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The Myth of Debt Sustainability and Education

  January 7, 2014  |    #Eliminate Debt

Debt Sustainability, Is it Possible?

A couple of weeks ago we celebrated a friend’s birthday. One attendee asked us about our book; 4: The Four Principles of a Debt Free Life. She, like many others to whom we’ve mentioned our book, immediately said, “I’ll take 6 copies.” We all laughed and I commented that, “if everyone who says they’ll buy our book does, we’ll be millionaires.”

Later in the night she pulled us aside and with hushed voice asked if we had any sage advice for her and her situation. She told us she has hundreds of thousands of dollars in student loan debt.  She said bill collectors were calling her incessantly. With near tears in her eyes, she said that while having Christmas dinner with her family her father received a phone call from a collector about her loans. We consoled her as much as possible and told her that we don’t have any quick fixes, but that there are a few things she can do.

We tell this story to help others. Over the last 20 to 30 years our friend somehow borrowed a sum of money that’s nearly impossible for her to pay back, even with a well paying job. We’re not implying that there isn’t culpability on her part, nor are we saying that her school or bank is completely at fault. Pointing fingers now is useless. No one will be the better for it.

The lesson here is to understand the myth of education debt and sustainability. Over the years, students have been promised that if they get an education they will get a good paying job, and a good paying job means a better life. We agree that education builds skills and if those skills are applied, maintained and supplemented they will lead to a more prosperous life. At some point, however, education becomes cost-prohibitive.  It reaches a point of diminishing returns.

Now more than ever it’s important to assess whether the cost of post-secondary education is worth the potential reward. When making any purchase, such as buying a home, car or education, always ask the following questions:

  • Is this a want or a need?
  • How much can I afford? How much should I spend?
  • What is the return on investment?
  • What will the payments, including interest be? How will this affect me?
  • What are the opportunity costs?
  • Does this investment make sense?

If you’re making $45,000 a year, can you afford a $500,000 home with a 5.3% 30-year fixed interest rate requiring $2,400 in monthly mortgage payments?  Probably not.  Student loans are no different.

Also Read: How I Saved/Earned $654 in One Week

Parents and prospective students must do the same assessment with the cost of education.

The average business school student can expect to graduate and get an average paying job. Yes, everyone wants to believe they’re above average, but not everyone is. Being realistic saves a lot of money.

As of April 2013, the average starting salary for a bachelor’s degree was $45,000. After considering taxes, healthcare and the multitude of other deductions, along with typical life expenses, such as housing, food and transportation, what’s left over? Not much.

SoFi Reduce Loan Payments button 3

Taking this into consideration, does it make sense to acquire $150,000 or more in student loans? Can you afford the payments, including interest? What will that be? By our calculations, they’ll be a little over $1,000 a month for 30 years with a 6.8% interest rate.

These are details your lender should provide. Tell them you’re making a money conscious decision as to whether this is the right move or not and get all the details. After your lender provides all the details, research and verify the answers for yourself. You’ll be the one responsible for paying back the loan, not your lender.

Money Conscious Student We’re just starting to see how skyrocketing education costs are impacting recent college graduates and their ability to repay them. This is delaying moving out of their parent’s homes, getting married and having children of their own. This could cause strains on new and existing relationships, as the number one reason for divorce in the U.S. is money issues.

Don’t find yourself in the position of our friend or recent college graduates.  Assess what you or your child can afford.

Consider trade and vocational schools. Local and community colleges are often cheaper. Remember, it’s always an option to go to college after graduating high school, working and saving for a few years. It’s never an option to write off student loan debt.

David Auten and John Schneider are The Debt Free Guys™. After paying off over $51,000 in credit card debt, they have dedicated themselves to helping people live debt free, have fun and be Money Conscious. They are the authors of four books including 4: The Four Principles of a Debt Free Life available on Amazon now.

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