you to be smart and not fall for the trap of keeping your payments low so you can go take on more debt to buy a house.

Here’s another quote.

“Extending the student loan debt can help mortgage eligibility.

For those whose monthly income is already heavily sliced with student loans, extending the repayment term can leave more room for a mortgage payment, making it easier to afford a home.”

Their advice here is to look at ways to extend the life of your loan by lowering the payment. This is usually done by consolidating your loans if you have multiple loans

In most cases, consolidating your loans is a horrible idea that can have a number of negative consequences. But even if you can do it without creating other problems, you are only increasing the total amount of money you will have to pay back. You are making the loan more expensive. And you are making it last even longer. Yuck.

The goal is to get rid of the debt so you can start using more of your income to build a strong financial foundation in your life. Not to mention the fact that you want to start saving for your children’s college education. That way you and your children can avoid student loans in the future.

And one final quote.

“How important is it to buy a home?

Extending student loans can make room for a mortgage, and it may also allow you to save to buy a home later, Baumbach says.

Indeed, although it may be possible to afford a home by getting a Federal Housing Administration-insured mortgage with a small down payment, lenders want to see emergency savings, too, Chedester adds.

Baumbach says it’s financially smart to buy a home when mortgage payments are manageable, they compare favorably to what you would pay in rent, and “you’re sure you’ll stay there a few years.”

Many young adults, he says, need to be able to move anytime for a new job. Some will decide they don’t want a home badly enough to extend their student loans or skimp to get the necessary savings.”

What happens to many people who buy a house when they are already deep in debt (and have very little money saved) is their dream of home ownership quickly turns into a nightmare.

Buy a home once you have paid off all your debt, including your student debt. That way you are strong financially and you can handle the purchase.

That’s the smart way to buy a home.

It’s the smart way to create freedom from your student loans.

Here is the article I referred to.

Even smart people are burying themselves in student debt

Wow, here is a story all parents and young people need to read and consider. This is a story written by a smart young lady about how she ended up with over $100,000 of student debt.

Parents, please pay close attention to the message here.

Here is the first part of the article by the author.

“My mother was quadriplegic by the time I was in high school. My dad was a real estate agent who worked on commission, so he worked long hours to make ends meet. As a result, I took on a lot of responsibility at a young age.

I cooked and cleaned and did all the grocery shopping. I did the laundry and paid the bills (in the “balancing the checkbook and writing the checks” sense, not the earning money sense). I took my mother to the bathroom, fed her, and tracked her pill regimen. And most importantly, I believed that a college education was a good value.

I knew my parents couldn’t afford to send me to college, and I wasn’t allowed to have a job because of my responsibilities at home. So in lieu of saving for college, I threw myself into everything school had to offer.

I was salutatorian. I was on the dance team and the academic team. I was secretary of the service club and president of the math club. And it worked: not only did I get out, I graduated from college with a 4.0. Then I went on to get an MA and a PhD. Unfortunately, I got $100K in debt to go along with it.

I mention this only because it begs the question: what leads a (relatively) smart person to make almost ten years’ worth of poor financial decisions? As immoral as universities may be, there’s more to any individual’s decisions than external influence.”

What a great question she is offering to you and me. Why does a smart young person put themself into such deep, deep debt?

There are so many strong emotions at play here. That’s why student loans are so dangerous. Mixing huge debt with such strong emotions and dreams is a recipe for disaster for way too many people.

I will address this in much more detail in a couple upcoming posts.

Please don’t put your children, or your own financial future, on the line over this myth about funding college.

The government and colleges are pushing student loans to kids and parents like they are candy. Like it’s a free ride to a quality education and a quality job and income.

It’s not.

You have to put your common sense hat on when evaluating how you pay for college.

I will help you do that in this blog.

 

Tips for teaching your children about college (and avoiding student debt)

Most politicians are trying to teach your children that because the cost of college has gone up… you have to take out more student loans.

But that is BS. You have other choices than to purposefully put your children deep in debt.

An article by Russ O’Reilly titled “Students mortgage future for higher education” has a couple good lessons for you and I as parents.

Here is a quote about what politicians are trying to teach your children about student loans.

“The cost of higher education underscored President Barack Obama’s visit to Washington Lee High School in Virginia in May.

“Unfortunately, since you guys were born – which doesn’t seem that long ago to me – maybe it does to you,” Obama said to students, “the cost of going to college has more than doubled. And that means students have to take out more loans.”

I’m not picking on Obama here (almost all politicians say the same kind of stuff), but if that is how you look at student loans as a parent, you are buying into the conventional wisdom that says “just borrow more money… it’s OK… just teach your child to dig a deep, deep debt hole… you have no other choice.”

