How Much Student Loan Debt Is Too Much?

The state of the economy over the past few years has called into question our cultural love affair with debt of nearly all types. The once unassailable notion that home mortgages in nearly any type and in almost any amount were “good debt” has all but crumbled. A mailbox stuffed with credit card pre-approvals – once seen not only as evidence of a sterling credit rating but also as a symbol of our status as solid citizens – is now considered a temptation on a magnitude not seen since the infamous apple caper in the Garden of Eden – resist we must! Could student loan debt be next?

Reversals in the job market and collapses in asset values have all served to bring home a point that seemed to be virtually ignored in recent decades: debt has to be paid back!

As had become our happy little way, debts were seldom extinguished outright by full payoff in the time honored way, but rather by rollover, consolidation or the sale of the securing assets. When those avenues are exhausted we’re left with two unpleasant options – payoff or default. OUCH!

Not all debts are created equal

How Much Student Loan Debt Is Too Much?
How Much Student Loan Debt Is Too Much?

But what about those most sacrosanct of good debts, student loans? What have we learned about those, or have we learned anything?

Placing the Blame as Students Are Buried in Debt (Yahoo Finance via New York Times, June 1, 2010) reported that students and “their families made borrowing decisions based more on emotion than reason, much as sub-prime borrowers assumed the value of their houses would always go up.”

The article focuses on the plight of a young woman whose carrying $97,000 in student loans but has been unable to find employment in her major field of study since graduating from New York University in 2005. While this might seem to be an extreme example, it goes on to report that “10 percent of people who graduated in 2007-8 with student loans had borrowed $40,000 or more”.

I’ll go a step further and say that those numbers understate the problem since college related indebtedness frequently originates outside of direct student loans, in the form of credit cards and second mortgages taken out by parents to cover some of the costs of educating their children. Students themselves often leave college with substantial credit card debt used for expenses not covered by student loans themselves.

OK, we can all agree that student loans aren’t like other debts in that they can facilitate the preparation of young people for survival in a complex world; but does that mean that they operate outside the realm of economics or the limits of good sense?

There are three rarely discussed aspects of student loans that make them potentially very dangerous debts to have:

  • they’re unsecured
  • they’re long term, and
  • they generally can’t be discharged in bankruptcy.

Now if you land in a well paying job related to your degree right after graduation you may not give these caveats much concern. But in the highly uncertain employment environment we’re in now – and have been for the past several years at least – should we be paying as much attention to the pitfalls of student loans as we now see as only obvious with excessive credit card debt and no income verification and sub-prime mortgages?

The entanglements listed above are complicated by the fact that there are few qualifying safeguards in place with student loans – a student can borrow almost as much as needed, and do so without any form of qualification. They’re loans based exclusively on the borrowers future potential – isn’t that the same mindset preceded the mortgage meltdown?

It’s usually not until after the fact, when problems have clearly manifested themselves, that we see what was plainly staring us in the face all along. Only then do we ask ourselves the oxy-moronic question “what were we thinking?”—oxy-moronic because we weren’t thinking at all!

What are your thoughts on student loan debt?

Here are some questions for you…

  1. How much student loan debt is enough? How much is too much?
  2. Should there be some sort of metric to limit how much money a student and their family should borrow in order to finance a college education? With mortgages for example, the rule of thumb for decades was “28/36”—primary monthly housing expense should not exceed 28% of stable monthly income, primary monthly housing expense plus other recurring debt should not exceed 36% of stable monthly income. Should there be some sort of limiting guideline in relation to student loans?
  3. Have we reached the point of diminishing returns on a college education, that the state of the economy and of the job market no longer justify the cost of attendance at many colleges?
  4. Have student loans been driving the explosion in college costs, fueling a non-stop Catch-22 we’re bound to lose?
  5. Are there alternatives to high cost universities and high student debts that could be considered?
  6. Is it possible that student loans are acclimating college students to a lifetime of indentured servitude?

Am I off base with these questions? What do you think?

( Photo courtesy of bensonk42 )

24 Responses to How Much Student Loan Debt Is Too Much?

  1. I would say that #’s 3, 4, and 6 describe my thoughts! Just like with the price of housing and cars, the costs of education have skyrocketed because we are now paying for them with debt. At one point in this country, entry into college was an exclusive thing. Even if one was intellectually able to get in, they couldn’t afford it. We are at a point now where everyone is expected to attend college and a 4-year degree means nothing – it’s what a high school diploma was in the past. I think that many people who borrow money for their education face a shock when they enter the job market and receive low-ball (in their minds) offers! For many – especially those without a specialized degree – it will mean working outside of their desired field, earning less than expected, while paying the minimum amount on a student loan and being a debt slave for many years!

