Those of us in the workforce today have all been told one thing about building a great career: go to college! While we all know that there’s bad debt out there as well as good, we’ve been led to believe that a college degree is “good debt” because it’s an investment in the future. Any funds that pay for a solid education are worthy of the debt they leave you with, we think.
That’s both true and false.
How Student Loans Can Bite You Later in Life
The biggest danger in taking out student loans – bigger, even, than the impact of the mortgage crisis – is the student loan bubble. Student loans have been protected by legislation which allows these loans to be treated like good old IRS debt in bankruptcy court. This means that even if a person filed Chapter 7 bankruptcy and was forgiven on all other consumer and real estate debts, he would be left holding the bag for his student loans. There’s no walking away from it. If you’ve made the temporarily devastating decision to file Chapter 7, you’ll still have to find a way to repay all principal and interest on your student loans.
Because of this legal protection, private universities and technical schools have been able to use their accreditations to qualify for federally guaranteed student loans and offer them to any student who wishes to attend. These schools don’t have to worry about the default risk, unlike a bank. This, in turn, has inflated the cost of tuition at many schools because the student can enroll without any upfront investment. Schools have made massive profits using government guarantees. This practice may be seen by some as unethical, albeit completely legal, since the promises made to aspiring students often exceed the real-world likelihood of their professional opportunities after graduation. The key message here is for you to make an informed decision about the value of an institution’s education before taking on the associated debt.
Why College Degrees May Not Fulfill Their Promise
Like any other kind of financial transaction, individuals need to consider the basic principle of return on investment when thinking about student loans. If you invest in “good debt,” your use of other people’s money (OPM) is an extremely useful tool to gain more with less. If you invest in “bad debt,” this improper use of OPM can result in a lifetime of pain and indentured servitude.
Taking out a student loan to earn a degree should be viewed like any sophisticated business investment. What’s the likelihood of the borrower receiving her investment back – and then some – in a reasonable amount of time? For instance, to take out student loans valued at $20-50,000 per year, a borrower earning a degree should be guaranteed to return double or triple that amount in income potential on an annual basis. Without this kind of return, the borrower won’t likely be able to pay back the loan in a 5-year period.
The belief that a formal college education is the key to wealth is flawed. It’s a faulty paradigm that keeps poor and middle-class children and their families deep in debt for years. As a society, we value a 4-year degree at a higher rate than it can typically return in actual income potential. Education is great for intellectual and personal development, but it’s not a guarantee of earning potential – only highly specialized fields, like medicine, can justify the risk, and not nearly as well as they once did. If there’s not a clear way to profit from the risk of borrowing, then grants or other methods of obtaining education and experience would be a better investment.
As a young and enterprising businessperson, intelligent decision-making is at the core of your success. Don’t simply follow in others’ footsteps and get a college degree just because common practice says you should. Determine whether the pros outweigh the cons, and make sure college is a smart investment before you put your future down on student loans. The best education is one that will pay you back.
Chris J. Snook has spent over 11 years as an author, entrepreneur, and venture catalyst and has spent the last 5 years in the investment community incubating media startups as the Managing Partner of TLEC Ventures. He co-authored three international best-selling books entitled Wealth Matters 2007 and 2011 (2nd Edition) and Burnout: How to Transform Frustration to Fortune in 2005.