Bad debt comes in many forms — including credit card balances (especially when tied to high interest rates), car loans and other forms of consumer indebtedness. With bad debt, you’re financing consumer items that don’t appreciate in value or create wealth. And that’s OK in small chunks, until your payments can’t keep up with interest charges, let alone pay off principal.
Good debt, I was taught, uses bank money or financing to secure a valuable asset: a mortgage is a good example. But my, how things have changed. In a future column I’ll share why one financial whiz argues that buying a home isn’t the bedrock investment many think it is. I’d still argue that mortgage is good debt, though. We all need shelter, and real estate almost always appreciates…given enough time.
Then there’s student loan debt. Oh boy.
If you subscribe to the “good debt” theory, a college education loan constitutes good debt because you’re making a sound investment in yourself. The debt allows you to earn a degree, develop your talents and look more attractive in the job market. That’s a compelling argument, right?
But here’s the problem: When students today amass loan balances in the five and six digits — to the point where they’re financially hamstrung for decades — how can such debt possibly be “good”?
As I wrote in an earlier column, student loan debt now averages $23,000 per college student borrower, and some estimates place the figure as high as $27,000. Meanwhile, the cost for college education at a four-year private college education tripled in price between 1980 and 2010. To me, the tuition hikes are often unjustified — and the value students get for going that deep in the hole is debatable.
Here’s a simple financial question for you: If the job market in your chosen field is particularly sour, what’s the return on investment? Thirty grand in debt versus … a post-graduation job as a barista because no one’s hiring?
Sadly, I have several friends caught in this very predicament. One of my favorite Starbucks employees also ranks as one of the most talented music critics I’ve ever met, but he can’t find full-time work as a journalist three years out of school.
Back in 1980, anyone who graduated with student loan debt of $10,000 or more was considered a freak. Today, I could break out my address book and within 30 minutes find a half dozen twentysomething friends with student loans of $50,000 or more. And we’re not talking about loans for medical school, either.
Fortunately, students saddled with that kind of financial load can find relief — not that it’s getting widely advertised by the universities that have already pocketed your cash.
‘Pay as You Earn’
In December 2012, the Obama administration fast-tracked the “Pay as You Earn” program, which allows eligible student loan borrowers to cap monthly payments at 10 percent of discretionary income, with loan forgiveness after 20 years. That might sound like a long time, but consider that an earlier version of the program had a 25-year clock.
Qualified borrowers must have federal student loans that date after Oct. 1, 2007 and will have received a disbursement (or cash payout) from the loan on or after Oct. 1, 2011. You’ll qualify for partial financial hardship based on how much of your income would otherwise go to standard repayments. This page uses a calculator to tell you if you’re eligible.
Unfortunately, this relief doesn’t apply to private loans from banks and other non-federal lenders, but for roughly 1.6 borrowers, it could spell welcome relief, if not a clean financial slate.The loans covered include all William D. Ford Federal Direct Loan (Direct Loan) Program loans, as well as certain types of Federal Family Education Loan (FFEL) Program loans.
Additional Benefits for Public Servants, Vets
For those looking to speed up the timetable to 10 years, here’s how you can do it: Get involved in public service and make all your payments on time. Eligible positions include those in nursing, government, police, fire, social work and nonprofit organizations.
Other loan forgiveness programs will reward you for volunteering through the Peace Corps, AmeriCorps or VISTA, or service in the Army National Guard. Certain state programs also grant forgiveness to medical school grads and nurses who work in underserved areas. It’s a great idea to check through agencies in your state to find what assistance might be waiting for you. In my home state, for example, the Illinois Student Assistance Commission administers at least half a dozen loan forgiveness programs for public interest attorneys, child care providers, veterans home nurses and more. A friend of mine with a staggering $50,000 in student loans just started taking advantage of help from the ISAC.
If she ran up $50,000 on her Visa buying kung fu memorabilia and Versace swag, I’d find it hard to sympathize. But anyone who runs up $50,000 in student loan debt deserves a chance to beat back that financial albatross. No doubt schools should do more to help students get the education they need without the backbreaking debt; sadly, it doesn’t work that way. In many corners, higher education is big business, with a captive market of customers who’ve been cowed into thinking that they need a degree, no matter the cost.
To me, that’s not bad debt — that’s bad-faith business, and the universities should act more responsibly. Instead, they view this sort of student debt insanity through rose-colored glasses as the “new normal,” and justify it with glitzy ad campaigns and feel-good slogans about investing in your future.
The last time I checked, 25 years of student loan debt doesn’t exactly equate with “investment.” But remember: It’s your money. And if it’s your debt, you need to take charge.
Hopefully, that’s something they taught you in college. If not, don’t beat yourself up. We’re here to help, and I’ll do my best to inform and enlighten through this weekly column.
Have you taken advantage of programs that help you reduce student loan debt?