    A good alternative would be to focus on a trade beginning in high school if possible, or if college is desired, work and save until they can pay for the degree!

    You know it’s bad when the “trade schools” begin to offer 4-year degrees and even graduate degrees!!! Just look at Devry and Kathryn Gibbs!!!

  2. It makes you wonder if in a few years if a college degree isn’t enough, what will we be asked to pay for in it’s place?

    I worked my way through a local state college, as did a lot of people at the time, and when you do that there’s natural inclination toward thrift. I somehow doubt that’s the case when large amounts of money can be easily borrowed. Just as with houses and cars, anything that can be financed can easily can be overbought. Should anyone be paying $200,000 for a four year education for a field that averages $50,000 a year?

  3. One other thing you don’t mention is that many of the kids taking out huge student loans are getting degrees with little commercial value. They have no idea how their poor choices as 17/18 year olds will dictate many aspects of their 20’s and even early 30′ as they struggle to pay back debts.

  4. GN – We’re in a mania phase when the common mindset believes that any degree is a good degree.

    As I pointed out in the post, one of the dangers with student loans is that they’re long term; if you leave your career field after a few years for what ever reason, you still have debts to pay for the career you’re no longer in.

    How consistent is long term student debt in a world that’s increasingly absent lifelong careers?

    My own thinking is that it’s one thing to take on debt to finance a medical or law degree–something where we know the long term prospects are strong. The issue really centers on more generic degrees like business and liberal arts. A $50,000 student loan is a heavy burden when you’re making $40-50,000. I think we may have gotten a bit casual about that.

  5. I remember when I went to college, all you ever heard was that student loans are “an investment”. Of course, rationale on an investment is that you put money in and expect a return on that money that satisfies you.

    Tha challenge is that college has become such a highly leveraged investment that the margin for error is razor thin. Whether you believe a student loan is an investment or not doesn’t change the fact that it’s a liability that must be repaid. I personally believe that those who take out student loans (or any type of credit) don’t do any risk analysis. We don’t ask ourselves, “What’s the worst that could happen and would I be able to get by if it does?”

    To question #1, I believe that a student loan that can’t be repaid within 18-24 months of graduating on entry-level income is too large. There are absolutely no guarantees of future income, and yet we use that to justify huge loans. Instead, operate by what we can better estimate – what would be earned after just getting started.

    T0 question #3, I believe college degrees have been commoditized to a certain extent. In the business world, the line of thinking is that you have to get an MBA to stay competitive. So, everyone and their brother will get MBAs. Pretty soon you’ll need a Ph.D. However, those that earn the most are the ones that produce the most. I think we’re seeing a shift back toward productivity rather than educational pedigree. This will probably break the back of the entitlement thinking many of the graduates in the last ten years have had. Signs are pointing toward entrepreneurs being the ones that thrive in the days ahead – degree or no degree.

  6. Derek – We should ALWAYS be asking ourselves “what’s the worst that can happen?”–in everything we do.

    In the 1990s and early 2000s no one was asking that question in regard to housing and mortgages. When the level of implied certainty reachs a level that no one questions the outcome, we’re ripe for a fall. But again, we get back to the sticky issue that student loans can’t be discharged in bankruptcy. People could walk on their mortgages and even credit cards when things got tight, but what do you do with these???

    I like the 18-24 month payback idea. Mortgaging your career–tying a long term debt solely to your income–is worse than mortgaging a house because you have nothing to sell if you want to get out from under.

  7. Thought provoking post, Kevin. I graduated from a private college with $56k in debt! And while it is a lot of money, I am extremely happy I attended. I guess it comes down to what knowledge and experiences the student takes away from the college.

  8. It’s a really great question. Students are borrowing in advance of completing a degree or having any idea what the job landscape is going to be like when they have finished.

    One suggestion is to really, really consider what you’re studying and what the realistic financial situation is going to be. And to choose a college that offers something in the way of financial aid that doesn’t have to be paid back, like work study.

