Wednesday, August 8, 2018
Amid rising costs for higher education, many parents are rethinking how they pay for college and are weighing in more actively on their child’s choice for a school and field of study. What’s more, crushing student loan debt after graduation means more young adults are delaying marriage and homeownership, with real consequences for the economy.
Manisha Thakor, CFA, CFP®, vice president of financial education at Brighton Jones, took some time to answer common questions she often hears from concerned clients, friends, and family on everything from student loan debt to federal policy to the ROI of a college education.
What tips can you offer students looking to minimize the amount of debt they take out for higher education?
First and foremost, let go of the idea that “educational debt is good debt.” Debt is a four-letter word no matter what it’s used for (including houses!) and you want to use it sparingly and only with good reason—the same as you might for some of those not-for-print four-letter words.
I often see students taking out the maximum they’re able to versus the minimum they need to. When it comes to what a lender offers you, just because you can, doesn’t mean you should. Your primary focus when taking on student loan debt should be in clearly understanding how many years of work it will take to pay those loans off. Yes, taking out a reasonable amount of student loans to fund your education is an investment in your future earnings power. But as with so many things in life, moderation is key here.
Should the government reduce the amount of money students can borrow? How about basing the total amount a student can borrow on the quality of the university and employability of the degree/field?
I don’t think that the amount of student loan debt should be linked in any way to the “quality of the university.” That is such a subjective measure. However, I do support some metric that limits students from taking out loans at a level that is unreasonable to pay back within say a 10-15 year timeframe.
The real driver of whether a student will get a positive ROI on educational debt is a function of what field they enter into and the quality of the skills they bring to that job out of school—which is not a function of the overall quality of the university but rather the nature of the major and the quality of the professors in that department.
How do we slow the growth of higher education expenses?
I can’t help but notice that the housing, cafeteria, student center, and gym on many campuses today are so nice that a graduate can’t afford those items at a similar standard until they’ve worked for a decade or so. So instead of cutting back on professors, I suggest institutions of higher learning take a long look at how much they are investing in these areas and what kinds of expectations they are setting up among students about life after graduation.
How does mounting student loan debt affect the economy?
Total student loan debt now eclipses total credit card debt (and unlike credit card debt, student loan sticks with you through life even if you declare bankruptcy). What this means is that countless students are graduating from school with a very heavy ball and chain right out of the gate. It’s not unheard of for students to have monthly loan payments that are equal to—and in the extreme cases—larger than mortgage payments.
As such, many graduates are delaying home purchases and even delaying marriage and/or having kids until their financial picture gets cleared up. The lack of spending in these areas adds up and negatively impacts our economy. It’s a classic example of the law of unintended consequences.
How should students and their parents think about the return on investment to spending on higher education?
My rule of thumb is this: don’t take out more in student loan debt than you expect to make ON AVERAGE over your first 10 years out of school. Some professions like finance or law offer steep escalation in income over that 10-year period, thus justifying a higher loan balance. By contrast, if you are going into a field where salaries peak at $40,000, taking out $60,000 in student loan means you will be behind the eight-ball.
You simply won’t earn enough to spend 10 years paying off interest and principal to the tune of 10 percent of the loan such that when you are ready to get married, have kids, or buy a home you aren’t having the double whammy of having to still pay monthly student loan payments.
Manisha Thakor, CFA, CFP® is vice president of financial education at Brighton Jones. You can follow her on Twitter @ManishaThakor. This conversation, which has been lightly edited, was originally published by WalletHub.
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