Showing posts with label student loans. Show all posts
Showing posts with label student loans. Show all posts

Wednesday, May 16, 2012

This is a story we've heard before...

In case you need to read yet another downer article about how college grads have racked up outrageous amounts of student loan debts, The New York Times delivers.  It's timely because graduation has just passed or is coming up shortly for most colleges. But the article fails to present any truly new or helpful information.  The first paragraph says it all:
Kelsey Griffith graduates on Sunday from Ohio Northern University. To start paying off her $120,000 in student debt, she is already working two restaurant jobs and will soon give up her apartment here to live with her parents. Her mother, who co-signed on the loans, is taking out a life insurance policy on her daughter.
The article covers the growth in student loan debt, some personal profiles, and plenty of political drama.  It also takes six pages (online) to cover the same story and issues as The New York Times has covered before.  It presents no advice or help to students who already have loans.  At best it's a cautionary tale or an alert. 

While it's a great overview for someone who's never read about the issue before and one long shout out to Ohio, for students or grads who already know the story and have debt their time would be better spent doing something other than reading this .... like getting a second or third job.

Friday, February 10, 2012

Student loan holders headed to bankruptcy

The LA Times has a brief update on what may become the "student loan crisis" talking about how bankruptcy attorneys are seeing a large increase in the number of potential clients with student loan debt.  Over half of attorneys, according to the article, report increases of greater than 25%.

This is of course inevitable simply because the number of students taking out student loans has increased significantly over time as well.  However what I don't know is how much the increase bankruptcy attorneys are reporting is beyond the expected increase based on the population of people with student loans.  If this is much higher and there is no relief for the student loan debt burden then this could potentially spiral into something much more significant.


Tuesday, August 16, 2011

An "arrangement" to pay the bills

Huffington Post recently posted an article about women working with sugar daddies to pay tuition or other bills.  It's a follow up look at the business Seeking Arrangement which the New York Times profiled in 2009

It seems that the most common demographics on the site are young women trying to pay tuition and older, financially secure men looking for companionship.  Women in the article reported being given between $300-$500 or as much as $2,500 per night for their services.  The New York Times article states that sugar babies out number daddies 10 to 1, not the best odds for a student looking to negotiate a favorable deal, but also quotes monthly retainers of $1,000 to up to $10,000.  Around 30% of relationships through the site have a monthly "allowance" and they average $1-2,000 per month.
Roberts asked 315 college students at a university in London about their participation in sex work. The findings were stark. Nearly 17 percent said they would be willing to participate in the sex trade in order to pay for their education, while 11 percent indicated a willingness to work directly as escorts. A decade ago, only 3 percent answered in the affirmative. Today's respondents are far more likely to have peers who are working in the industry. HuffPo
 In other European cities the findings were even more stark:
In Berlin, a city where prostitution is legal, they found that one in three university students would consider sex work as a viable means of financing their studies. Nearly 30 percent of students in Paris similarly responded in the affirmative. Finally, of the 3,200 Berlin students sampled, 30 percent of students working in the sex industry reported being in some amount of education-related debt.  HuffPo
My guess would be that the correlation between debt and sex work of the Berlin students would also be found in American students.  I'm doubtful that women register for the site purely out of greed for money or fancy presents and that most of them have significant financial hardship they're trying to deal with. 
In fact, Seeking Arrangement pays to have its ads pop up on search engines whenever someone types in “student loan,” “tuition help,” “college support” or “help with rent.” Lola was one of many to stumble on the site that way, when — behind on her rent and tuition and down to one meal a day — she Googled “student loan.” What popped up was hardly what she expected, but she was willing to try almost anything to stay in school. NYTimes

That seems an effective but shady marketing tactic, targeting those who are most likely to be in difficult financial situations.  Some of the women interviewed for the Huffington Post and New York Times articles seem financially savvy and conscious of the risks they're taking.  Others seem less responsible and their quotes seem to focus more on getting the finer things in life and less on making tuition payments or paying off debt.  Both articles emphasize the ambiguity of these relationships and that participants have varying opinions on whether their actions constitute prostitution. But it seems to me that, no matter if the process is legally prostitution, being a "sugar baby" has to be hard on the woman's self worth.  Just the title seems a little bit demeaning.

