Borrowing for an education is no different than borrowing for an investment, so it is important to perform due diligence and conduct a cost benefit analysis. Ask yourself if this education will provide a reasonable return via steady income over the next thirty or forty years. Weigh your alternatives, approach it with open eyes – compare the cost of college A with college B relative to your projected income and be confident with your decision.
The college selection decision is a difficult one, cost versus gaining entrance to your top pick. You must decide if taking on debt, debt a young adult must repay and debt that reduces post-graduate options, is really worth it. Keep in mind that a person’s intelligence and a certain amount of luck determine ‘success’, so even though a student may not be able to get into what they perceive as a prestigious university, their true abilities come through in the long run. Therefore, be aware of your motives – be certain your decision is not ego-driven, but logic-based.
Academic ability is another key factor. If a child demonstrates low academic enthusiasm, borrowing for a university might not be appropriate. Too many children begin college, assume debt and subsequently fail to complete their degree. They have a debt burden with nothing to show for it – a really bad thing and a less than favorable way to begin your adult life. It becomes an onus with no bonus, so tread carefully.
Trade school is a viable alternative. I know plenty of tradesman earning more than college educated individuals. The trades offer a clear path to self-employment, a direct correlation of pay for hours worked. Plus, it provides the ability for those who choose the full time employment path an opportunity to work independently in the evenings or weekends. Not only is it a viable alternative to college, but it may prove to be rewarding. Personally, I was never more appreciative of the carpenter who installed our wainscoting or the plumber who unclogged the drain - great people providing valuable services.
Trade schools charge tuition, so you may need to borrow for those too. The difference is the time and cost, usually shorter and far less expensive than a four year degree. Research the trade school, look for graduation rates and more important, placement rates – what percentage finish and find work. Also, search for opportunities to learn on the job, possibly seek out a reputable construction firm willing to train you for free.
Student loan debt, or any debt for that matter, has an adverse effect on your options in life. Too much debt may hinder your ability to save for a down payment on a home and limit the amount you can borrow. Ideally, your student loan debt to income ratio should be five percent or less. See our student loan calculator to help gauge your threshold. Additionally, if your plans are to get an advanced degree, one that you know will yield a much higher than average income, by all means go for it. But do so with the idea that you will pay it off as soon as possible by living below your means for a few years. It may be worth the sacrifice in the long run.
Borrowing for an education is necessary for some, but doing so for the right reasons is of the upmost importance. Know your goals because higher education is very expensive. We are all familiar with the saying that those with a college education earn more over their lifetime than those without, but question the basis for that statement because statistics can be deceptive. Therefore, ask yourself - does this debt obligation truly make sense for me and/or my child?
Good luck and may you find happiness in your life’s accomplishments.
G. Michael Kennedy
Financial Strategist
Family Financials, Inc.