Is that what you want someone teaching your children? Absolutely not!

Here is what you can do as a parent to help your children.

  • Teach them that college selection is about affordability
  • Begin saving for their college early
  • Have them become experts in college costs and scholarships while they are in high school
  • Let them know that demonstrating an enjoyment for learning and making good grades is a part of their preparation for college

Later in that same article a student was quoted as saying:

“Justin Peroni, 20, of Altoona, a political science major at Penn State Altoona, said he has taken out federal and private bank loans to cover the full cost of his $6,000 tuition and other expenses per semester.

Peroni said he has some concerns about not finding a job when he graduates, but he’s prepared to take more than one job outside of his field of study just to pay his loans back while working toward a fulfilling career.

“I’d rather do something I love and be penniless than do something I hate and have security,” he said

This is a great example of the flawed thinking that student loans foster.

How you live your life isn’t a matter of choosing work you love and being broke vs. choosing work you hate and being strong financially.

The choices your children have to develop a fulfilling and satisfying life run much deeper than those two choices.

Here’s some ways you can help your children make good financial choices.

  • Teach them from an early age how money works
  • Teach them that a home is one of the only purchases where debt makes good sense
  • Teach them the importance of spending less than they earn so they can save a portion of what they earn
  • Teach them that success in a career is about a commitment to continuous learning… long after school is over
  • Teach them that working hard at adding value and making a difference in their work is the key to growing their income

The more active you become in teaching your children about money and work the more likely they are to avoid student debt.

You will be teaching them a valuable lesson in freedom!

Here’s the link to the article “Students mortgage future for higher education

Student loans defy logic and common sense

As you learn more about how student loans really work, you’ll find that the whole concept is backwards. It defies logic and basic common sense.

Frank J. Fleming captured that reality in a humorous way in an article recently at PJ Media.

He said:

“Now, I don’t like to use the word “crisis” unless people are actually running around the streets on fire and screaming, but this whole student loan mess is becoming a bit of a problem.

Student loans top both credit card and auto loan debt, and student loan debt is all held by an increasingly worthless group: college graduates. We give $100,000 loans to teenagers, people you normally wouldn’t trust with $100 loans…

…This student loan nonsense has to end.”

His article is definitely meant to be funny – while also pointing to the strange reality of student loans.

Here’s another poke at the student debt mess.

“In a sane world, if a teenager walked into a bank and said, “I would like a $50,000 loan to major in modern dance,” the bank manager would call security, who would then pummel the stupid kid, and everyone would end up smarter for it.

But what happens instead is that Uncle Sam walks by and says, “I like his moxy. Give him the loan; I’ll guarantee it. And I’ll make sure he can’t ever get out of his stupid choice through bankruptcy.”

So they give this giant amount of money to a dumb kid, and then the colleges are waiting outside, saying, “Hey! They’re giving huge loans to moron teenagers; we need to get some of that money!” So we have colleges preying on these gullible saps, increasing costs while their diplomas plummet in value in a complete mockery of our capitalistic system.”

One of the basic tenets of responsible lending requires the lender to do some basic evaluation of the ability of the borrower to repay the loan.

Not with student loans though.

They loan money despite the fact they know almost 40% of students never finish school. Not to mention all the data they have about the hardships many of their borrowers will encounter because of the student loans.

The article goes on to talk about the idea of not allowing a student loan to someone until they reach age 30.

He uses a funny analogy about why this makes sense. Check out the article here: solving the student loan problem.

The truth about what student loans really buy

Most people fill out the FAFSA form (at least in part) to find out how much of a student loan the government will “give” them… or to find how much the government will “give” to their child.

Oh boy! If it was only that innocent!

What the government, or a private lender, is actually doing is “selling” you something.

You are not buying an asset and using the loan to pay for that asset like a car loan or a home loan. (By the way, borrowing money to buy a car is not a real smart financial decision either. A little sacrifice up front and you can live the rest of your life without a car payment.)

Here is what student loans actually provide you:

  1. Access to classes at a school, and
  2. The ability to allocate more of your time to school rather than work

That’s what you get. And neither one of those is an asset.

  • Getting access to classes at a school doesn’t mean you will get an education
  • It doesn’t mean you will graduate
  • It doesn’t mean you will get a degree
  • It doesn’t mean you will come out of school with a job
  • It doesn’t mean you will enter the workforce with a skill that pays well

The debt only provides you access to the school and the classes.

An Inflated Lifestyle

The second thing you get, the ability to work less and, at least in theory, get through school faster, may or may not be a good thing.