Plus, as one article notes, it must be hard to go back to traditional work with the significant pay per hour discrepancy especially if you have become accustomed to living significantly beyond your means via gifts, dinners, clothing or other areas paid by the sugar daddy.  It makes me think that the whole process likely significantly hampers instead of improving a young woman's odds of success financially and in the work place.  The significant bias against these relationships would probably blacklist women from numerous companies or industries were her "side income" to come to light publicly.  There are also significant health risks if the women are not insisting on protection.

What do you think?  Does the opportunity to make an extra $1-10,000 per month (tax free) out weigh the psychological, health, moral or career consequences?   Do you think these women are putting the money against educational expenses or new clothes?

Wednesday, August 3, 2011

Extra hoping that I don't have to take out loans next year

So I'm paying for my first year of business school in cash, but I'm not yet certain that I'll be able to the same for next year.  Now I have extra motivation to try to get through next year debt free.  CNN reports that the debt ceiling compromise cuts out all subsidized loans for graduate students.  The money saved will be redirected to Pell Grants and deficit reduction.  I know I won't get any of those new Pell Grants, the program is reserved for very needy undergraduate college students, but now I won't be getting an offer of subsidized Stafford loans either.

Subsidized loans do not accrue interest while you're enrolled in school full time.  Removal of this option means that any student loans taken out while in graduate school will accrue interest.  This is not so bad for business school students since MBA programs are only two years long, but for law and particularly medical school students the impact will be much stronger.  These students have longer programs (three and four years plus residency respectively) which means more years of tuition, fees, living expenses and no income that need to be paid for and more years in which interest can accrue.

I'd considered a subsidized Stafford loan as a potential source of an emergency fund for next year (I have cash for one this year) but that option is off the table now.  Most likely I'll use a loan from my SO if we can come to a mutually beneficial agreement or my roth IRA as my emergency fund instead. This also means that if I do have to take out student loans next year I'll be limited to loans that accrue interest, making the process more expensive.

I probably wouldn't have picked subsidized student loans as an area I'd cut were I in congress since the program cost is relatively low and I imagine that they will have more students opting for private loans instead while interests rates are low meaning they may have less revenue coming in long-term.  I don't know if this will be substantial enough trend to result in the end of subsidized loans causing a greater reduction in revenue than the original subsidy did.  Either way, having a compromise in hand and not defaulting is significantly more important.

Are you affected by the end of subsidized federal loans for grad students?  Was this the right decision in the debt ceiling compromise?  Will students opt for private loans instead at a high enough rate for the decision to cost money instead of saving?

Monday, July 18, 2011

But don't take my word for it.... Student loans

There's a lot of student loan bashing here on the blog.  My personal pet-peeve is calling student loans an investment.  Hint: they aren't, the degree is.  My goal is to graduate with my MBA debt-free from business school and I've committed myself to two years of dogged avoidance of student loans.  So things here might be a little bit slanted. Because, clearly, I only maybe have an opinion.  Honestly, it's not all bad, I'm just saying that if you can avoid student loans do so and carefully evaluate the ROI and risks in your plan before committing yourself to an expensive degree.

But I thought it might be time to gather some outside opinions.  So without further ado, the round up is below so you don't have to take my word on student loans.
 How do you feel about student loans?  What contributed to your views on them?

Friday, June 24, 2011

Debt boosts self-esteem??

There's an article on research from Ohio State University claiming that debt boosts the self esteem of young adults.  These people have clearly forgotten about the difference between correlation and causality. 
Researchers found that the more credit card and college loan debt held by young adults aged 18 to 27, the higher their self-esteem and the more they felt like they were in control of their lives.  The effect was strongest among those in the lowest economic class.

Only the oldest of those studied – those aged 28 to 34 – began showing signs of stress about the money they owed.
 Okay, they found a correlation between self esteem and debt.  They can't have found causality because they were examining surveys of students.  Researchers did not control who had debt and who didn't.  If they had taken a large group of students, measured their self esteem, randomly assigned half to receive debt and half to be a control group then they could have measured debt's effect on self confidence.  But as it is, all they know is that the two, debt and self confidence, go hand in hand.  They don't know why.

