A quick riddle for everybody: Your friends have this, your relatives have this, and chances are your parents may have had this, and the government recommends this. What is this? a student loan. Is it a student loan good or bad? That is not for me to decide for you, all I can do is influence your decision by listing the advantages and disadvantages of common student loan facts.
I hate articles where you read an advantage of something and you find yourself scratching your head wondering why it’s an advantage. For this article I will list a statement and then provide you with both sides of the coin so that you are able to determine what is the best option for you. You may decide that a student loan is ideal for you or you may see things differently and come to the conclusion that you will not acquire a student loan to fund your college education.
1. With a student loan you will not have to stress about finding work.
Advantage: If you are truly a focused student and you will spend every moment of your spare time on your studies then a student loan is ideal for you. This way you will not have to lose any unnecessary study time to a job that will only hinder your ability to gain an A average.
Disadvantage: If you get distracted easily then you will probably spend most of your time on Facebook or playing pool at the school lounge. By attaining a student loan you will end up becoming too comfortable with having no work and as a result your time will not be spent effectively.
2. Student loans are fairly easy to attain.
Advantage: You won’t have to put up with the hassle of being interviewed and questioned in regards to why you need the financial assistance. This way you will not have to worry about losing sleep worrying about how you will cover the costs of a post secondary education. Many times students end up not even pursuing a post secondary education simply because they don’t have the many to cover the large expenses. By being able to obtain the proper tuition assistance, every young person has the opportunity to pursue a college education.
Disadvantage: With a student loan being easy to obtain you may end up receiving more financial assistance than required. Let’s be honest, this “extra” money will not go towards tutoring or education, it will be treated as your spending money. I have seen this happen many times to people around me where they attain more financial assistance than required and they end up buying a car or some other unnecessary purchase.
3. Most student loan repayment plans do not begin until 6 months after graduation.
Advantage: This gives you the proper buffer zone so you will not have to be in a position where you complete college and you are immediately drowning in debt.
Disadvantage: In this economy 6 months will most likely not be enough time for you to find that perfect first job where you will excel and grow your career. There is a good chance that you will get hit with the loan repayment and interest charges at a time where you are still on the job hunt. As a result of this you will find work in a field that is not ideal and may end up working a dead end job just to pay your bills. You don’t want to spend four years of your life working hard to get a degree only to end up working a job you hate.
Now the choice is up to you. Read over the various statements about student loans and their positive/negative implications to decide whether a student loan is for you or if you plan on doing things the old fashioned way by working a part time job.
{ 14 comments… read them below or add one }
Definitely agree with the pros and cons both directions. I personally had student loans and just finished paying them off in December, a solid 5 years after I graduated. The bummer is my degree is in a field I’m no longer really working in, yet I was still paying for it.
I know a family friend who is a successful lawyer in our city in his upper 50s and STILL has student loans from law school! That’s insane. I encourage students to do everything necessary to avoid student loans.
I agree with everything you and Grant said. The best way to pay off a student loan is to not have one! I’ve worked to help put myself through school, and it’s motivating to stay on task and work hard if I know that I can’t do anything without that paycheck!
I have a question for you about student loans. My family has just about enough money saved to pay my way through university. However, we’ve been talking about a possible plan.
1. Get as much money out of the Student Loans Company as possible – tuition fees, maintenance, the lot.
2. Put the money they’ve saved into a 3 year fixed-rate bond (or similar investment).
3. Use the loan money to pay for my education and living expenses.
4. When I graduate, use the saved money to pay it all off before interest kicks in and keep the interest earned from the savings account (a couple of hundred, probably).
Is this a worthwhile option or is it just too much hassle? Particularly as the current interest rates for savers are low, it’s beginning to seem like too much work for too little money.
Oh, and nice question on The Simple Dollar. (This one, I mean: http://www.thesimpledollar.com/2009/02/02/reader-mailbag-48/).
I think the amount of your loan and when the interest starts accumulating are the two critical factors when determining whether or not to take out student loans.
I had to take out student loans to get my bachelors degree. I was able to pay off my student loans before interest started accumulating. I worked hard over the summers and had the money to pay it off a month or two after I graduated. I think student loans are another topic like emergency funds that are not one size fits all. Everybody has a different situation.
