3 Reasons Student Loans Are Bad Debt

Millions of people think student loans are good debt. They are wrong. There is no such thing as good debt.

There are two types of debt most people think are good:

  1. Mortgages
  2. Student Loans

I think was all under­stand why a mortgage is bad debt. If you forget, go back to 2008 and look at the mortgage crisis. Then look at what banks are doing differ­ently and ask yourself if they learned anything. (Spoiler alert: they didn’t).

Student loans are trickier.

Few people would say college is a bad thing. In fact, college can be a really good thing! Most higher paying jobs expect a bachelor’s degree. And there is no denying a “club” exists that you join when your resume has “Bachelor’s of…” on it. But that does not make going into debt for college a good thing.

3 Reasons Student Loans Are Horrible

They Allow Uncertainty

Half of students who declare a major when they enter college will change it at least once (some more than that). Many students don’t even pick a major until two or three years in! That is $4,000 or more per semester going nowhere. Students I speak to take out a lot more than four grand a semester. I have heard of people who borrow $20,000 a semester. One of these students didn’t even have a major!

That is stupid.

At least with credit cards you are actually buying something. With student loans teenagers feel they can take their time deciding what to “buy” at college without suffering consequences.

But the conse­quences are coming.

They Are Unbankruptable

Let’s say a few years after college you get laid off and your emergency fund runs out. You can’t get a job anywhere except McDonald’s and you decide to file bank­ruptcy to get rid of the loans and move on with your life.

Sadly, it won’t help.

Student loans never go away – ever. There is nothing you can do to drop them. Even bank­ruptcy doesn’t protect you. The only way to get rid of a student loan is to pay it off and for most “normal” people that doesn’t happen for 20 or 30 years!

This fantastic info graphic explains it well.

No Income Guarantees.

I have never seen a college guarantee post-graduate income. I have seen a lot of other promises but never income.

I bring this up because I hear people say “don’t take out more loans than you could reason­ably expect to make your first year of work.” The problem with that logic is you can never know how much money you will make. Some indus­tries disappear. Other folks never work in the industry they went to school for. Other degrees (like social work) cost double or triple what a person could reason­ably expect to make in a year.

Without an income guarantee there is no way of knowing when or if you will be able to reason­ably pay off your student loans

What To Do

Going to college can be a really great thing; but only if you have a plan.

Start with a direction. It is okay to change majors as you grow older, but entering college without any direction will cost a lot of money without any reward.

Then, instead of taking out student loans figure out what you can afford (this may mean community college for a few years) and pay for it with cash. Only look at private schools if you can afford to pay the tuition.

Finally, remember that the most important part of college is what you learn. Some of the world’s most successful people didn’t graduate. College is not the be-all-end-all to a great life.

Am I too harsh on student loans? Have they been a blessing in your life? Let me know in the comments

14 Responses to “3 Reasons Student Loans Are Bad Debt”

  1. Brandon April 14, 2011 at 8:08 AM #

    This was great! It is for this reason, I am going to college right now (while I am in high school) because it is free. I am also working toward some schol­ar­ships so I won’t have this burden…

    • Alex April 14, 2011 at 8:20 AM #

      That is awesome, Brandon! A great way to do it!

      I also know you have a business that you work on. You are in a fantastic position to get ahead in life. When you enter college you will already be a mile ahead of your classmates!

  2. dustin April 14, 2011 at 9:19 AM #

    One of the biggest blessings in my life was to leave college and not have any student loan debt. Through a little help, some jobs, summer work, etc, I didn’t have to take anything out…

    Then it wasn’t a big deal, but now, 10 years later, I am espe­cially grateful.

    • Alex April 14, 2011 at 9:56 AM #

      That is awesome, Dustin! My story is very similar to yours. Worked hard, got some help, didn’t take all the classes I would have liked to, and left with only debt (which my parents took out on my behalf and then imme­di­ately paid for).

      There is a sense of freedom in having a debt-free degree.

  3. Moe April 14, 2011 at 9:25 AM #

    I agree. But for some, it’s the only way to go. If we only learned how to be savvy savers and investors. We would avoid all the headaches that come with student loans.

    • Alex April 14, 2011 at 9:58 AM #

      I would agree if you would change one thing, “it’s the only way to go right now”. As in, if I am going to go this semester I need to take out a student loan.

      I think what most people miss is if they take a year off college to save up some money then they won’t have to worry about the headaches of student loans.

      Thanks for the input, Moe! I appre­ciate it =)

  4. ixnayonthetimmay April 14, 2011 at 2:33 PM #

    I guess I take the Dave Ramsey tack in that mortgage debt is not “as” bad as other kinds of debt, if done right. Of course, maybe I am trying to a poste­riori justify my own mortgage, but at least it’s not a 3–1 ARM with balloon payment, and you better believe I am trying to pay it off as quickly as possible.

    I’ve never taken out a student loan, but I’ve never gone to college for more than a collec­tive three semesters. So my expe­ri­ence is by proxy through people I know. The funny thing is, most people I know who have gotten student loans have not used them exclu­sively for school. Maybe partially or maybe even mostly, but not totally. This seems a little strange to me.

    I have to wonder what it is that’s at work here. Maybe the loan orig­i­na­tors know that they aren’t bank­rupt­able, so they don’t care what people actually spend them on? Perhaps if there was no implicit govern­ment guarantee, they’d have a bit more incentive to make sure people used them for what they’re intended for. But even then, I guess student loans aren’t that good an idea.

    Regard­less, I never hear people who took them out, for whatever reason, talk about the student loan debt like it was a great thing. It seems as if the presence of the payment hangs like an albatross around their necks and far over­shadows the “use of money” they got so they could go to school. It even seems more magnified if they did complete school but aren’t yet in a career utilizing their education.

    • Alex April 15, 2011 at 9:16 AM #

      I hope to never get a mortgage, but I agree with you and Dave (for the most part) that mortgage is okay as long as you have a plan and you buy one you can afford (which you do, Tim).

      I think the reason so many banks so happily give away outra­geous sums of money to students is the same reason they give out outra­geous mortgages to people: no risk.

      With a student loan there is no risk you will lose the money. If the payee defaults the govern­ments pays the insti­tu­tion 100% of the loan plus interest. Then the gov tacks on large fees and high interest and makes money hand over fist (the info­graphic I linked to explains it well).

      Basically, if they loan more than a person can pay and then the person doesn’t pay it then the gov and the lending insti­tu­tion end up with a net gain.

      What a crazy world we live in…

  5. Jacob May 1, 2011 at 12:47 PM #

    See Alex, I told you I was going to read your blog. I for one went to college for 4 years and the first year had no major at all. I became a criminal justice/fine arts major (it was a double major) and now currently work as a salesman. I was pretty nieve through out college and never thought about how it was getting paid for. After­wards I looked into the loans that my Mom had taken out for me and realized that after 6 months of grad­u­a­tion I was going to get a $200 bill/month for the next 10 years (thats if I pay every­thing on time). I wouldnt trade my college expe­ri­ence for anything but I do believe had I gone to a community college for the first year I would defi­nantly have been a little more prepared for what kind of debt I would have in the future (I would have also have had a lot less debt).

    • Alex May 2, 2011 at 9:48 AM #

      Haha, I’m glad you were finally able to read a blog or two!

      You are a good example, Jacob. Thank you for sharing it!

  6. Keala November 23, 2011 at 2:07 PM #

    I’m STILL paying on my student loans I got over 15 years ago. Maybe longer.

    • Alex November 23, 2011 at 3:26 PM #

      Yikes! That sucks. Was it worth it?

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