  9. It’s terrible that people have to start off in life with a huge amount of debt from education. I had about 8k in private loans that ballooned to almost 30k from interest capitalizing on the principal. Stay away from those loans if you can.. work a part time job or go to a really affordable college for the first two years… if you are in the boat already.. get a part time job and put large amounts towards the principals to knock them down as quickly as possible.

  10. Payback & Tia – You’re both advocating something that was common until a couple of decades ago, which was working your way through college. That’s what I did. The concept seems extinct today. The other thing is that there seems to be an “all or nothing” approach to college, that is, people want the best school, to live on campus, and to give 100% of their time to schooling, rather than some sort of work/study or compromising on a close to home or less expensive school.

  11. I was one of those starry eyed 18 year olds who believed nothing could stop me and no was just not the right answer. I wanted the best and when I got into a college that was very difficult to get into the 35k loan I took out each year I attended seemed like nothing, I will pay it, then my father passed away I had to move home, I became confused on my choice of major went to school again had another 25,000 loan…and then I had to move back home to help my mother with the house. Now Im nearly 100k in student loan debt at 25, with no degree and I am so so so stressed about it I dont know where to turn. My whole life everyone told me you have to go to college you have to go to college, tv, the media, my teacher, but I obviously wasn’t mature or even grown up enough to be making those decision yet. I feel like wanting to get an education has ruined my life and its so hard to ignore.

  12. Joey – Your first line captures the student loan mentality perfectly. It’s pretty typical of the thought process, and not reflective of any shortcomings on your part, as you said, the whole system cooperates in moving you toward debt. The thinking is based on emotion, not logic.

    I’m sorry for the situation you’re in, but maybe what you’ve written will be considered by others as a possibility of what could go wrong with a situation where most think nothing can go wrong.

  13. Demonstrating students today have every right right to be outraged. All of us should be – because of the student fees, instead of the brightest kids only the richest kids will get the education. That’s to all our detriment.

  14. AG – That’s an interesting point. It may be that we’re returning to the days when college will be only for the wealthy. All the borrowing has driven the cost so high that even borrowing enormous amounts of money may not be enough any more.

  15. Kevin – this is a fantastic article, and I thank you for it. Having graduated in 2007 with almost 100k in student loan debt, I am only now “getting ahead”, while still accruing graduate loan debt.

    My question is this – would it be a smart idea to purchase a small condominium to make good of the rent money I am otherwise “throwing away”, or use the cash that would serve as a downpayment, as a major payment towards the loans?

  16. Hi Jarett, thanks for the compliment. As far as buying a condo–that’s really a matter of opinion, but here’s mine. You already have a very significant amount of debt, so I don’t know what would be gained by going deeper in for the mortgage on the condo. I would think that the cash you have for the down payment would be better used as either a) a cash cushion, since you have so much debt, b) to pay any high interest debt apart from the student loans, then c) to pay down the student loans.

    That’s just an opinion, as there are a number of ways to deal with debt. But over-riding all is not taking on any new debt when you already have a bunch. I don’t know if that helps your situation, but it’s just a personal opinion.

  17. Kevin – Great article. I’m debating taking the plunge right now into student debt. I don’t have any debt left from undergrad, but am about to take about $150,000 out in loans to pay for college. The number is really scaring me and I’m trying to think logically about it instead of emotionally as others have said. It seems like I am going to be in debt for the rest of my life to pay it off. I think you are right with question #6. Is it possible that student loans are acclimating college students to a lifetime of indentured servitude? I completely agree and think taking out these loans is going to make me an indentured servant for the rest of my life. I think a lot of people graduating these days aren’t realizing just how much money these loans are, and just how long it’s going to take to pay them back.

  18. Hi Michael–Another variable is the economy. If things are getting better it’s happening very slowly and extremely unevenly. You also have to assess where you think the economy will be long term, ie, will there be a strong enough economy to support high enough salaries to even pay back the student loans back. It looks as if a lot of people are getting caught in that trap these days. There’s risk in everything you do, but $150,000 sure sounds like a lot of debt. You said you already have an undergraduate degree? Is the 150k for grad school???

  19. By the time I had been through college and grad school, I had racked up only 20K in student loan debt. I was able to pay that off relatively quickly compared to others.

    I think a major item high school and college students may overlook is the income potential for the careers they want to pursue and how that will impact their debt repayment. When I was in college, no one sat down with me and said, “OK, this is the amount of money you can basically expect to see in the career you are choosing.” I didn’t think to ask the question either. More education is needed on the front end to set the expectations for the students. That’s one reason I enjoy teaching personal finance at the high school level.

