More students are going to college, and most of them are going into debt. Student loan debt outpaced credit card debt in 2010 and is expected to pass $1 trillion in 2011. Student loans, long considered a “good debt,” may morph into a bad debt for graduates faced with decades of payments.
Student loan debt rises with tuition
In 1993, less than half of students earning a bachelor’s degree graduated with student loan debt. By 2008, the number of students graduating in debt had risen to two-thirds. In 2009, college graduates left school with an average of $24,000 in student loan debt. Total student loan debt is expected to reach $1 trillion this year and grow at at even faster rate. Republicans in Congress want to cut Pell grants, a form of federal financial aid for lower-income students. As cash-strapped states cut funding to universities and colleges, tuition increases will add to a mountain of debt that is expected to have a profound impact on the current generation of college students. As student loan debt grows, so does the rate of student loan default. Credit damage, as well as burdensome student loan payments for those who don’t default, will limit the range of options when it comes to buying a home or having children. Those who have children may have to choose between paying off their student loan debt or saving for their children’s college education.
Good debt versus bad debt
When it comes to debt, student loans have always been considered “good debt,” as opposed to “bad debt” such as credit cards, auto loans or payday loans. In the aftermath of the recession, any kind of debt has become undesirable. But even as the average cost for a four-year private education has reached more than $37,000 a year, according to the College Board, student loans can be good debt if the degree results in a salary that allows the debt to be paid in a reasonable amount of time. A simple rule of thumb among financial advisers is not to borrow more than you expect to make in the first year on the job after graduation. That rule of thumb, however, highlights the risk of taking on student loan debt. Finding a job that pays off the average cost of college with a degree in sociology or history is unlikely. The risk may be lower for fields such as engineering or medicine, but the costs, and the debt, will likely be higher.
Bottom line: debt is risky
When it comes to good debt versus bad debt, the bottom line these days is simple: all debt is bad if you can’t pay it off. Default rates are rising — to almost 50 percent — among students who attended for-profit colleges. Student loans usually can’t be discharged in bankruptcy. For federally guaranteed student loans, the government can garnish wages, withhold tax refunds or dock Social Security payments. The Obama administration did make it easier for student loan debtors stuck in low-paying jobs by forgiving the balance on debt for those who have dutifully paid 15 percent of their income toward their student loans for 25 years — or 10 years if they work in public service.