One of the dangers here is that it makes it very easy to maintain a living standard that is much higher than you could otherwise live.

That’s one reason students make it out of school only to discover their student loans are harder to pay back than they originally thought (or hoped).

After they graduate and go to work they have to fund the same level of living they have become accustomed to while they lived off a portion of their student loans.

They weren’t living like a broke college student when they were going to school.

They were living more like someone who had a pretty good job and a pretty good income. Now the loan money is not there to fund that level of spending anymore.

They have to pay for it out of the money they earn.

And it puts a strain on their budget and leaves them with even less money available each month to service their student loan payments.

Now the Nasty Part

In return for getting those two things, you agree to sign their Master Promissory Note (in the case of federal student loans). I call that document the Nasty Promissory Note.

It has some of the normal provisions of most any debt… like you agree to pay the loan back including all the interest that accrues.

BUT, it also has some very nasty provisions that very few people know about… until it’s too late.

I’ll talk more about that in future posts.

The Real Education

Parents, take the time to educate yourself on what student loans really are.

They are not “financial aid”. They are not a gift from the government.

They represent hardcore debt and you should go to great lengths to educate your children why they should avoid student loans.

They will thank you later for caring enough to take action. :-)

The dangers (and the history) of student loans captured in one infographic

This is one of the most powerful infographics I have seen about student loans.

It provides a concise history of student loans and how they became such a nasty and onerous form of debt.

It includes tips for avoiding student loans also.

Please take a couple minutes to read through this infographic.

So that’s a brief, yet powerful lesson on student loans.

Parents, I encourage you to teach your children that student loans are not worth the risk.

You can help make sure they avoid the potential of ruining themselves financially by saving for their college and teaching them to stay away from student debt.

Please! :-)

Student loans make college tuition even more expensive

One of the discussions among those advocating for student loans is that the government needs to make low interest student loans available to “help students and their families better afford tuition costs.”

The problem is that student loans don’t make tuition costs more affordable.

In fact, it’s probably more accurate to say student loans increase the cost of tuition. It puts interest expense over a long period of time on top of the tuition costs.

Debt makes college tuition even more expensive than it already is.

And there are many voices out there that would say that the huge increase in tuition costs over the last ten years is at least partly a result of the government making student loans so easy to get.

A Student Loan is Not an “Award”

Here is a quote from an article by Janet Lorin at the San Francisco Chronicle on May 6, 2012

When Susan Romano first read her son Zach’s financial aid letter from Drexel University, a private college in Philadelphia, her eyes immediately jumped to the line highlighted in yellow: “$13,442 expected payment” for the first year at the $63,000-a-year school.

“At first, I thought it was great,” says Romano, an insurance claims representative from Huntingdon, Pa. “The more I read it over and over, the worse it got.”

It turned out the college’s “offered financial aid” included $42,000 in loans to be taken out by the family.

“A loan to me is not financial aid,” says Romano. “It is money I have to pay.”

Colleges try to make it sound so nice to be “awarded” a loan. Reality check – it’s just marketing lingo.

Taking on student debt is not an award.

If you can’t afford tuition, you can’t afford tuition.

Taking on debt to make the tuition payment doesn’t make it affordable.

A grant, or some other form of benefit that actually reduces the amount of tuition you have to pay, would make it more affordable. Providing you a student loan doesn’t.

Making tuition more affordable for you and your children is all about saving money, searching out grants and scholarships, choosing schools with lower tuition and a host of related activities designed to allow you to pay for school—not borrow and mortgage your future with student debt.

Zac Bissonnette on getting an education without student loans

Great interview on April 26 on the Daily Ticker at Yahoo Finance with author Zac Bissonnette.

Zac wrote the book Debt Free U. His newest book is just coming out. It is How to Be Richer, Smarter, and Better Looking Than Your Parents. I own his first book and will be getting his latest book as well.

Zac is a very sharp young man.

Here is a quote from the Introduction in Debt Free U.

“Throughout this book, I’m going to be letting you in on the strategies – some secret, others blindingly obvious but rarely discussed or put into practice – that will allow your student to get a great college education, a great degree, lifelong friends, and (this is the part that makes this so unique) a strong, debt-free financial foundation that will prepare your child for tremendous success in life.”

Here is a quote from the interview with Zac.

“Probably 10 percent of borrowers have essentially ruined their lives with student loans,” he says.

My view is the number of people ruined is more like 30%. And another 30% are harmed for having taken out student loans.

Either way, it’s a good reason to avoid student loans.

Or pay them off aggressively if you already have one.

Mixing education with debt is a recipe for trouble (deep trouble for far too many people).