Knowledge Hoop

While the economy continues to show signs of improvement, the bleak outlook on student loan debt stole headlines last week.  Due to the recession, there were many people (young and old) who seized the opportunity to go back to school in hopes of retooling themselves for the emerging job market.  On the surface, this seems to be great news, but there were some alarming facts reported in the news:

• An article in Forbes announced that four economists at the New York Fed reported that outstanding student loans now exceed credit card balances and auto loans
• According to the Federal Reserve Bank of NY, Department of Education, and private sources, outstanding student loans will exceed $1 trillion this year as reported by USA Today
• The College Board reports that students are borrowing twice as much as they did a decade ago, and total outstanding debt has doubled in the past five years

Given the information above, you might say that borrowing money to go to school is a bad idea.  Although the economy is improving, there are still a significant number of people out of work.  Additionally, as parents attempt to help their children by cosigning, taking out personal loans, or drawing down equity (if available) in their homes, many may be faced with paying those loans back on behalf of their kids in the event that they’re unable to secure employment after graduation. 

After considering all of this, what’s the alternative?  Ultimately, if you want to compete, school may be the only option.  You will likely be faced with applying for loans to pay for your education, but I urge you to make wise choices.  The following three steps may help you avoid getting in over your head:

1. Assess the salary potential for your new career and pursue jobs in growing industries (e.g., healthcare, technology, and service.)  Try to pursue opportunites that require your presence and cannot be outsourced to other countries.  Additionally, only borrow what’s practical for your new career choice
2. Seek opportunities to apply for grants and other job training programs.  Explore opportunities to participate in programs at local non-profit agencies (i.e., Urban League, Goodwill, etc.) which offer services at a free or reduced rate.  Review the Workforce Investment Act (WIA) and confirm whether or not you’re eligible for funding under this program.  WIA supersedes the Job Training Partnership Act and offers a comprehensive range of workforce development activities through statewide and local organizations
3. Avoid dipping into your home’s equity.  Although the economy is showing signs of recovery, we should still be conservative about the financial decisions we make.  If you take out the equity in your home or use your home as collateral, you very well may be jeopardizing your home if you default on the loan

As a result of the recession, we are slowly rebuilding America, and many families have found themselves in similar situations.  We are all defining new norms and learning how to do more with less.  Our ancestors experienced similar times and they survived.  We will also survive, but it will require us to continue to make sacrifices and become more intentional in our spending.  

In closing, because most student loans are deferred as long as you’re a student, it can become very easy to forget how much debt you’re accumulating.  Each time you apply for new debt, take an opportunity to review your outstanding debt, and if you don’t remember anything else about this post, please GRADUATE – you don’t want the debt without the degree!  An article in the Wall Street Journal reported that a college graduate earns $800K to $1M more than a high school graduate over their lifetime.  Another important fact to remember is most student loan debt cannot be discharged in bankruptcy.  In essence, nothing but death can keep you from being required to pay back student loans!