Earn What You Spend

Leverage is a dangerous game - it magnifies both returns and losses - but a historically safe bet has been education.  Not only do I (strongly) believe in the intrinsic value of education, there is little doubt a college education substantially raises your future earnings.  Just look at unemployment rates for confirmation: those with a bachelor’s degree or higher have significantly lower unemployment rates.

Yet going into significant debt for higher education should be recognized for what it is: a gamble.  (Especially, I believe, with masters programs).  There are those who took out too much debt in the housing sector, yet if they can no longer pay their mortgage, the worst that can happen to them is that they lose their house (which is certainly quite bad).  But that’s the extent of it: it’s a debt that can literally be walked away from. 

Not so with student loans. 

Student loans remain with the student through thick and thin - sometimes even beyond the grave: 

And as many borrowers have learned, student loans are among the most ironclad debts, on par with child support, alimony and overdue taxes. They stick with you no matter what.

Bankruptcy usually doesn’t provide relief, except in the most dire of circumstances. Even death isn’t a good enough excuse for discharging some private loan debts. And the government can wield a heavy hand to collect what it is due: If you fail to repay your federal loans, it can garnish up to 15 percent of your wages or take your tax refund or part of your Social Security benefits.

Think about this for a moment.  Most say that buying a house is the biggest financial decision of a person’s life.  But if that decision was a wrong one, there is the option to simply walk away from that debt.  No such recourse exists with student loans.

These are, of course, two very different financial decisions.  But the upfront expectations are similar.  Few take out a mortgage with the expectation of losing money.  Rather, they assume some level of appreciation in the long run.  Similarly, no student goes $150,000 into debt - as one student mentioned in the NYTimes article did - with the expectation that they’ll make less money after they earn their degree.  Rather, they believe the education will substantially raise their future earnings.  And when a variety of circumstances, including a severe recession, preclude this from happening, the student loan holder is underwater with no way out.  

Thus the financial decisions made by many 17 and 18-year-olds have the capacity to affect them quite literally for the remainder of their lives.  That a decision this important, which is made before many students even have a credit card of their own, is left in the hands of those without significant financial literacy seems wrong.

Yet the culprit can be seen on either side of this equation: the ironclad restrictions on the student debt or the ballooning costs of tuition.  It seems that by altering either one, we could go a long way towards alleviating these problems.  Not too mention there is a need for more education about some of the dangers of going into debt for higher education!