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Making your student debt worth its burden

By Peter Andrew

Making your student debt worth its burden

If you write about personal finance for enough years, you end up on a lot of strange email lists. So I wasn't surprised when a message intended for debt collection agencies turned up in my inbox yesterday. But I did raise an eyebrow over its content.

It was advertising a publication called "Student Loans -- A Primer," and the message's subject line read, "One Trillion Reasons to Collect Student Loans -- What You Need to Know." The trillion (it actually topped $1.2 trillion last May) refers to the amount of outstanding student loan debt in this country, and is a sum that makes this the second biggest form of consumer borrowing, behind home mortgages but well in front of auto loans and credit cards.

Am I alone in finding the email a touch distasteful -- not dissimilar to training sharks to be better at sniffing out blood in the water? Maybe I should be. Without collection agencies, paying debts would become optional, and that could create a collapse in the economy and society faster than any zombie apocalypse.

Public problems with student loan debt

There are problems surrounding both public and private student loan debt.

On the public side, the federal government holds or guarantees more than $1 trillion of the total $1.2 trillion of student debt, according to federal regulator the Consumer Financial Protection Bureau. So, if there's another recession or depression, you and I as taxpayers could be on the hook for dizzying sums.

And there's a second impact that's already affecting the economy. In September, The Los Angeles Times reported a study conducted by John Burns Consulting. This estimated that 414,000 home sales, worth $83 billion, won't happen this year because people who in previous generations would by now have been in the market for mortgages are too burdened with student debt to buy their own homes. Previous studies, including one conducted last year by the Fed, suggest a similar effect on auto loans. Fewer home and vehicle sales must be a real drag on the recovery.

Private problems with student loan debt

And, of course, those same outcomes have implications for private individuals: delayed -- sometimes permanently -- home ownership, older cars, high stress levels caused by debt and generally less affluent lifestyles. In August, Gallup reported one of its surveys under the headline, "Student Debt Linked to Worse Health and Less Wealth."

You can see why this is the case. The New York Times has an online student loan calculator, which, until you enter your own figures, is set at the national average: $29,400. If you want to pay that down over 10 years, your monthly payments would be $306.97, and you'd rack up $7,436 in interest charges. In order to prevent payments of $306.97 a month from being a painful 20 percent (or more) of your discretionary income, you'd have to earn at least $35,923 a year.

Clearly, many former students aren't coping. In September, the U.S. Department of Education revealed that 13.7 percent of borrowers who began making payments in 2011 are already in default. That's extraordinarily high by the standards of other forms of mainstream debt, and the sole glimmer of good news is that the proportion is lower than it was for people who were three years into their loans this time last year. It was 14.7 percent then.

The way forward

University of Michigan education professor recently wrote a piece for The New York Times in which she made an obvious but important point: "Graduates with student debt used it to buy something valuable." It costs a lot to get an education, and, now that taxpayers are prepared to foot less of the bill than they once were, students have to pay. For most, it's not possible to get a college degree without borrowing.

However, there are things those with an interest in student loans -- prospective students and their parents and grandparents -- can do to avoid the worse outcomes:

  1. Start young. If you've a newborn baby, follow the advice in Hey, baby. How's your college fund? Begin saving while your child's still young.
  2. Get help. Before you apply for college, make sure you're going to get every cent of public and private aid for which you qualify. You could start at studentaid.ed.gov.
  3. Research your college before enrolling. Those Department of Education figures show the loan default rate for students who attended private for-profit schools was 19.1 percent, while those for public schools and private, nonprofit schools were 12.9 percent and 7.2 percent respectively. Some private for-profit colleges have default rates of 30 or 40 percent or more (the DoE listed more than 20 of them), while others are great. Just make sure, before you commit, that yours is one of the latter.
  4. Research your course. Is the course you're planning to do going to boost your future earnings enough to cover your payments? You can search the U.S. Bureau of Labor Statistics website (bls.gov) for average salary rates and qualification requirements for different careers. Do the math.
  5. Keep a cool head. There's a lot of pressure to attend college, but it doesn't suit everyone. If you're not going to benefit enough from the qualification you earn (or if you think you might not get a good degree, or are likely to drop out), maybe you should consider other paths.

Don't miss out on a college education just because of the prospect of student debt. But do all you can to make sure it's going to be a "good" debt: an investment in your future that's going to provide an attractive return. After all, you now know how keen collection agencies are to do business with you.

Peter Andrew has over 25 years of experience writing about marketing, advertising and management. He regularly covers consumer credit card topics for IndexCreditCards.com and other personal finance publications including Fox Business, TheStreet and MSN Money. He also writes frequently about mortgages and auto loans. Peter has spent extended periods living overseas, in the UK, France and Africa. He lives with his partner of 20+ years, and wastes too much of his time on cryptic crosswords.

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