Charlie Harper: Be aware when taking student loans

August 6, 2013 

It is not just K-12 students returning to campus. College students are moving into dormitories this week as well. Their arrival should coincide with the signing of new compromise legislation that slows the rate of increase for student loans. That said, the money is far from free.

Many of the programs available now contain variable interest rates. This, combined with the fact that student loans are now the second largest portion of Americans' consumer debt with total outstanding obligations surpassing $1 trillion, and concerns over a bubble and individual's ability to repay these notes should be addressed.

For students needing to receive these loans in order to pursue a higher education degree, their first lesson should be how to calculate a return on investment. Too many are borrowing money for the sake of "learning," which when pressed, means for too many a break from joining the adult world with adult responsibilities for 4-6 years.

Students should avail themselves to see the job placement rates and average annual starting salaries for the degrees which they are seeking from the schools they are attending. They then should be asked to create a pro-forma budget for housing in the area which they plan to live, transportation expenses, other living expenses, and then see how much the repayment on their loans which they have amassed will cut into their discretionary income.

This exercise should not be voluntary. It should be required at the beginning of each term that a student applies for additional student loans. This would not only reinforce the cost of the mounting debt, but also demonstrate how delaying degrees by changing majors or dropping classes is not only putting off the inevitable, but raising its price tag as well.

Students should also understand that certain majors carry more risk in finding employment than others. According to a recent Georgetown University study, those majoring in architecture, anthropology and political science have an unemployment rate two to three times higher than those with degrees in nursing, early childhood education or chemistry.

And then there's the unpleasant thought of bankruptcy for those unable to pay all of the debts and living expenses for those unable to find work or those who remain underemployed. Students should also be aware that their student loans cannot be discharged by bankruptcy. Thus, since post-graduate financial problems are mostly high living expenses and student loan debt combined with a low starting salary, bankruptcy will not help alleviate the situation. A second job may be the only option.

Students entering college today need to make a careful assessment of what their finances are now -- and what they are likely to be for the five to ten years after graduation. While there is great temptation to "experience" all that college has to offer, there needs to be more sober reflection on how this will be paid for. If a second job will eventually be required to pay off the debts accumulated during this time of self-exploration, then perhaps it is better if this second job is taken while the student is still living a student's lifestyle in order to thwart accumulating this debt in the first place. It will also look good on a resume to prospective employers.

Every student will face a different situation, and how that student faces the financial realities of life are ultimately up to them. We have perhaps reached a point where borrowing money for college is too easy, with the long term consequences of these early financial decisions not adequately explained or understood.

If we actually cared about this generation of college students, we wouldn't be throwing loan applications for unlimited credit lines at them any more than we would hand them bottles of whiskey and car keys and tell them to go have a good time. Instead, we would emphasize that there is a great opportunity before them, but their own decisions and actions have consequences.

College is an awesome time to learn a lot. It should not be the time to learn long term financial consequences the hard way.

Charlie Harper, author and editor of the Peach Pundit blog, writes on Georgia politics and government; www.peachpundit.com.

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