Excited about my learning, freshman year in college, I relayed to my dad a version of economist Lord Keynes “paradox of thrift.”  Keynes postulated that although a healthy economy relied on people forgoing present consumption and saving for the future, if everyone did this the economy would collapse.  The paradox: if everyone saves, no one would be able to save anything.

“That’s fine Mike,” my Dad replied, never one for placing too much stock in academic theories.  “You can let other people apply that wisdom.  You save.” 

In this article I attempt to copy my father’s ability to abstract from a broader, perhaps true point, and apply a profitable lesson.  In that spirit, I want to provide you some simple principles that will allow you to make big decisions when it comes to student loans.  

Debt allows people to buy homes, cars, and yes, an education.  Debt is neither virtuous nor evil.  Like a hammer, a backhoe or a calculator, it’s merely a tool. It allows us to consume or invest today and pay in future. Student loans provide people the opportunity to bolster their “human capital” and increase lifetime earnings or even happiness in some cases. (People can earn plenty of money in America without attending college.)  This is evident in graduate and professional schools. It also applies to even the most general liberal arts education, provided it broadens the mind and builds basic skills.    

In my practice, I’ve seen student-loan inflicted damage in each category: undergraduate for a degree that didn’t pay off, a law degree that came at too high a price, and parent plus loans that debilitated a family.  I’ve worked with a career changer who borrowed money for a new career that never materialized.  I’ve also seen plenty of people use student loans wisely, secure educations they couldn’t fund in advance, and, as a result, live better lives.  

Big numbers grab attention, and much is made of the fact that outside of mortgages, the $1.6 Trillion* is student loans is the largest debt category, beating out, thankfully I might add, both credit cards and car loans. 

Some perspective is in order:

It’s true that half of those with student loans owe less than $18,000.  The payment is under $225 a month. 

By way of comparison, the average used car loan is approximately $20,000 with a monthly payment approaching $400. ** 

According to the Department of Labor’s Consumer Expenditure Survey, the typical 25 to 34-year-old headed household spends $300 a month dining out and another $200 on entertainment.

*Forbes Magazine, “Student Loan Debt Statistics In 2020: A Record $1.6 Trillion, Zach Friedman, Feb 3, 2020.

** lendingtree.com/auto/debt-statistics

In other words, the typical student loan is not damaging American families.

In my opinion, there’s a reason for the modest size and therefore burden of these bread-and-butter student loans.  It’s all the U.S. Government will loan undergraduates.

The large loans tend to fall in one of two categories.  The first is graduate and professional students, doctors, lawyers and business students.  They can borrow more and pay higher interest rates. While these numbers can be eye-popping, these bigtime borrowers are the least likely to default. Their big incomes repay the big loans.

The second is parent plus loans. These are not “student loans” but they do finance education, and they have serious interest rates.  The U.S. Education Department released data on these and, not surprisingly, they seem to finance largely private and specialty schools. 

So how can you apply this information to benefit your family?

First, understand the debt offer for what it is: a very generous way to finance a portion of higher education, including trade schools.  It’s not “aid” but a loan and must be repaid.  You are borrowing to improve human capital and lifetime earnings or happiness. 

If you’re not excited about school and don’t think you will finish, don’t take the loan.  Apple co-founder Steve Jobs quit Reed college for exactly this reason.  He wasn’t excited enough about the learning to justify the costs to his parents. He did just fine on the backside.

It’s not the big loans that do most of the damage. Borrowers most likely to default have the smallest loans.  They also didn’t finish school. It’s like having a car loan without a car.  A mortgage with no house. Don’t let this happen to you.

Understand the true cost differences between a state school—already financed with your tax dollars—and a private school, that must lean more heavily on your tuition to pay its bills.  Private schools dominate the big parent loans.  The federal loans are too small to finance the big tuition. 

Calculate the extra cost of the more expensive schools, determine the 10-year monthly payment on the required financing, and ask yourself if it’s worth it. (Don’t rule private schools out, as they often offer real aid to attractive students and this can put the cost on par or even lower than taxpayer financed schools.)

Be ruthlessly realistic about the earning capacity and career trajectory of the postgraduate you or your loved one.  Unless money is no concern, don’t attend a $70,000 school if you plan to be an educator. The financial stress isn’t worth it. Consider graduate school as trade school.  In my opinion, you should be confident that you can make the trade pay!

Separate the education from the experience.  One of the many things COVID clarifies is that the total cost of college can be separated into two parts. First, the actual education. The second is the experience that includes the housing, food and recreation fees.  For many, the experience is well worth the cost. Just be clear what it is. You may not want to finance fun with borrowed money.

I’ve hired two people who secured big educations at low cost. They remained at home and attended UCONN branch campuses.  They also landed great jobs and have fantastic careers.  I know that for sure. One is leveraging his degree. The other is now working in a completely different field and earning great money.  She does not have a burdensome debt load to repay.  Instead, she now owns her own house and has no problem paying the mortgage.

If you’re the parent, remember that students can borrow on their own credit—or even lack thereof—to get that sheepskin.  Nobody will lend you a dime for your retirement. You may want to prioritize your golden years over your child’s exploring years.  

Bottom line is that if money is an issue, you should treat education as an investment in human capital.  Be clear about what you are buying.  Get it done as efficiently as possible. Recognize that nothing worth having—education included---can be provided for free.  Be grateful that federal loans exist.  Use every dollar you can and plan to pay it back.  Take my dad’s advice and let the so-called “student loan crisis” be somebody else’s concern.

 
Michael Lynch CFP is a financial planner with the Barnum Financial Group in Shelton CT and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020. He can be reached at mlynch@barnumfg.com or 203-513-6032. CRN202212-275843

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