These researchers hypothesized that students would have a self esteem boost from debt because it was allowing them to accomplish great things in their lives like going to college through student loans or buying books on their credit cards.  Hold on a sec, how many college kids do you know where the majority of their credit card debt was because of textbooks?  It's unlikely and the researchers couldn't know what the students were buying.  So they came up with an alternate hypothesis:
“Obviously, they are probably using credit cards for multiple purposes.  Along with education spending, they could be using credit cards to pay for non-essential items.  They may feel good about their debt only because it allows them to buy the things they want without having to delay gratification.”
 That seems a bit more reasonable to me.  But there's a strong class factor in the correlation between self-esteem and debt:

Results showed that those in the bottom 25 percent in total family income got the largest boost from holding debt – the more debt they held, both education and credit card, the bigger the positive impact on their self-esteem and mastery.

Those in the middle class didn’t see any impact on their self-esteem and mastery by holding educational debt, perhaps because it is so common among their peers that it is seen as normal.  But they did see boosts from holding credit-card debt – the more debt, the more positive effects.

On the other hand, the study found that young adults who came from the most affluent families received no boost at all from holding debt.  “The wealthiest young people have the most resources and options available to them, so debt is not an issue for them,” Dwyer said.
I'm thinking that not only did these researchers jump to causality when all they had was correlation, but that they also jumped to the wrong causality.  My bet would be that debt doesn't cause higher self esteem, but that higher self esteem encourages students to take on more debt.  It would be a stronger correlation in the lower family incomes because these students have the least chance of paying off their debts.  You have to be ballsy to take on debt when it's more than your family's annual income.   You don't have to be confident or have high self esteem to take on debt if your family has a high income because you have a big safety net.

This explanation is a lot simpler than the researchers dual explanation of how debt improves self esteem and having three different reasons for the three different correlations by students' economic class.  Occam's razor, anyone? 

Do you think debt causes high self esteem or vice versa?  What do you think about the OSU study?

Tuesday, June 21, 2011

Why I'd rather take out student loans than dip into my 401k

As I get closer to the point where I have to pay my fall bill, I'm running and re-running the numbers on how much and how I can pay.  The good news is that I'm fairly certain I can pay for my first year including living expenses in cash. The bad news is that I'm facing an estimated $25,000 gap in my expenses for next year based on my current assets.  There are many ways I could fund that gap without having to take on credit card debt (thereby protecting and maintaining my high credit report score) including potentially a combination of working more, living on less, withdrawing funds from my Roth IRA, taking out student loans or withdrawing money from my 401k  But I know one thing for sure.  I'm leaving the 401k money alone.  I'd rather take out student loans than raid my 401k.

Let's run the numbers.  Assume I can save $4,500 from my internship or work next summer towards my bill for next year making my outstanding gap $20,500.  The amount saved isn't important, it just makes the numbers work out nicely since $20,500 is the limit on Stafford loans for one year.  I can either fund the $20,500 gap through either student loans or my 401k.

So let's compare the two.  First, if I use student loans, I'll be taking out subsidized and unsubsidized Stafford loans.  These are Federal loans and generally have some of the more favorable terms available to grad students.

Loan type
Origin. fee
In School
Bal. at grad
Sub. Stafford
Unsub. Stafford

The table above shows the break down of the two types of loans, the interest rates while in school and after, and the balance at graduation. So the assumptions around the student loan funding option are as follows:

Student Loans
Interest Rate
Balance at graduation
Monthly payment
# of payments
Total interest paid

I'm assuming that I can pay off the student loans in three years after graduation which seems conservative enough.  The payments and interest paid are calculated around that assumption.

Second, I have the option of withdrawing funds from my 401k.  However, I'll pay a penalty of 10% on that money as well as having to pay income tax on it.  So I'll have to withdraw more than $20,500 in order to have $20,500 left after taxes and penalties to pay my expenses.

Federal tax rate
State tax rate
Withdrawn from 401k
Investment return

So I'd have to withdraw $29,286 from my 401k to fund the $20,500 gap in expenses.

