Thinking about debt

As seniors work through their final weeks of deciding where they'll go to college before the May 1 deadline, I want to acknowledge that money probably plays a big role in the decision and write some posts about financial matters.

Last week I talked about Return on Investment, and this week I want to talk about student loans. No matter where you go to college and how good a financial aid package you get, there's a really strong chance you'll be taking out some loans. For most high school students, thousands of dollars of debt is hard to imagine. And that's a problem for some. Because the numbers are so "unreal," some young adults can't grasp the ramifications of that much debt and borrow much more than they really should. Some have the opposite problem and are so paralyzed by the idea of student debt that they refuse to take on any loans--and therefore refuse to go to the best college for them or to college at all.

But most college-bound seniors are somewhere in the middle. They know that student loans are normal, but don't know how to think about them or approach them. So let me give you some guidelines (keeping in mind that I'm not a financial expert).

Don't panic. Every day you can find a new article in the news about the student debt crisis. You're told that student loans will ruin your own life and that of the whole national economy. It's tempting to decide you're not going to participate. I don't want to make light of the very real problems that millions of Americans are facing, but I also don't want you to panic. More than a third of those people struggling with debt are people who went to for-profit colleges, places like Phoenix or DeVry. They often took out private bank loans. Another two million or so of the borrowers you read about are over 60. So when you factor out these kinds of situations that don't apply to you, the landscape is a lot more "normal" than the news might make it seem in the headlines. Yes, you're taking risk, and things might go badly. But you should be comparing that (very serious) risk with the (very serious) risks involved with not having a college degree. For most people in your situation, it's worth the risk. 

You can't know the future. You don't know what the job market in your field will be like in four years. You probably don't even know what your field will be, considering how many students change majors or even schools. You don't know what the economy or unemployment rates will be like. You don't know if you or anyone in your family will have the same health as you have now. There is no certainty, so you have to make the smartest decisions you can with the limited knowledge you have. How do you do that?

Look at what's normal and adjust as best you can. We know that right now the average amount of debt that students leave college with is around $34,000. We know that, on average, your first year or two out of college you'll make around $20,000-$25,000, and that over the ten-year span of your student loan that income will grow to--again, looking at averages--$35,000 to $50,000. We know that if you're a woman you'll probably make less than men in the same job, which you should be angry and politically active about, regardless of your sex. We know that jobs in engineering and other applied sciences tend to pay much better than jobs in education or public services. So you can get a sense of what is normal and adjust for your expectations.

You can even get a fairly good estimate of what a normal debt load is for your particular school. This might be a good thing to look at before you make your final decisions.

Use the help that's available. If you're a high school senior going into college and doing things the usual way, then the debt you take on will be with federal programs administered through your college's financial aid department. This means there is lots of help for you to understand the loans you're taking out. Read all the pages of all the documents. Ask lots of questions. Look things up online. Here is where you should not be normal: be much better informed and in control than your peers. It doesn't change your risk significantly, but it will have you feeling better about that risk and managing it better.

Talk to your family. Like it or not, you and your family are in this together. Your family may be asked to co-sign loans, and they may be taking out their own loans to pay for their portion of your aid package. If you can't afford to pay back your loans and live on your own when you first graduate, it's your family you'll probably be looking to for help. When you panic, it's probably your family you'll lean on for support. So keep them in the loop, always. It doesn't make you less independent, it makes you more wise.

Update this process at least once a year. After every semester, you'll have a better estimate of where you are and where you're going. You'll have a better sense of your major and career path. You'll be aware of how economic forces in your family and in the general economy are shaking up. Go over the entire process each year, if not each semester, as if it's the first time. Things change, and that's as it should be. 

I can give a very personal example, even if it's a little dated. I spent my first two years of college at a small, private, liberal arts college. I got a lot of financial aid and had some scholarships, but I was also borrowing a fair amount. I didn't worry about the debt, because I knew that college is one of the smartest and safest investments you can make in the long run. But by the middle of my sophomore year, I was really sure that I wanted to be a public high school teacher. Which means that I knew those loans didn't make sense any more. Public teachers don't negotiate their individual salaries, and you don't get any extra for going to a "good" school. So I transferred to a state school in my home town and moved back in with my parents. Instead of borrowing $12,000 a year, I was waiting tables around 30 hours a week and paying cash for school. I was able to move out on my own before I graduated, and my first several years out of college I was making more money than most of my high school friends (though that stopped quickly--the school district had great starting pay but very tiny annual raises) and paying back fewer loans than them. I missed out on the small liberal arts college experience, trading that in for commuting to school and being much more transactional about my education. But after working for five years, I was able to go to grad school and get all that campus-life experience back. 

So to recap: don't be afraid; understand what's normal and work to get a deal that's not more expensive than that; ask lots of questions; readjust as necessary. Follow this advice and do it right, and you'll be all the more ready for other big scary risks down the line, like buying a home or starting a business.

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