Student Loan Debt

I recently read that student loan debt is rising in America.  No big surprise since I am seeing the same thing in all of my financial counseling appointments!

There are two facts I want you to know about student loan debt.

  1. It WILL come due some day
  2. You can not bankrupt on student loan debt 

Yes, student loans will come due one day.  I financed my undergraduate degree.  I was able to pay some of it as I went along, but I still left Purdue University with nearly $20,000 in debt.  It took me 8.5 years to pay it back.  Do you want to pay payments on your education for 8.5 years or more?

You can not bankrupt on student loan debt.  There are two things that are non-bankruptable – taxes and student loans.  So if your plan was to go get a degree and then declare bankruptcy, you have a VERY BAD PLAN!

The median student loan debt of graduating bachelor degree recipients in 2004 was $19,300 according to the College Board.

Are your children going to have to finance their education as well?  If so, it will likely set back your child 5-10 years in achieving debt freedom.

I resolve to provide my daughter a paid-for college education and set her up to start out life with ZERO debt.  Life is just so much more fun when you are debt-free!

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  1. Andy on July 23, 2007 at 9:05 am

    Hi Joe –

    I’m sure you are well aware of those fun topics of opportunity cost, ROI, and TVM (am I bringing back any MBA course nightmares?!?) but wanted to provide the flip side as well to your readers…

    Depending on current rates and your financial situation, certain debt types (student loans and mortgages) can be used to your advantage. I’ll use myself as an example. I completed my MBA which cost approximately ~$50k (2 years of tuition fees). I had enough saved up at the time to pay for it out of pocket but at that time, rates were very low and I was able to borrow at 2.9%. If you figure that in some cases, student loan interest is deductible, then this is a steal! If I can use this money instead to invest at a higher rate (let’s say a safe CD at ~5-6% –> figure ~4% after taxes), then it’s basically a wash and the money is effectively free. Unfortunately, student loan rates have gone up since then so it may not be as applicable now.

    Same things applies to mortgage loans. I was able to borrow @ 5.25% fixed for 30 years. Again, mortgage interest is deductible so figure an effective rate of ~4%. If I am able to invest the money at a somewhat higher rate, then it makes sense to borrow as long as I can.

    Of course, you need to do your homework to see what makes sense (and this is assuming you are comfortable with taking the risk involved with investments).

    Again, just wanted to provide another perspective…keep up the great work Joe!

    – Andy

  2. Jamie on July 23, 2007 at 9:19 am

    I will graduate in December with $65,000 in student loans. Yeah, it’s a mountain in front of me, but it ain’t nothin’ that’s gonna hold me down. (Dontcha love the college grammar?) If it takes 8 years, I will pay it off. If it takes 15 years, I will still pay it all off. (I am thinking that I can tackle it in 5-7 though with a proper budget and priorities.)

    I will also begin saving for my child’s education as soon as that last payment is made.

  3. Moneymonk on July 23, 2007 at 9:47 am

    Joseph, I wish you were my Dad. !

    My Dad did not have a acct set up for me for college. But I still made it through.

    I can only now provide my daughter with an education fund

  4. Kevin on July 31, 2007 at 9:59 pm

    Hi Joe,

    You are lucky to have only been in debt for 8.5 years – most people with loans have far more and take far longer.

    I too went to Purdue – I am appalled that Purdue offers only one preferred lender with that lender raking in over 96% of Student Loans at Purdue. I am incensed that Purdue offers a “School as Lender” program (known by Sallie Mae as a private label program) whereby they deceptively tell students that they are getting loans through PEFCU when in reality, they are already subject to a forward purchase agreement and have been agreed to be sold to Sallie Mae – the same company that lent PEFCU the loans to make the loan in the first place.

    The Chief of Staff of the Governor of Indiana sits on the Board of Directors of Sallie Mae. If the Sallie Mae buyout goes as planned ($60/share), he will make over $10 million. Indiana Univ forces over 96% of loans to Sallie Mae, Purdue (a state school) and Purdue forces over 95% – coincidence? The Governor’s office appoints the trustees of each school.

    The Purdue Exec. Dir. of Financial Aid sits on the Advisory Board of Sallie Mae.

    Sallie Mae kicks back cash to Purdue to the tune of $2.8 million for Sallie Mae as preferred lender in the form of “opportunity funds” and in the form of profits through the “School as Lender Program.”

    Our alma mater is one of the worst abusers of the system. Only when lenders are forced to compete will the rates come down. Yes – the cost of education is out of control – but schools don’t have three corporate jets, CEO’s with $57 million salaries, personal golf courses – as does Sallie Mae.

    Purdue is at the heart of the problem – and I’m embarrassed – how bout you?

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