Okay, we've outlined two options and some assumptions. Let's further assume that I'd either put money in my 401k or use it to pay my student loans. I'll ignore the fact that you contribute pre-tax to the 401k and use post-tax money to pay student loans.  We're also ignoring the tax deduction for student loan interest. So how does this play out:

Retirement accounts
Loan balance
Retirement accounts
Loan balance

At the end of the day the student loans win by a long shot.  With the assumptions I've made I come out over $11,000 ahead by taking out student loans instead of dipping into my 401k savings.  This difference would be higher with better investment returns and if you account for contributing pre-tax money into your 401k instead of using post-tax money to pay student loans.  Assuming I'd contribute twelve times the monthly student loan payment to my 401k isn't accurate; I'd likely contribute around 50% more than that to the 401k to see the same effect on my available cash.  On the other hand, student loan interest paid is deductible, but I'm only paying about $2,300 in interest over the life of the loan.   So overall I'm probably underestimating the benefit of taking out student loans instead of withdrawing money from my 401k.

The big caveat here is that most MBAs will be leaving their employers before starting school and could roll their 401k money into an IRA which has much more favorable terms for withdrawals used for qualified educational expenses.  I won't be, however, since I have a solo 401k and may be able to contribute to it a bit while in school and (hopefully) won't need the funds either way.  We know that obtaining a masters of business administration can get expensive, but there are at least some reasonable options.

What would you do in this situation?

Wednesday, June 15, 2011

But you're going to make tons of money, quit worrying!

The most common argument I'm hearing against my goal to graduate debt free is that it doesn't really matter.  That I'll be like Croesus after graduating, rolling in so much money that six figures of student loans will just be a drop in the bucket for me, insignificant to pay off. Don't worry about student loans, they're a great investment and you'll be making $150,000, $250,000, or $300,000 after graduation and more as you go on.

First, let's address the idea that student loans can be an investment.  Allow me a moment on my soap box here - I have a bit of a pet peeve.  I recently wrote about this in the comments of another post
I think the MBA degree may be a good investment and degrees in general may be good or bad investments, but the student loans are only a method of financing. The student loans are never an investment in and of themselves and if they were they would be a terrible one since they have a negative return.

Like a mortgage on a house, student loans can only reduce your return on investment since you will be paying significant interest on them eating into any gains you have. In some cases you may still be left with a positive ROI, but it will always be smaller than if you had paid with cash.

The only benefits to student loans, buying on margin, and other debt is their ability to leverage what assets you have to provide greater opportunity. So while you may not be able to get the degree without student loans and obtain the maximum ROI you can still potentially use them to obtain the reduced ROI which is better than no ROI. Debt also allows you to minimize opportunity cost which can be helpful if you can pay for an asset in cash, but could gain a bigger return elsewhere (ie student loans are 7%, but you could get a 16% return elsewhere giving you an over simplified profit of 9% minus fees etc). The latter is not the case for most students, but the former might be if the degree is a good investment. 
The point is, unless you have an amazing alternative investment and tons of cash (in which case send some of your good luck my way), student loans will NEVER be as good as NOT having student loans. Student loans are not the investment, your degree is. The other important note is that when you leverage debt you are also leveraging risk which reduces the value of your return on investment relative to a safe bet.

Okay, now that I'm off my soap box (sort of, am I ever really off my soap box here? I guess that's partly what blogging's about) let's move on to the income side of the argument, the part that says student loans won't matter because I'll be making so much money.  Boy, oh boy do I hope these guys are right.  I would love to be working in a job I love and making a quarter of a million dollars a year shortly after graduating.  I may be frugal but that just makes me better at using large sums of money. ;)  I could definitely find a use for that much money without student loans to pay down.

But there is one big problem.  Money is never guaranteed.  I've met people who graduated from Harvard Business School and Stanford, but could not find a suitable job for months after graduation.  I'll agree that it's likely I'll be able to find a well paying job after graduation but it is also in no way guaranteed.  The typical starting salaries are also not as lofty as some might think.  US News puts Stanford and Harvard at the top of their MBA rankings so they may have some of the highest starting salaries, but the median starting salary at Stanford is $120,000 and Harvard's is $110,000 which is significantly lower than some of the income numbers that have been tossed around on the blog.  Sure there are some way bigger numbers on the high end but there are also plenty of numbers way smaller than this.   Salaries are also tightly clustered around the median - 50% of Harvard grads have salaries between $100,000 and $125,000, with 25% falling below and 25% above.