I definitely would have taken out even more in student loans if it was necessary to get my degree.
I think too many people are used to going from elementary to high school and straight into college/university and end up in debt for years to come.
And you call this your career, when you are trapped into it now?
I think it is best to take time off or plan ahead, in terms of finances, plan accordingly before you jump into it.
Truly the only time that a student loan REALLY makes sense is when you’re going to grad school and can’t work at all. What are you going to do when Tuition at Harvard’s MBA program plus living expenses is 75k a year? You don’t have time to work and still have to feed your family.
You have to get one.
So- they can be good. But, typically, I think you can work your way through college and come out debt free. My wife and I save nearly 1k a month and are BOTH going to school!
@Grant Baldwin I agree with you that a little sacrifice in your early 20s can go along way to help you out financially as you grow older. You don’t want to be in your 30s or 40s and still paying off your student debt.
@Jeff Congrats on your dedication and determination to paying off your college education without any loans.
@Suzie You are in a very enviable situation. I don’t want to be telling you what to do because I am not fully aware of your entire situation nor do I want to be held accountable in case things don’t go as planned. However, I will tell you what many of my friends in similar positions have done.
I know two buddies that both obtained student loans to pay for their education while they put the money their parents gave them into bonds and stocks. I will not get into details because everyone has a different opinion and understanding of the stock market. All I will say is that you should do your research to see what rates you could get for your money. Since most student loans are interest free until graduation you can still make some decent money if you earn 3-4% interest.
Once again it all depends on your risk tolerance and understanding of the stock market. I will conclude by saying that you should perform proper research on possible interest rates and the availability of student loans where you live. If you conduct all the research and find that you could potentially earn some decent interest off the savings your family is providing you with then why not?
@Suzie, If I were you I would do exactly what you are proposing. I would never ever put this money into the stock market though. I would stick with fixed income investments like bonds, money market accounts or high yield savings accounts (in other words, nothing that will lose you money).
@Steve Good point about how student loans are just like emegency funds, there is no right answer. We are all in unique situations with different variables. The reason I like topics such as this one is I get to read about how other people have dealt with similiar situations.
@Tom I like your idea of taking some time off to prepare yourself financially for the road ahead.
@Trevor Wow good job on being able to save all that money while in school! Grad school would definitely require a student loan unless you can somehow earn 30-40 grand at your summer job.
Thanks to both of you. I’d never put it in the stock market. I have a very low risk tolerance, particularly with this sort of thing, and interest rates are so low on savings accounts nowadays. It’s been useful to get another perspective on it, though, so I’ll keep on thinking!
I never did take time off but I had an RESP which paid for majority of my University so I was not left with any debt when I graduated.
RESP is an education savings plan here in Canada that parents can put in effect for their kids to use for school.
But I sometimes question if it makes sense for you to borrow for school, say you are studying to become a doctor, your debt is probably close to 100K, calculate how many years it will take for you to pay that off plus you need something to live on.
One of my co workers is doing the same, he finished school and got a 30K job in a hospital, which he is just barely getting buy while at the same time buying a car.
If you ask me, those are questionable habits.
Studenomics, good job on covering both the pros and cons of student loans. Too many people make the assumption that student loans are both necessary and helpful, and thus tend to whitewash the negative features. Good to see a more balanced approach.
@ Susie – It sounds like you have an interesting plan, but one thing to note: there are two different types of student loans, with the interest treated differently. Subsidized loans have the interest paid by the federal government while you’re in school; unsubsidized loans do not (the interest accrues while you are getting your education and is added to the loan total). Depending on the exact mix of loans you are able to get and type of investments you make, investing an amount of money equal to loan principle when you start your education may, or may not, grow enough to completely repay the loans by the time you graduate. Starting with more money to be put aside will allow you do so, but you should be sure to run the numbers first, so you know how much to set aside.
I hope that helps.
This article is so important right now in England!
I don’t know how the student loans in Canada and the US are calculated by in England the rate of borrowing goes in line with RPI. Due to recent cuts in the Bank of England base rate this RPI is droppping fast and may soon be in the negatives. What does this mean? In theory the treasury could be paying back interest on the loans. My sister is in this category as she will start paying back in April of this year when the RPI is predicted to be dropping to as low as 0.8 %!