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On Student Loans (again)

July 1, 2008

Are they “good debt”? Is there such thing? I will provide you with the definitive answer! (Ok, it is just my opinion, as is everything here.) I still get excited when someone links to me. Someone recently (not SO recent, since this post has been hanging in draft state for awhile) linked to an older post of mine, where I argued that the federal government’s investment in my education was a good thing, for me and for them. She is considering student loans, and asking the important question: How much is reasonable? How much is too much? Everyone should ask these questions before borrowing, but unfortunately, not all do.

College students are typically young and not financially savvy, and commercials (used to) abound offering you “Up to $40k a year!” for school. It makes me sick when I see those. That is rarely going to turn out to be good debt. If you can go to college without student loans, that is quite obviously the optimal solution. If you can’t, (I think) student loan debt can be a great investment if and only if (iff for math geeks):

  • It is a reasonable amount for the degree and expected salary.
  • It has a reasonable interest rate (this typically excludes private loans). Canada also doesn’t seem to offer as nice rates.
  • It was needed to pay for college, not to fund an extravagant lifestyle while in college.
    • Disclosure: I took an undetermined amount of extra student loans to help fund my amazing study abroad experience. I did get a $5000 scholarship, but I’m sure I spent more than that. I’m not apologizing for that extravagance, even thought it doesn’t meet my own criteria. It was worth every last red cent!
  • Other options were exhausted: Savings, part time jobs, scholarships and grants.

Much traditional federal student loan debt really should be viewed on a different level than credit card debt (though current rate offerings are almost 7%, a little high). However, private loan companies jumped into the game and really mucked things up. If you have $100k in 12% interest loans for a degree that commands a low salary, it is hard to say that was a good investment (individual exceptions may apply, as well as non-financial benefits of college). If you have $10k in loans at 2.0% tax deductible interest (some people do have those crazy low rates) for a degree in almost anything, it probably was a good choice.

If you have student loan debt and it doesn’t seem to fit the bill of “good debt” (and you are a pf blogger or reader), you probably are paying it off quickly if you can (go FB!). If you have “good” student loan debt, such as Well-Heeled’s zero precent interest, forever loan, you probably are not (unless you do it for the emotional payoff, which is fair). Mine is more good than bad, but not as good as others. It is at 4.5% (tax-deductible) for about $20k, commanding me almost $70k early on in my career (inflated due to high cost of living city), and more later. If I had extra money, I might pay it down, but I use my money for other priorities. I’m maxing out my 401k before I’ll pay extra on that loan. (It also will be at 0% from this September for about two years.)

I’ve heard anti-debt militants people argue that you should save up, pay as you go, and take extra time to graduate. That is certainly an option, for those of you that it suits. Financially, I doubt I would have come out ahead doing this (how much could I make with no degree?), and personally, it would have (to put it eloquently) sucked. It is an option, but not one that I was interested in.

Some other student loan information:

  • From Get Rich Slowly, A rough guide to Student Loan repayment, guest post by me, geared towards those who just graduated and don’t know what to do (one year old). I wrote this because it is the info I wish I had the year before.
  • Check out finaid.org: My favorite resource for federal loans.
  • If you are considering consolidation of older variable rate Stafford loans, the rate has reset! Current rates for those longer out of school is 4.21%, and in the grace period, a nice 3.61%. Consolidate now to lock in those rates!
  • For balance, a post on why student loans aren’t good and advocates paying as you go, even if it takes you 6 or more years.
  • There are a lot of different ways to get a degree. Here is an interesting article about someone getting a technical certification to earn more while they pursue a degree.
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5 Comments leave one →
  1. July 1, 2008 8:24 am

    Thank you for this post. It really is great consideration of student loans, and with the costs of college very few people can get through school without loans. When I was considering going back to school for an advanced degree, student loans stressed me out more than I would like to admit.

  2. tom permalink
    July 1, 2008 9:27 am

    Stafford loans through private banks are a great way to get amazing incentives on interest rates and principal reductions. For example:

    Navy Federal Credit Union (if you qualify as a member) is offering .25% rate reduction for auto-payments, and a WHOPPING 2% rate reduction after 24 months of on-time payments. That brings your rate down from 6.8% to 4.55%! On top of that, interest is tax deductible.

    NFCU is just one bank that offers great incentives, other banks such as Regions Bank out of Missouri offers 7% principal forgiveness after a certain amount of on-time payments.

    Lots of good stuff out there…

  3. July 3, 2008 3:13 am

    For me, my rule of thumb has been: if I can clear it in the time it took to get it or less, then my ROI (return on investment) was peachy keen.

    If not, it wasn’t worth it – which ties into your whole job/salary expectations bit.

    In Canada, we have tax deductible student loans, but once you graduate they murder you on the rates (7.75% – 8% was what I paid on my $30k loan from the government)

    Great post – am linking this later.

  4. July 5, 2008 7:59 am

    I don’t think I could have made it through college in four years without student loans. Although I saved like crazy in high school, the money just wasn’t there.

    What a lot of students don’t think about: If you have a subsidized loan (government pays the interest), the loan doesn’t cost you anything while you are in school. Take the loans, and vow to pay them down before graduation.

    I made it my goal to work at least 15 hours per week in college, and paid back $15,000 in student loans over 4 years. It sounds awful, but it really wasn’t! Over the four years, I set aside about $300 each month. I graduated with $8,000 in loans instead of $23,000. If you can’t stand the workload during the semester, at least get a summer job.

    If I had to do it over again, I would make one small change. I would have stuck that $300 each month in a SAVINGS ACCOUNT, and earned interest over the 4 years. Then I would have made a lump-sum payment after graduation. Live and learn – I’m encouraging my cousins and niece to do the same thing.

  5. July 9, 2008 4:00 pm

    @FB – Your debt was a good investment in yourself, for sure, yet is still the type of “pay it off quickly” debt because of the rates. Not a bad investment, but not “good debt”, at least by my humble definition

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