So a salary of $120,000 is big, really big compared to the American average, but it's still not enough to make a typical student debt load seem insignificant.  A salary of $120,000 isn't enough to make debt of over $70,000 seem insignificant.  I'd be scared to have $35,000 of debt on a $60,000 salary or worse $17,500 of debt while only making $30,000.  A higher income does mean more truly disposable income, but it also means lifestyle inflation for a lot of people as well as higher taxes.  Either way it's still not enough to make your typical student loan burden evaporate.

The income argument also assumes that you'll be making the big bucks for as long as you have student loan balance.  To make this true you have to be lucky with layoffs, burnout, and motivation to be in that kind of position. This would need to be 10, 20 or 30 years depending on how your loans are set up and if you just pay your minimum payments or add more (in which case those numbers would all go down).  Let's say you graduate from business school at, say, age 28.  Worst case scenario you could be just polishing off your student loan payments at age 58! I don't know about you, but I'd kind of like to be in a position to retire if I wanted to before then, which means no debt and fixed payments would be awfully nice.

So to my thinking in the vast majority of business school graduates' financial lives (and I would wager this holds true for medical and law school graduates as well) it absolutely does make sense to worry about student loans and try to avoid them.  Particularly once you factor in that with student loans you can end up paying for your degree twice or more.

What do you think?  Though I write a lot about student loans for the blog here, I'm hardly in a panic or a lather about them all the time in real life, I just think student debt can be destructive and should be avoided.  Am I over reacting?

Monday, June 13, 2011

Defaulting on your student loans

There's a controversial article over at Above The Law where the author, Elie Mystal, shares his experience defaulting on his student loans from law school.  It certainly sounds like the author thinks he's "above the law"; he has a remarkably cavalier attitude towards remaining essentially impoverished so there's nothing for the debt collectors to take:
Actually, I’d go so far as to say that living in world where your creditors are constantly angry with you is kind of liberating. I mean, I pay my federal loans back, so it’s not like anybody is going to garnish my wages. Beyond that, what can they really do? Send in a SWAT team? Every six or eight months they call and they tell me that I need to be paying more money. Every six or eight months I send them a pay stub and say, “Really?” They threaten. I say, “Well, you could take this money I am paying you or I could stop paying, you could sue me, and in two years a judge will order me to pay you pretty much what I had been paying you.” It’s not like I have any assets. You don’t get into the situation I’m in if you have stocks and bonds and trust funds and all that. You get into this situation from owing more money than you can pay back.
You want my advice? Having your student debts go into default is survivable. The world will not end. Your girlfriend will not break up with you. The creditor will not show up at your house with a guy named Rocco looking for a few hundred dollars.
Survivable, but not desirable. If I could go back 11 years ago, I wouldn’t have taken out the debt in the first place. If I could go back eight years ago, I would have made minimum payments to keep them out of default. Of course, if I could go back 30 years ago, I’d tell my mom to invest in Apple. Whatever. Hindsight is blinded by obviousness.
And so I refuse to be an indentured servant to my debts. Life is too short. You can never be truly free of your debts (until they’re paid off), but you can be free from the fear of them. Debt collectors feed off of your fear. And most people are all too willing to allow fear to dictate their decisions.
This attitude really rubbed me the wrong way and maybe that's the point, but for some more accurate information about the legalities and rules around defaults and discharging student loans you can turn to The Atlantic's excellent rebuttal to the Above The Law article which sets the record straight:
But unless everything I've ever been told about settling student loans is wrong, Mystal is giving people a dangerous misimpression that they can default and get their debt burden substantially reduced.  I've seen some cheering for his post on various blogs that link it, presumably because they think this is a way to really stick it to the banks.  But I would hate to see a lot of people follow his lead, and then find out that they've trashed their credit score--and in some cases, their employment prospects--in order to get a "deal" that's no better than what they could have achieved by just making their payments.  Can any readers comment? Anyone have success settling student loans for pennies on the dollar?

Update: Commenter SPQR9, who IIRC is a bankruptcy attorney, says
Like you, I think Mystal is completely wrong.  For that matter, last time I checked, student loans had no statute of limitations in addition to being largely non-dischargeable.  And the "hardship" provision through the DOE is largely "so you are a quadraplegic?  Well, maybe we'll give you a hardship discharge ..."
In other words: it's a very, very bad idea. And trying to stay judgement-proof for 60 years is likely to be more miserable than repaying your loans.
That last point is really key - there is almost no getting out of student loans and if you try you will likely be more miserable for a longer period of time than if you had just paid up.