  20. Hi Brian–I suspect a bit of foul play, or at least runnawy self-interest, in the lack of enlightenment by the schools. Financing is the life’s blood of the college education industy (make no mistake – that’s exactly what it is, an industry). They have nothing to gain, and much to lose, by cluing students in on exactly what they’re signing up for. Conversely, the schools have everything to gain and nothing to lose by enabling – by their silence – students to borrow as much money as possible. After graduation, the loans are the student’s problem, not the school’s. Talk about a hornets nest!

    BTW, if you got out owing “only” $20k, that’s really good by todays standards. That’s basically a car loan. The real problem is when student loan debt looks like an unsecured mortgage. Where do you go with that???

  21. Working in printing, which is a declining industry, I am looking at going back to school in my late 40’s.
    It’s astonishing to me how high tuition is at a “good” school vs. community colleges. The same accredited online Associate degree ranges from $8,100 – $42,000. When I consider my return on investment with 15-20 years left I the workforce, I can’t justify the high end of that scale.
    I believe the first job I land may rely on perceived quality of the institution, but after that the person, not the school, will advance my career. The company I cuurently work for will reimburse up to $4000 a year and I hope not to exceed that by much.
    I think people get caught up in what school, instead of what schooling, they’re paying for.

  22. Hi Joolie–I don’t know what your background and skills are, but if you’re going to invest that kind of money in an education, might you be better off investing in a business instead? You’ll probably be 50+ by the time you finish, and you have to ask how will employers see you as a 50 year old rookie in the field? With a business, you can carry it into retirement then sell it for retirement capital when you’re ready to ride off into the sunset. It’s just a suggestion.

  23. Kevin, bottom line is that there are no guarantees a degree will get you a job when you finish your studies. Things have changed and parents need to change along and try to figure out ways to educate their children without creating debt for themselves or the student. Financial aid (scholarships) and grants are still available for certain career choices and a decision needs to be made about the ability of the student being able to fulfill the career requirements. Personally I believe in “paid” internships that lightens the financial burden while learning a new career or testing one out. As budgets either dry up or get reduced, students no matter what age are now facing more of the financial burden while pursuing an education. On the other hand we have the students that never seem to leave school and they are draining the system for other students that may just need to get a 2 year degree to begin with. I use to see students going after multiple degrees in several majors while getting the FREE money to do so. We call them “professional” students as they get to pocket the left over money. But I cannot get mad as the welfare system is the same. It is time that these systems are audited and changes made. I remember students from overseas (non USA) were attending university classes for their Phd’s for FREE while USA students could not afford to do the same. I am so glad I am no longer working at a university as it got harder and harder to look the other way. Sorry, but if you are going back to your country it is so unfair to come to the USA, get a free ride and then go back to your country. I see years down the line when we will have to import “skilled” labor due to the USA not taking care of their own students. So many high schoolers will not be able to attend college/university due to the lack of funds and financial aid. Parents need to get loud about this injustice and force changes. Great post as usual Kevin.

  24. Hi Angela – I’m a big fan of two year colleges. They’re less expensive and you can cut out with a two year degree after two years. If you drop out of a four year school after two years, you’ll have nothing to show for it. I also think we need to get back to work-study. A degree in most fields is close to useless without relevant experience to support it. I think that’s been lost, and it has a lot to do with high rates of unemployment among recent college grads.

    The whole mentality needs to change, but that could be decades in coming, so it’s up to us as individuals to make the right choices, no matter what the cultural norms are. I like the Wall Street saying, “the herd is usually wrong”. Sadly, that doesn’t usually become apparent until some sort of disaster sets in, and by then it’s too late. That’s what’s happening with student loan debts, one graduate at a time.

    I’d like to say that most students are making a mistake of ignorance by borrowing too much money to finance school. But I think most of them have some idea that there will be trouble at the end, but ignore it in favor of the desired goal. Example: when I went to college, most students commuted to school, and held jobs. Today, most students live on campus, and far fewer work. How they can possibly think that combination won’t cause problems later is beyond me, in a world where there is so much information out there about this subject.

    No matter what you do in life, and no matter how good it may seem on the surface, you ALWAYS have to assess the cost. I think that step is missing in too many activities these days.

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