Going to school without loans today is something seen by the masses as an idea only for the rich or very talented. However, when we look into why it is that people choose to go into debt for school, even for those with no other responsibilities, it is odd that loans are taken out at all.
Why do People get Loans for College?
President Carter was being interviewed by Bill Maher in November, 2010. During the course of the interview, he said that the person most likely to be elected to run the country is the one who will tell Americans that they do not have to make sacrifices today. Just as President Reagan used more oil than any other President before, today’s students are spending much more than their parents did in the past. They have cell phones, cars, and brand new computers while their tuition is much higher relative to income.
In fact, students today do not always need income to go to school; they just need to want to go to school. While some people cannot attend without loans, many would just rather not have to sacrifice today.
Private vs. Federal Student Loan Rates
A federal loan compared to a private one is like comparing apples to oranges. They are members of the same family, but they are obviously different.
On average, private loans have higher interest rates. When loans are defaulted on, though, private student loans are more like personal loans or credit cards. They can be forgiven in bankruptcy whereas federal student loans cannot be.
Regarding federal loans, it is not a bad thing that students will be held to account for the money they borrow. Interest rates can be as low as two or three percent, and the opportunity to go to school on borrowed money that is not called upon while school is in session is quite generous. The only area of the agreement that is out of the student’s favor when it comes to federal money is that it has to be paid back, as it should.
How Long it Takes to pay off Student Loans
According to CollegeScholarship.org, the average graduate of a four-year university is leaving with $20,000 in student loan debt. This is partially due to students who borrow responsibly, paying the loan down as they go, attending public colleges, and seeking grants and scholarships. Others also receive help from family members who take on part of the responsibility.
If a student was to have a loan balance of $20,000 with a 2.9% interest rate over 10 years upon graduating, he would owe $192.20 a month. After 120 payments, he would have paid just over $23,000, a small sum given his potential income leap, but $5,000 a year is not hard to come up with for the average college student between summer jobs and working during the school year for those not playing NCAA Division I sports.
The question is, are there other costs to having waited to pay off school?
Are Student Loans Worth it?
In many cases, student loans are a burden to those who get them. Making an extra $5,000 a year is not hard for students whose schooling is their top priority, and many do. The problem is for those who do work but use the money to support their lifestyle.
The $192.20 above could be invested from age 22-32 into a 401(k) or Roth IRA. If the rate of return was only 3.0%, the money accrued would be $26,440. Rather than paying $23,000, the student would have $26,440. If no more money was added and interest rates never changed, the principal amount would grow to more than $64,000 over another 30 years. A small part of the $192.20 could also be invested into a $500,000 term life insurance policy.
The difference between paying for school up front and paying it off over 10 years when you don’t have to is retirement savings and piece of mind. Rather than growing tens of thousands of dollars, some students are needlessly nickel and diming their way out of paying their loans off, leading to less money to invest or enjoy. The answer to the question, is it worth it to go into to debt for school?, is, in many cases, no.