Student Loans—Are They Worth It?

With the rising costs of college tuition, student loans have come to be accepted as inevitable. Very few young people entering college right out of high school can afford to attend a four-year university without some kind of financial aid. If their parents have saved for their education, this can help. But the price of college tuition has been rising at about twice the rate of inflation, meaning even these funds might not be enough when the time comes.

According to a study done in 2003-2004, two-thirds of students graduating with a four-year degree had some debt after graduation. The average debt among these students was just over $19,000. In 2007, this figure rose to 50% of students graduating with debt that averaged $10,000 to $20,000.

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After graduation, of course, these students are faced with paying off their debt. If they’re able to land a good job in their chosen field, this might not be unmanageable. But with the job market shrinking so that even college graduates are having difficulty finding employment in fields previously in high demand, being left with student loan debt can be debilitating.

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How Much Will a Student Loan Really Cost Me?

student loan consequencesThe good news is, student loans generally have much lower interest rates than other loans. The Higher Education Access Act, passed in 2007, has lowered these rates even more for Federal student aid. Interest on private loans is higher. But even with lower rates, interest is still interest, and unless you pay off these loans in a timely manner, it will accumulate, making your debt even larger and more unmanageable.

As an example, consider a loan of only $5,000 with an interest rate of 6.8%. While you’re in school, interest is deferred, making it seem like you’re getting a free ride. When you graduate, though, interest kicks in.

At this rate, your interest will accumulate by $340 per year. If you defer your loan payments for only four years after you graduate—a reasonable amount of time to land a good job, pay off some credit card debt, and get yourself established—you’ll be paying an extra $1,360 on that initial $5,000 loan. Now imagine the numbers if you borrow the average $20,000 and you’ll see how this burden can mount.

Is College Worth It?

The average salary of a college graduate varies greatly, but generally ranges from $30,000 to $40,000 per year. By contrast, the average salary of a high school graduate who hasn’t received a college degree is closer to $25,000. This disparity increases with time—most college grads make up to twice as much as their less-educated counterparts.

Is this enough to offset the burden of debt created by student loans, though?

The answer, of course, varies. If you receive a college degree in a high-demand, high-paying job, chances are you’ll end out ahead in the long run. It’s a gamble, though. A job market that seems like a sure thing when you start college might be glutted by the time you graduate four years later—or six years if your career of choice demands a Master’s degree.

Choosing to delay college until you can afford it without taking out a large loan might seem like a good option, too. But again, this might or might not work out. The longer you put off college, the more difficult it becomes to take that step, as everyday life takes precedence. It’s easier to head for college straight out of high school, when you’re still free of other financial burdens, than it is to try to work it in later around a full-time job and possibly even a family.

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Conventional wisdom says it’s smarter to pursue that college degree. After you graduate, there are ways to manage that debt, including consolidation and other forms of settlement. Some financial consultants even believe that student loan debt is an acceptable form of long-term debt, much like a mortgage.

In the end, there’s no hard and fast answer, and the best way to approach this conundrum is to be prepared. Take a look at the numbers, decide what you want from your life, and make a plan to achieve that goal. Whether this means taking out a student loan or saving to pay for your college degree, you’ll know you went into it with your eyes open.