Student Loan Borrowing: We’re on Dangerous Ground

By Joe Messinger, CFP®

March 18, 2022

3 min READ

We’ve been seeing a dangerous trend. Students entering college are completely ignoring their impending student loan debt. They believe the proposals of several presidential candidates in past elections will actually become fact–that their student loan debt will magically go away.

Realistically, we’re skeptical this will happen.

Student Loan Hero recently shared the thoughts of four student loan lawyers. The government would have to come together in an extremely rare show of cooperation to make that happen, and the government relies on the income of student loans.

Student loan debt is the single largest financial asset of the US government. A sound financial plan cannot be created on political promises. Student loan borrowing levels cannot be ignored.

Future Me

Too many students we talk to believe it doesn’t matter how much they take out in loans. They believe the loan will go away. They really don’t realize what their future will look like with debt factored in.

We can’t really blame them. 18-year-old students don’t have much financial experience. They don’t know how adult finances work. We have to teach them. We have to sit down with them and go through what their future budget will look like.

“I’m going to college in order to make more money.”

Yes, statistics have shown that college graduates earn $1 million more in their lifetimes than their peers who only graduated from high school. But factor in an $80,000 student loan, and a student is looking at an $800 monthly loan payment.

Suddenly, the picture is not so rosy.

How will they pay for housing? Get married? Have children? Save for retirement?

The key is understanding and smart choices. Students need to understand what their “future me” will look like factoring in a monthly loan payment and their anticipated starting salary.

They also need to understand the reality that federal student loans are not going to go away. You currently can’t discharge them through bankruptcy. A “future me” without smart choices BEFORE starting college can get dicey.

When the dream becomes a nightmare.

A growing number of adults with careers and children have decided that they are not paying their student loans. Their past decisions have come back to haunt them and will continue to do so into their futures.

I recently spoke to a 45-year-old with a PhD in Tibetan Studies that had over $225,000 in loans. A worthy and needed area of study with amazing culture and history, but at what cost?  Her annual salary is good but is not enough to pay the $2,500 per month on the loans.

Plus, she has two children to take care of. If she does an income-based repayment plan of nearly $900 per month, she will need to continue to make payments for the next 20 years. Instead, she chooses to be in default and accept the phone calls and letters trying to collect payments that she can’t make. It has profoundly impacted her personal life and is heartbreaking and sad. You don’t want this future for your children, which means that careful planning before they enroll in college is critical.

The danger lies in bad choices.

Is the college your high school junior or senior looking at too expensive? Is the advanced degree worth it? What is the return on investment?

For example, medical school can at least have a predictable income expectation. Spend a lot upfront, but earn enough after to make up for it.

Tibetan Studies? Not as much, even if the field of study is needed, noble, and fascinating.

Misguided student loan borrowing without a reasonable picture of what the future salary and job prospects could look like is dangerous.

So, what do you do?

Parents and students need to understand the impact of their choices BEFORE committing to a college and a major.

• Parents and students need to have a college money talk before starting their college search.
• Investigate future job growth potential on the Occupational Outlook Handbook from the Bureau of Labor Statistics.
• Use a web page such as www.Salary.com to estimate a future first job salary.
• Limit any total student loan debt to equal that amount.
• Choose a college carefully based on the aid they can provide and the final cost to you. Leverage our free College Money Report™ to compare financial aid opportunities and the net cost of the top three schools on your student’s list.
• Understand how to pay for all four years (or six if a graduate degree is required) before choosing a college.

Now, we don’t mean that your future career and college decisions should all be made based on future earnings, but the realities cannot be ignored. Being equipped with knowledge can help along the way. For example, valuable experiential learning experiences (jobs, co-ops, internships, research) along the way in college will make you more attractive and in demand to an employer. You just need some extra planning.

The truth is the government will gladly continue to issue student loans. Colleges have no motivation to keep costs in check yet. The only way to fight back is to learn all you can and plan. Make educated choices. Think about that “future me” before entering into misguided student loan borrowing which leads to a nightmare.

Updated March 2022