Never Get a Student Loan

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Never get a student loan.

On October 26th, President Obama unveiled a plan that would reduce the repayment rates required for student loans and also limit the time before such loans would be forgiven entirely.   In doing so, the President virtually guaranteed that people who go to elite colleges – those that charge more than about $30,000 per year – would never need to repay their loans in full with interest.  Because these loans now come directly from the taxpayers, the result will be to place more of the cost of attending these elite universities on the taxpayer.  Given that about 75% of people don’t attend college at all, and an even lower percentage attend elite universities, this might seem a tad unfair.  For those with morals, this obviously should raise a moral question.

Beyond the moral issue, however, is the practical issue.  By taking out student loans, one can easily graduate with enough debt to purchase a house, but without the house.  Unless you are going to get into a profession such as being a doctor, it will be very difficult to pay that much money back.  Even if you plan to be a doctor, there are a lot of people who start out planning to be a doctor who fail to graduate because life gets in the way.  They are then left with no degree and a lot of debt.

How can anyone go to college without taking out a loan?  It’s impossible right?  Not so.

First of all, anyone who has a child and plans to have that child go to college has about 18 years of warning.  While it is difficult (and nothing worth doing is simple), money can be put away each year.  There are tax-advantaged accounts such as the educational IRA and 529 plans (which grandparents can also help fund).  If one takes out a 15 year mortgage, as recommended by this blog, you should also be paying your house off just about the time your kids are going into college.  Direct that money that was going to payments to tuition.

Secondly, unless you have a substantial scholarship that makes costs about even, there is no reason to go to a really expensive school.  While an elite school may be briefly noted on a resume, an employer will care most about what you can do, not where you went to school.  The high costs charged by the big-name schools just aren’t worth it.  If instead of spending that quarter million for a Yale education you just invested it, you could be a millionaire before the age of 32 and have about $36 million by retirement.  I doubt any job you could get would have that kind of return.

There are plenty of perfectly adequate state schools that cost far less, and there is more to learn anywhere than anyone can possibly learn.  It is really more about what you put into it than how popular their sweatshirts are.  The one exception might be lawyers who want to get into extremely competitive firms.  Even then, however, a poor performer from Harvard won’t get far.

Another idea is to use community colleges.  There is no reason to go to a big university and sit in a huge lecture hall to take basic English and math classes.  Community colleges are better at teaching and the lecturers actually want to be teaching the classes.  You will also probably get a real professor instead of a grad student.  With far lower costs, and the ability to live at home, community colleges are a great deal.  Transfer to that elite school for the last couple of years and you’ll still have the big name on your diploma.  Really, states should require all basic classes to be taught at the community colleges only.

Finally, there are a lot of scholarships out there.  Many are small, but a student who spends the summer applying for the little $500 and $1000 scholarships that get few applicants can pay for their whole college career and make a lot more per hour than they could at a job in a fast food place.

Yes, college can get expensive, but by planning ahead, choosing wisely, and thinking outside of the norms, there is no reason for student loans.  Don’t start out your working life owing a house.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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