Markets & Finance

Student Loans: A Bitter Financial Lesson


Borrowing to get academic degrees looks to have been a risky investment for a generation of students mired in debt and facing a jobs shortage

Where I grew up, it's in bad taste to talk about your personal finances. But with the financial woes of governments, companies, and ordinary people making headlines just about everywhere you look these days, it's about time we had an honest discussion about the great big money mess of 2009.

So let's talk about student debt.

For me, it was necessary to go into debt to get an education. In my undergraduate years, I tried to accrue as little debt as possible. I worked two jobs while maintaining a full course load at University of Wisconsin-Madison. But when I was accepted to New York University to study business journalism last fall, I faced a real hurdle. How was I going to pay for it? I had no parental support and I was going into a professional degree program, for which there is little funding available from the university or other sources. With numerous hands eager for a slice of the financial aid pie, chances are slim that you'll get a piece.

A couple of months before I moved East, I examined my finances. I had two options: first, not to go to grad school; and second, to fund most of my education with student loans. NYU ain't cheap. My tuition runs upwards of $15,000 per semester.

Most graduate students borrow tuition

I was fully aware of the consequences of going tens of thousands of dollars into debt to pay for school. But with no alternatives, I took out the loans. With the stroke of a pen, I indebted myself to Sallie Mae over what today feels like an eternity. (It's actually around 10 years.)

Now multiply my experience by millions. As college tuitions rise, so too, do student debt loads. The average yearly cost of a private four-year college in 2008-2009 was $25,143, an increase of 5.9% from the year before, and $6,585 for a four-year public school, up 6.4% from 2007, according to the College Board. With tuition levels as high as they are, many students have no alternative but to fund their schooling with loans. The percentage of graduate students borrowing money for a master's degree in 2007-2008 was about 55%—86% for those seeking a professional degree, according to the National Postsecondary Student Aid Study (NPSAS).

That's just one part of the story. Students are carrying credit cards to meet other expenses. In 2008, 84% of undergraduates had at least one credit card and half of all college students had four or more cards, according to the Project on Student Debt. Of course the study doesn't say who makes the payments on the plastic, the parents or the students. But with the average outstanding balance on graduate student credit cards sitting at about $8,000, the debt burden carried by young adults can be debilitating.

For Meghan Sharp, these statistics are all-too real. The 29-year-old graduate student in landscape architecture at University of California-Berkeley funds 100% of her $11,000-a-year tuition with student loans. On top of that, she carries about $18,000 in credit card debt. Sharp got her first credit card when she was 18 while a freshman at William Jewell College in Liberty, Mo. Matriculating students were given information about on-campus resources, university paraphernalia, and an unexpected lesson in personal finance: a credit-card kit.

Still paying for long-gone items

How convenient. It's situations like this—credit card companies plying their wares to people who typically don't have jobs or substantial assets of their own—that should inspire fury in twentysomethings. It's part of the reason why so many of us carry so much debt. My first credit card, which I applied for during my sophomore year in college, was sent to me by the UW-Madison alumni association. Madison mascot Bucky the Badger smiles at me each time I buy a plane ticket home.

For Sharp, the available credit has been dangerous. She says she's probably still paying for things she bought when she was 22—things she no longer has. She also knows her decision to live by herself last year, paying $1,200 a month in rent, hasn't helped. "I will probably try to find a roommate or a cheaper place this fall," she says. "I guess this falls in the category of changes I'm making to deal with my debt."

To be sure, students should also look in the mirror when searching for someone to blame for their credit problems. Many make questionable choices. But not all students accrue debt to maintain comfortable lifestyles. Katie Fleischman, a third-year doctoral student in educational and counseling psychology at the University of Wisconsin–Milwaukee, faced extra expenses when she considered attending graduate school. As a survivor of malignant bone cancer, the 28-year-old had to pay $800 a month to extend her health insurance coverage through COBRA. To fund her coverage, tuition, and living expenses, she borrowed more than $20,000 during her first year in graduate school.

Unlike many twentysomethings, she couldn't forgo medical coverage. "Being a cancer survivor, I had to continue my coverage. But my health would have had to outweigh my education," she says.

Degrees lose investment value, too

Ultimately, the reason for putting yourself in hock to Sallie Mae or other student lenders is to obtain the grail: an undergraduate or graduate degree. It's an investment in your future—the ticket to a comfortable existence.

Just look at how most investments have been performing lately.

Everyone from our college professors to our financial aid officers assured us that student loans were "good debt" because our educations would be long-term, steadily appreciating assets—unlike, say, a car. But if an education is an investment that appreciates, there should be the prospect of a solid return.

Instead the mountains of student loan debt have an unsettling parallel to another one-time boom market: real estate. Like those who took out big mortgages to fund their "can't miss" investments in pricey McMansions—only to find those homes suddenly dropping in value—those of us who took out student loans to pay for pricey degrees now find our prospects of securing well-paying jobs with comfortable lifestyles shrinking every day.

I've accepted this reality. But if I sought an education to add value to our society through my work as a journalist, I'd like at least to be able to pay off my loans with a reasonable interest rate—not the 5% to 8% I face today. (The Federal Reserve is currently lending money to the no-doubt-deserving likes of Goldman Sachs and Morgan Stanley at around 0%.)

And I'd like to believe what a professor recently told me, as I sat in his office appealing for more financial aid: My master's degree will ensure that I'll get a well-paying job and my loans will pay for themselves.

But that's not looking likely, especially in my chosen field. There's no certainty that I or my classmates will get jobs, especially well-paying ones.

As bailouts are doled out left to right, and stimulus packages are unwrapped to the tune of billions of dollars, spare a thought to the debt-ridden student. And for those of you who were able to get their educations in a far less expensive era, please don't lecture us about our irresponsibility in going into hock for what we were told was a necessity. After all, we'll likely be the ones funding your Social Security.


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