What do you think about strategic defaults or Mystal's article?

Friday, June 10, 2011

I don't want to be like the Obamas

Recently there have been several posts floating around praising the Obama's financial situation after the recent release of their tax returns.  Sure there may be a few quibbles about their investments being too conservative, but on the whole bloggers have been supportive and positive.  There are good reasons to do so - the Obamas have several million in assets and over a million in income.  The first family's assets are safely and patriotically invested in treasury bills and a low cost Vanguard S&P 500 index fund. 

But their finances haven't always been this cushy.  Both Obamas graduated from Harvard Law School with significant student loan debt:
“We left school with a mountain of debt,” Mr. Obama said in 2008. “Michelle I know had at least $60,000. I had at least $60,000. New York Times
Sure they've now paid it off and congrats to them for doing so, but it certainly wasn't quick or easy and I don't envy them going through the process.  Barack's student loans were not only for Harvard Law but also from his undergraduate degree from Columbia:
Mr. Obama personally took out $42,753 in loans for Harvard Law School, on top of several thousand dollars for his undergraduate education at Columbia University. New York Times
Paying off those loans sounds like a long and painful, sometimes shaky road the Obamas traveled:
“We’re making it easier to repay student loans so kids don’t graduate like Michelle and I did with massive loan payments each month,” he said. “It was more than our mortgage for 10 years."  Reuters
Obama wrote "Dreams From My Father" and "The Audacity of Hope," which secured his once precarious personal finances. Arriving for the Democratic National Convention in Los Angeles in 2000, his credit card was rejected when he tried to rent a car. Obama in December recalled a difficult period when he wasn't flush.  "We're not that far removed from struggling to pay the bills," he said. "Five, six years ago, we were still paying off student loans." LA Times (Apr. 2010)
For reference, Obama graduated from Harvard Law School in 1991.  So according to the quote above the Obamas took at least thirteen years to pay off their student loans and for at least ten years of the thirteen their payments were more than their mortgage.  It could have been even longer than that since Audacity of Hope wasn't even published until 2006.  Barack also had his credit card declined, though the article doesn't say why it implies that it was due to financial mismanagement or reaching his credit limit.  Michelle also felt that her student loans constrained her career options:
She resolved to leave the law firm and mentor young people from the neighborhood she grew up in. But she was daunted by how little money she would make, and feared she would not be able to pay back her sizable student loans. Obama convinced her that if they married and combined their incomes, they could afford a more frugal life. Newsweek
That quote makes it sound like the Obamas got married for financial reasons. The Obama's have also said that the only way they got out of debt was through the royalties from publishing best sellers:
Michelle Obama ... told women at a town hall meeting .. that when she and her husband left law school, the monthly payments on their school loan debt was more than their monthly mortgage payment, and that they only got out of that debt when Barack Obama wrote his two best selling books, "The Audacity of Hope" and "Dreams from My Father." USA Today
What are your odds of publishing a New York Times best selling book?  I'd never wager my financial security on it.

The Obamas have been highly successful.  Barack has broken down numerous barriers.  But had I been in their shoes I would have likely made very different decisions.  Both Obamas have accomplished a lot and can serve as great professional and ethical role models, but they could never be true financial role models.

Who are your financial role models?

Tuesday, June 7, 2011

Why student loans are the worst kind of debt

So much of the discussion on families in debt in the current economic crisis has focused on their mortgages, car loans, and credit cards.  But I am here to tell you that these are not the worst obligations plaguing American families in the US - student loans are.  Student loans are no longer the cheap debt they once were.  With mortgages at under 5%, the 6.8%, 7.9% or more charged by Federal or private lenders these days for student loans seems fairly pricey in comparison.  Here are five reasons that show that the silent threat to the American economy is not people's cravings for Gucci bags, McMansions, or Hummers but instead their blind devotion to financing outrageously expensive degrees.

