Are Student Loans Good or Bad?

by mike on July 14, 2011

I often spend time discussing credit card debt and the problem with living beyond your means.  I would guess that most of you reading this would agree that credit card debt is a bad idea.  The giant elephant in the room that no one will acknowledge, however, is student loan debt.  It blows me away the amount of student loan debt that some of my clients have.  After much reading, much thought, and working with many clients, I have concluded that student loans are just rarely a good idea.  Let me explain.

1)  You cannot bankrupt student loan debt.

One of the questions I most often get from clients is if they should declare bankruptcy.  Very rarely do I recommend that (for multiple reasons I will address in a different article).

Declaring bankruptcy wouldn’t do much good for most people I talk to anyway.  The reason: often most of their debt is student loans.

Since you cannot have student loans discharged in bankruptcy, it wouldn’t gain you much.  For example, if someone has $50,000 in student loans and $5,000 in CC debt, declaring bankruptcy would only wipe out the $5,000.

2) It stifles your freedom.

The lack of choice in your life from having tens of thousands of dollars in student loans is staggering.  It could affect the city you choose to live in, the career path you take, when you get married, and even when you decide to have children.

According to several different surveys, having to pay back student loans  has forced people to make tough decisions they would not have had to make had they been student-loan free.

In fact, a recent survey showed that only one in five working mothers with minor children said that working full time was the ideal situation.  It is extremely sad to me to think that 80% of working mothers would rather work less and be with their kids more, but having to pay back student loan debt is keeping them from doing so.

Giving up that much control of your life for any reason (not to mention debt) is really scary when you think about it.

3) The opportunity cost will blow your mind!

Something people in the world of finance often talk about is opportunity cost.  It is the concept of spending money on one thing prevents you from spending or investing that money on something else.

For the purpose of this article, let’s take a look at the opportunity cost of making payments on student loans.  The average student loan payment is roughly $200 per month for about 20 years.  If you, instead, invested that $200 per month in good growth stock mutual funds for 20 years and then stopped, you would have approximately 1.5 million dollars at retirement age (65).

I don’t know about you, but where I come from, that is a lot of money!

I don’t want to give the impression that I believe a college education is a bad idea or a bad investment.  Doing it with tens of thousands of dollars of student loans, however, is.  Many people make the mistake of thinking that they will make way more money when they graduate than they actually do.  They use the false idea of future income to justify large student loans.  I have grown tired of seeing people’s lives still torn apart ten years later because they were fed the myth that having large amounts of student loans was not only acceptable, but smart.  Sitting across the table from crying wives and frustrated husbands who have lost all hope with their finances has convinced me that student loans are neither smart nor acceptable.

Source For Content: Debt Free U

Photo Source: Our Lady of Disgrace

Previous post:

Next post: