The College Debt Bane

Here is a vital college education tip: Don’t take on too much student debt. Otherwise, you risk ruining your future.

As you finish up your secondary education, thinking about the harsh reality of college debt is difficult to do. High school graduation is a time of optimism and possibilities. Commencement speakers all over the country urge graduates to follow their dreams and reach for the stars.

But when it comes to funding the education you need to fulfill those dreams, you might be better off with a dose of negativity and pessimism.

The transition into adulthood means making a host of major career and life decisions. Where should I go to college? Do I even need or want a college education? What career possibilities am I excited about?

Your answers to these questions obviously shape your life in significant ways. Yet even big life decisions like college selections and job choices come with some “undo” buttons. You can change majors, change universities and even change directions after you finish a degree and start down a career path.

Another significant education- and job-related decision, though, isn’t so easy to change. Its impact follows you even if you switch schools or majors, choose to pursue a new career, or decide higher education is not for you and drop out altogether. It affects your lifestyle, your options for employment and additional education, your ability to support a family and your long-term financial health.

This irrevocable decision is whether or how much to borrow for your education. It’s a choice to take every bit as seriously as choosing the best school or the right career.

A few weeks ago, Sen. Elizabeth Warren (D-Mass.) introduced legislation to allow refinancing of student loans for people who borrowed at interest rates higher than those currently in effect. In her speech, announcing the effort, she said this: “There are more than 40 million people currently dealing with student loan debt. When their interest rates are cut, many will save hundreds of dollars a month and many more will save thousands of dollars a month.”

Her proposal is part of a growing concern about the burden that college debt places on individuals and the U.S. economy. Instead of trying to ease this burden at the repayment end, though, here’s a better idea. The best way to prevent student debt from overwhelming you is not to over-borrow in the first place.

Here’s where the pessimism comes in. Before you sign on the dotted line to obtain a student loan, spend some time browsing at studentaid.ed.gov. In particular, use the “repayment estimator” to get an idea what your loan payments might be. Will the lowest range of expected income in your chosen career field support those payments? 

Hang onto that pessimism when you look at a potential financial aid package. It’s easy to think of financial aid as “free money.” But the loan portion of college financial aid isn’t a gift; it’s a business transaction. This is a legal obligation, a loan secured only by your future earning expectations. As soon as you walk off the campus with your brand-new diploma, you have to start paying that loan back.

If you have trouble repaying it, one possible option is to postpone payments with a deferment. Interest keeps accruing, however, which means in the long term your debt can grow from difficult to overwhelming. If you default on a student loan, you trash your credit rating. Plus, your future federal tax refunds may go toward repayment.

As a young adult, your future is indeed full of possibilities. Don’t burden that future with a heavy load of college debt. By all means, put your optimism and sense of possibility into following your dreams. But to support those dreams in a realistic way, borrow like a pessimist.

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Rick Kahler, CFP, is president of Kahler Financial Group in Rapid City, S.D.

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