  1. Student loan debt is huge.  The New York Times recently reported that student loan debt has surpassed credit card debt.  Pair this with their repeated stories of graduates struggling to make ends meet under the burden of their thousand bucks a month minimum payments and you know there's real cause for worry here.  The worst part is that the problem is only growing; the New York Times also reported predictions that student loan debt will surpass one trillion dollars ($1,000,000,000,000) this year. Of those who borrow for undergrad the average debt is $24,000 and growing.
  2. You can't sell or repo your education.  If you get in over your head with a fancy car or enormous house you can sell it.  Even if you're underwater on your mortgage or (even more likely) your car loan, selling at a loss will still reduce your debt burden.  You can also go through foreclosure and repossession which, while not fun or good for your credit, will wipe out your remaining debt for the item.  These are not an option when you're in over your head with student loans.  You can't sell your degree to someone else and you can't give it back to have part of your debt wiped out. Though one Boston College law student tried to do that in an open letter.  There is no collateral for a student loan so this debt is a debt pure and true without any offsetting asset with intrinsic value.  No, once you've made this purchase you're stuck with it.
  3. You can't get out of them with bankruptcy.  Unlike pretty much any other form of debt in the good old US of A, declaring bankruptcy does not normally wipe out your student loans.  Just think about all the scenarios where something can go really, really wrong with your finances.  Now think about the fact that in many cases no matter what that scenario is you will still have to pay your student loans each month or they will accrue interest, penalties, and fees leaving you with a lot more to pay off in the long run.
  4. They can sometimes last through death.  Check out this article from the Wall Street Journal about a family who is still paying off their dead child's student loans.  Can you imagine a more miserable situation?  If you co-sign a relative's student loans and the student passes away, the loans are still due.  You can be mourning the death of your child and still be responsible for making a large payment to Sallie Mae for their education that month.
  5. People think this is "good" debt.  There is an impression that student loan debt is a-okay because it's "good" debt. There are all sorts of rationalizations for this, you're making an investment, it's cheap money, it's the only way to get ahead, etc.  Families and students give themselves carte blanche to ring up an enormous student loan balance without really analyzing its benefits because they see student loans as harmless.  That makes their attitude really harmful.  With all the strings and costs and rules attached to student loans it's dangerous to think of them as anything but debt, pure and simple.  They are no more "good" than anything you buy with your credit card.  It's just another method of financing.  Sure, your education may be a great investment but your student loans are not.  Anything that's labeled with an APR instead of an APY isn't an investment and it's certainly not a good one.
I'm not saying that people should never take out student loans or that there isn't a place for them in financing your degree.  However, I am saying that students and families need to use more caution, perhaps extreme caution and prudence, in deciding if they want to take out these loans and how much they want to finance.

Similar thought and analysis should go to reviewing the degree program in the first place.  In some cases taking on student loans to get a degree pays off but in many cases it doesn't.  Can you guarantee that you'll be on the good side of that balance?

I can't.  I think getting my MBA is very likely to pay off but I am not so sure about it that I am willing to take out $100,000 in loans though it is commonplace, normal, "safe" and "good" debt in the eyes of my peers.   I just imagine the worst case scenario of being unable to find employment after graduation and being unable to find well paying employment long term. Do I really want to be saddled with ten years of $1,000 minimum payments on student loans in that scenario?  No thanks.  So for my degree I'll be trying to avoid them as much as possible.

Wednesday, May 18, 2011

Assuming MBA = student loans

I feel like there's a pervasive assumption that anyone getting a top notch professional degree is going into debt to do so. Of course this is not unfounded.  There are dozens of stories in the media about how law, business, and medical school students are graduating with back breaking debt and many of them don't even have jobs.

But I also know that there are plenty of people out there not paying a dime for their degrees.  There are students in MD-PhD programs whose whole educations are being paid for through research funding.  There are also plenty of business school students, full time and part time whose companies are picking up the tab for their degrees.  These tracks are not at all uncommon and result in degrees and zero student loans.

Less prevalent, but still common, are students who pay for their whole degree in cash either from their own pockets or their family's. Like the sponsored students, these cash heavy folks will never even fill out a financial aid form.

Finally, there at least used to be the model of working your way through school.  With the huge price tags now associated with just one year's tuition at a good school this may not be possible without scholarships and grants - merit or need-based.  After all, it's pretty hard to earn $50,000 after tax plus living expenses while a full time student.  But many schools have generous scholarships and financial aid so it appears possible to potentially still graduate without debt. At least I hope so given this is my path of choice.

