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Good Debt?

by Shawanda Greene

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Last Thursday, I headed off to Ozio (a D.C. cigar bar) to celebrate the life of Michael Jackson over a couple drinks. Like a loser the independent woman I am, I went alone. Secretly, I was hoping the extreme Libertarian bartender would be working that night so that he could distract me from all the craziness that was going on. Fortunately, he wasn’t there. Instead, Mohammed the cute, aspiring anesthesiologist was on duty. At least there was one person I could talk to. The conversation we had urged me to finally write this blog post. I’ve been putting it off for a while.

Let’s talk about student loans.

Almost since I started reading about personal finance, experts in the field have been harping about how student loans are “good debt.” The only other types of debt that fall into this category, according to most financial gurus, are mortgages and business loans. We’re only going to focus on student loans, but I think the others are worth noting.

Back to student loans.

I’m sure you’ve heard the statistics that support the importance of an education beyond high school. According to Education Pays: The Benefits of Higher Education for Individuals and Society, the following benefits highlight the significance of a college education:

  • The typical full-time worker with a four-year college degree earns over 60% more than a worker with only a high school diploma.
  • People with advance degrees earn almost two to three times as much as high school graduates over their working lives.
  • Higher levels of education are closely linked to lower rates of unemployment and poverty.

Such glowing advantages have led some people to ignore the cost/benefit of higher education. Because student loans are touted as “good debt,” it’d seem as if borrowing money to attend college is perfectly okay. In many instances, it’s not.

Check out the message boards at ForgiveStudentLoanDebt.com, and you’ll find countless sob stories from people who are suffocated by student loan debt. Although I acknowledge that some times people are a victim of their circumstances, I cannot disregard the fact that many of these people crying about the onerous nature of their student loan debt made the following mistakes:

  • Failed to consider whether their chosen career path would generate enough income to repay their obligations.
  • Assumed they’d command a higher than average salary upon graduation.
  • Performed little to no research regarding the expected demand for workers with their skills and education.
  • Ignored the possibility that their true calling would end up being a much lower or no paying, e.g., stay at home parent, occupation than the one they got their degree in.
  • Dropped out.

It’s unfortunate that so many people can’t buy a house, save for a child’s education, or go on vacation because of student loan debt. However, the individuals I feel most sorry for are people like Mohammed. When I asked Mohammed if he wanted to be an anesthesiologist he replied, “I don’t have a choice.” A simple statement made by a complete, but attractive, stranger broke my heart. Refer back to the three bullet points on the benefits of higher education above. Is it possible that many debt ridden college graduates don’t have the option to pursue a lower paying, yet more fulfilling, career?

In The Case for Frugality, I expressed that freedom is the motivating force behind my penny pinching ways. Being saddled with student loan debt will certainly deprive you of your freedom. Student loan debt is special. Here’s how:

  • There’s no statute of limitations on federally backed student loans.
  • It’s practically impossible to discharge student loan debt in bankruptcy.
  • Your wages can be garnisheed and income tax refunds withheld for repayment of student loans without a court order.

I’m a strong believer in education: formal and informal. But I think it’s irresponsible to assume that obtaining a college education, regardless of the cost, automatically results in financial success. It’d also be irresponsible of me to hold out on the Income-Based Repayment option beginning July 2009. Don’t get too excited. This only applies to federal student loans, but it’s a start. Check out the video below.

Whether you think I’m cold and heartless or an absolute genius, I’m interested in your opinion.

Also, I’m curious to know how the higher educational system works in other countries. I’m only referring to the system we have here in the U.S.  Do you think the system we have is totally messed up?

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{ 1 comment… read it below or add one }

TheFinancialBlogger February 9, 2012 at 9:42 AM

I have a bachelor degree, a CFP title and a MBA so I would be a fool to say that education doesn't pay ;-) .

However, I think it is more related to which studies you do. If you do a Master in Art History, I doubt that you will make a good investment return on your tuition fees.

In today's worlds, "useful papers" as I call them are used to open your doors to employment. This is probably the only thing that can "guarantee" that you will find a job if you get laid-off. However, it doesn't meant that you will be making money either… be careful choosing your career path!

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