Borrowing Money For College Is A Bad Idea For A Reason You’ll Never Guess

Three tough decisions

If you or your son or daughter is nearing college-age, you have some difficult and confusing decisions ahead of you. Three of the most important are choosing a school, determining how to finance its cost and deciding on a field of study. These are difficult decisions to make because making the wrong ones could have a very negative affect on you or your child’s entire life.

Should you or your child even go to college?

We have heard it drummed into our heads over and over that every child should have a college education. Unfortunately, this is simply not true. We are all different. We all have different skill sets. And we all have different abilities. So the first question you need to ask yourself or your child is whether she or he really needs to go to a four-year college. He or she might be better off in a two-year community college or in a trade school. You need to have a frank discussion with your child regarding his or her interest in college and whether or not they are committed enough to make it worth investing in what today’s four-year college education costs.

STEM or something softer

When choosing a college or helping your child choose a college you need to think about whether he or she would be best choosing a major in one of the STEM (science, technology, engineering, math) curriculums or in something softer. Study after study has shown that a STEM major will lead to a higher paying career than most other majors. However, again it’s important to factor in your interests, skills and abilities. Not everyone is cut out to be a math or engineering major regardless of potential earnings. On the other hand, if your child’s or your interest lies in areas such as photography and television arts, fine arts psychology or pre-K education you need to understand that he or she likely won’t be able to earn more than $25,000-$30,000 right out of school, which will make paying back any student loans very troublesome.

Food for thought

While this may not apply to psychology or social studies majors, a study of people in engineering and science and their earnings revealed some very interesting findings. What this research found is that the biggest single thing that has the most affect on salaries is variations in GPA or grade point average, And that students borrowing money for college generally end up with lower grades than those that didn’t have to borrow money and that this is the most important reason why they end up earning less. What this translates into is that borrowers don’t end up earning less due to financial restrictions or demographics that require them to go to inferior schools. In fact, students that are required to borrow money to finance their educations are 50% more likely to choose a more expensive program or a private school. This means they are betting more on the advantages they will benefit from these programs in their futures.

What are the results of this? It’s that non-borrowers that are disadvantaged and that attended lower-ranked schools leave schools with salaries that are more than 10% higher than those that were required to borrow money to finance their educations.

The reason for this

It all really boiled down to grade point average. Those that borrowed money had dramatically poorer grades than non-borrowers and this completely eliminated the positive advantages of attending a better school.

Why do the students that borrow money have lower grades?

The answer to this has been hotly debated. It could be due to the fact that there is the stress of debt that often requires them to get a job to help finance their educations. It’s also very possible that those who borrow money to finance their schooling are overestimating how important school quality is on their prospects for employment. Or it could be that borrowers faced more anxiety when they were trying to get a job and ended up taking one that paid less or was more secure instead of waiting for a better one.

Another possible explanation is that going into a very competitive program may not be in you or your child’s best interest. There is research showing that in the more competitive math, technology and science programs there is a higher dropout rate than those fields that are less competitive. The ugly truth is that the smarter are your peers, the dumber you may feel. And the dumber you feel the more likely you are to drop out.

The moral: Reconsider borrowing money to finance your schooling

The net/net of all this is that when it comes to your future your grades are more important than where you went to school. For whatever reason, it’s clear that students that borrow money will end up with worse grades. So the best bet for you or your child is to avoid student loans like the plague and just do the very best you can do in your studies.

Student debt is like the Roach Motel

You’ve probably seen that advertisement for the Roach Motel where roaches check in but they never check out. Unfortunately, the same thing is true of borrowing money for college. It’s very easy to get into but virtually impossible to get out of. Our federal government in coordination with our colleges and universities has made taking out student loans so easy it’s very difficult to avoid taking them. But our government isn’t so nice when it comes to repaying those loans. Six months after you graduate from college you will be required to start paying them back no matter how painful it might be. You were automatically put into what’s called 10-Year Standard Repayment unless you were smart enough chose another program. If you are in 10-Year Repayment you will have a fixed monthly payment for 10 long years. And, of course, the more you borrowed the higher your monthly payments will be. For example if you borrowed $10,000 at 6% interest, your monthly payment would be $111.10. And if you were in debt to the tune of $20,000, your monthly payment would be $222.04 for those 10 long years. That could be enough to keep you from buying a car or putting together a down payment on a house.

Not even bankruptcy can save you

In 2005 our Congress in its infinite wisdom changed the bankruptcy code to make both federally backed and private student loans non-dischargeable in a bankruptcy. This means that student loans can’t be written off or forgiven unlike other private debts. This puts them on the same level as alimony and child support payments – totally non-negotiable so that they stick with you forever. For whatever it’s worth there is one exception to this, which is if you were able to prove to your bankruptcy judge that you had a severe financial hardship. You would need to be able to show and prove you can’t maintain even a minimal standard of living if you are forced to repay your student loans and that this problem is likely to continue for most of the repayment period of your student loans. You would also need to show the bankruptcy judge that you had made really good faith efforts to repay your loans. Barring this, you’re stuck and you will need to repay those loans whether it’s for 10 years or even longer.