With these routes to a debt-free degree available it irks me that most discussions of these degrees presume student loans that will be nearly impossible to shake and a ten-year payback period with no mention of an alternative.  Yes, these degrees are very expensive and targeted mostly at people in their 20s who haven't had a chance to accumulate as many resources, but assuming six figures of debt for every graduate is almost a self-fulfilling prophecy.

What do you think? Am I way off base here?

Tuesday, May 10, 2011

The long and short term costs of loans

Let's say that I take some amount of loans out for just my second year of the MBA program.  The loans have only one year to accrue interest in school and I can take out a max of $8,500 in subsidized and $12,000 in unsubsidized Stafford loans and the rest can only be PLUS loans.  This isn't entirely accurate as it ignores the private student loan market, but let's accept it as a simplified worst-case scenario.

Loan Amount Loan type & rate Interest per year Fees At graduation Payment Total paid
$8,500 Sub. Stafford 6.8% $0 1% $8,585 $99 $11,856
$29,000 above + Unsub Stafford 6.8% $816 1% $30,106 $346 $41,575
$50,000 above + PLUS 7.9% $2,475 4% $53,605 $630 $75,617
$65,000 above + PLUS 7.9% $3,660 4% $70,390 $833 $99,971
$82,349 above + PLUS 7.9% $5,031 4% $89,803.53 $1,068 $128,113

That ends up being pretty expensive over time!  Even with no interest during school and a 1% loan fee I'd pay 39% more by financing the $8,500 instead of finding another way to pay for it.  At the high end, you more than 55% more by financing the entire student budget.  Of course sometimes you don't have the cash to pay, but over $20,000 of the student budget is living expenses.  This makes a really good case for living cheaply.  Going out for drinks is no longer a good deal if your $20 bar tab becomes $30.  Similarly, while I might pay $30 for a dinner out somehow $40 doesn't seem as reasonable.  With that math I'm not sure how anyone can justify financing living expenses.  Just another reason for me to stick to my guns and take on as little debt as possible.

Wednesday, April 6, 2011

Intro to Federal Student Loans

Since I may have to take out student loans to pay for my MBA no matter how hard I try not to I've been starting to educate myself on what my options are.

Student loans come in two primary flavors - Federal loans and private loans.  I'm starting with Federal since there's only one source making it easier to know what's up.  Federal loans are sometimes need-based and come straight from the Department of Education.  They seem to be generally perceived as the safe bet - lower fees, interest rates and better terms.  Undergraduate students have different programs and terms and will usually have parent finances considered unless they are an independent student.

The Department of Education offers several different loan programs. You can't borrow more than your cost of attendance minus any other financial aid. So say your school says its student budget is $100,000.  That would include tuition, fees, books and estimated cost of living.  Then the school is really nice and gives you $40,000 in grants.  You can only borrow a total of $60,000 from the Feds ($100,000-$40,000).

Federal Loan Programs:

Stafford Loans
Direct Subsidized Stafford Loans
Need-based, amount determined by school
Up to $8,500 per year
Max: $65,500
Interest rate: 6.8% fixed
Fee: 1%
Do NOT accrue interest while in school more than half time, during grace periods or while deferred

Direct Unsubsidized Stafford Loans
Not need-based, amount determined by school
Up to $20,500 per year (includes subsidized up to $8,500)
Max: $138,500 (includes subsidized up to $65,500)
Interest rate: 6.8% fixed
Fee: 1%
Interest accrues starting when first paid out. You can pay the interest while you are in school and during grace periods and deferment or forbearance periods, or you can allow it to accrue and be capitalized (that is, added to the principal amount of your loan). If you choose not to pay the interest as it accrues, this will increase the total amount you have to repay because you will be charged interest on a higher principal amount.

PLUS Loans
Not need-based, amount determined by student
Max: Cost of attendance (aka the $100k from the example above) minus other aid (for an example total of $60,000 in PLUS loans)
Interest rate: 7.9% fixed
Fee: 4%

So it looks like subsidized Stafford loans are by far my best option on the Federal side.  Interest free while in school is pretty nice and the fee isn't exorbitant, but enough to ensure that the loan isn't really free money.