The College Debt Trap

From time to time I will do a financial post on this site. These posts are not about getting rich. They are usually about minimizing risk and not doing something dumb. Using debt to finance college used to be a wise investment. Now – for many degrees – it is foolish.

Photo student debt pinata by Kate Raynes-Goldie

Earlier this year in the post Before Racing Back to College to Pile on More Debt, I posted a graph that clearly showed that although the costs of college have continued to increase at a rapid pace, the expected earnings for a degree peaked a decade ago! In other words, the ROI (return on investment) for a college degree has never been worse and continues to decline.

I know several people with over $100,000 in student loan debt that can’t find employment. The jobs they are applying for have pay rates that would give them just enough for food, rent, a car, and interest payments on that debt. Some don’t even enjoy the careers they spent so much money earning degrees for.

What happens when you graduate, can’t find a job, and then miss a few payments on your student loan debt? It dirties your credit history. This is a huge problem since many employers are now pulling credit reports on prospective job candidates. You may be perfectly qualified for the job, but because you got behind in your student loan payments during the worst job market in 70 years, that company won’t extend an offer because you are now a credit risk. Years of hard work can be undone in months when you don’t pay your debt overlords.

video: The Housing Time Bomb

It gets worse. The Market Ticker recently posted on credit card marketing to college students in the post Colleges and Credit Cards. It seems colleges have been getting kickbacks from credit card companies when students rack up debts.

Can someone explain to me why  any student would go to such a college? Can someone explain to me why any parent would provide any sort of financial or other assistance to their child to attend a school  that developed a program whereby the more their kid gets SCREWED by credit card interest THE MORE THE MONEY THE COLLEGE MAKES?

If senior citizens were the targets of these financial leeches there would be criminal charges. But we as a society don’t seem to have a problem with 18-year-old freshmen, with very little real-life experience, becoming lifetime debt slaves. Many people are finally waking up to the fact that debt sucks. We are at the end of a three-generation credit expansion. Now comes the contraction. Asset values and wages are going to fall. However, student loan debt must still be paid back in full and with interest – even when the earning power of that degree declines.

Unlike other forms of debt, student loan debt cannot be absolved in bankruptcy. It is with you for life. Leave college with too much debt and not enough earning power and you will be an indentured servant to interest payments for the rest of your life. I’m going to bet your parents or high school guidance counselor never told you that. Don’t take my word for it. Figure out what the true cost of your degree will be and a conservative estimate of what you can expect to earn should wages remain stagnant for 10 years. Back when attending college was fairly priced this was an easy gamble. Not anymore.

The price of college is no different than housing. It can not and will not rise forever. It is in a bubble phase and will at some point correct to the realities of what a degree is truly worth. It may take a few years or even a decade, but reality will set in and tuition will fall. In the meantime, what should the prospective student do? This entry is getting long, so I’ll share my ideas in the next post.

UPDATE: Check out this graphic on the problems and dangers of student loans. (h/t Dhammy)