College Debt Worse Than Credit Cards: Worth It?

My friend, Larissa, tells a story about a collections agent who called while she was working at an entry-level job for a non-profit and having a hard time making payments on her student loans.

"You can't use your degree if you can't pay for it!" the woman almost shrieked at poor Larissa. Even though she's long since paid off her debts, she still remembers that phone call -- not just with humor, but with embarrassment, too.

While it's impossible to prevent someone from using their education or degree, more and more people are vulnerable to such ridiculous threats. That's because student loan debt, which has flowed like water -- or more like home equity lines -- over the past 15 or 20 years, has grown to such an enormous level that American student loan debt has surpassed credit card debt and will likely be $1 trillion by the end of the year. And as credit card limits shrink, student loan availability seems to resist all good sense and propriety -- which might be fine, if indeed student loans were a worthwhile investment.

But more and more finance experts are saying, "They're not."Another friend and a co-founder of WalletPop, Zac Bissonnette, wrote a book about paying for college in which he posits that the sensible level of debt for an undergraduate education is zero. In Debt-Free U, he writes, "The monthly payments required of graduates to service their student loans are increasing extremely rapidly, while their monthly earnings aren't increasing at all."

Calling a college education "uniquely poorly suited to debt financing," Bissonnette goes on to point out that "you can't cash in your education to pay off your loan," and shows the myriad ways student loan debt impacts the quality of life, from increasing the risk of severe depression to decreasing mobility and the ability to take jobs for love instead of money.

Then there's Peter Thiel, venture capitalist, founder of PayPal and famed bubble predictor (he sold PayPal to eBay at exactly the right time, then predicted the housing bubble). The Economist calls out a recent interview with Thiel, who is now predicting that an education bubble will be bursting soon. "Probably the only candidate left for a bubble - at least in the developed world (maybe emerging markets are a bubble) - is education," said Thiel in the interview. "It's basically extremely overpriced. People are not getting their money's worth, objectively, when you do the math. And at the same time, it is something that is incredibly intensively believed; there's this sort of psycho-social component to people taking on these enormous debts when they go to college simply because that's what everybody's doing."

Thiel believes so strongly in the idea that college is not creating value for young people that he is offering a fellowship to 20 college students under the age of 20. The catch: You have to drop out of college. His fellowships will pay $100,000 for the winners to test their mettle in the world of entrepreneurship instead of academics.

When I graduated college, in 1995, a little less than half of all students graduated with loans. I was one of those lucky ones -- I had a substantial amount of merit scholarship aid, along with Pell grants and other financial help. When I needed to take out a small loan to cover the cost of interview attire and trips to job fairs, I was severely remonstrated by the financial aid officers (I left one meeting in tears).

If financial aid officers are sending kids away in tears these days, it's likely for different reasons. A full two-thirds of young people graduating with bachelor's degrees this year will have student loans. And given how quickly tuition has increased compared to incomes over the past two decades, they'll have far less ability to pay those loans back.

The conventional wisdom is that you shouldn't take on more debt for college than your expected annual salary upon graduation, but many people are taking on far more than that. And as Bissonnette points out in his book, "One study found that many students overestimate their post-graduation earnings by an astounding 45%." And then there are the unemployed, who might want to save the precious unemployment forbearance for the next economic crisis.

I agree with the experts I've quoted here: Instead of calculating just how much student debt you'll be able to afford, start out with the goal of having zero. To do that, choose a less expensive school; work throughout your college years; only go part time. Or take Thiel's advice and try your hand at entrepreneurship before you're buried under mountains of debt (student loans, mortgage, credit cards...) and family obligations. Or how about the Peace Corps? Or the military?

You wouldn't want to be starting life with $30,000 -- or way more in credit card debt. But more and more students are choosing to do just that by taking on student loans. And student loan debt is even worse, because you can't discharge it in bankruptcy and student loan companies rarely, if ever, settle.

If Thiel or Bissonnette is right and the bubble is about to burst, there could be dark times ahead for the American family indeed.
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