Experts weigh in for students considering loans
By means of deferred loan payments throughout college, students can remain blissfully ignorant of the debt their education racks up.
Without proper preparation, however, after graduation students may find themselves burdened by debt and unable to pay back their loans.
In the first quarter of 2012, the Federal Reserve Bank of New York reported that Americans owe $904 billion in student debt. And with an 8.2% national unemployment rate for May 2012, poor economic conditions and increasing tuitions make paying off student loans extremely difficult for recent graduates.
Neal McCluskey, education analyst for the Cato Institute, urged students to reconsider attending college if they think they might not be able to repay that debt.
“You need to know that college is where you want to go and that studying will have economic benefits for you. If that’s not that case, you should think twice about going to college, and three times before taking on debts.”
A benefit of taking out student loans is that they do not generally have to be repaid until after graduation, when students generally have jobs and a better economic situation. Students therefore do not feel the impact of how much money they owe, said Alex Pollock, resident fellow at the American Enterprise Institute.
“We ought to have some minimal amount students are paying to make them think about it, even if it’s just 10 dollars per month,” he said. “Give up a pizza and pay off your debt.”
Students that take on debt and do not graduate find themselves in the worst position. Without a degree, they fail to increase their earning potential but still have large bills to pay, Pollock said.
“You should really question ‘Am I really serious about this?’ Am I really going to complete this program?”
And students who default on their loans not only hurt themselves, but also create a drain on the average American tax payer, according to Richard Vedder, Director of the Center for College Affordability and Productivity.
“If you add in the cost of grant programs with student loan debt, particularly the Pell grants, that’s more than $500 for every family of four,” he said. “In the long run, those taxpayers will be you (the student), and you will be paying off the debt. You should be saving every penny you have, because you are going to get hit.”
The U.S. Department of Education’s College Affordability and Transparency Center showed large increases in 2011 in the tuition of both public and private universities. The availability of publicly funded student loans and the rising cost of tuition may be related, however.
Colleges receive the benefits of excess financial aid to students, but bear none of the cost of students’ defaults. Their increasing costs lead to higher debt and greater risk of default for student borrowers, Pollock said.
McCluskey agreed with Pollock.
“The existence of federal aid allows colleges to inflate their budgets without improving education,” he said. “It also encourages people to go to college who don’t end up finishing.”
Pollock’s solution: force colleges to have a 10% share in the credit performance of the loan.
“This puts a material risk of excessive and unrepayable debt and of high college costs on those who are promoting the loans,” he said.
The view is not all grim. Students can still attend college, take out loans, and through their jobs eventually pay them off. Vedder offered advice to current college students.
“Go to the cheaper school! Go to community colleges and transfer. Look at state colleges. Borrow less money. Work harder and get through in 4 years,” he said.
Pollock advised students to set up a savings account and put away some money each month and to build up a partial repayment fund.
McCluskey warned students not to panic about having debt.
“Media stories start with a human interest anecdote with people with awful amount of debts. Few people actually have that much debt. It’s not hard to pay off, if you are going to school to increase your earning potential,” McCluskey said. “For most people this is hardly a crisis amount of debt. It is manageable.”