Student Loans: The Third Way to Ruin Your Finances

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I've long said there are two ways people ruin their finances — loss of income or large uninsured expense. I've recently become aware of a third. (See also: Pre-Career Advice)

The new way to ruin your finances is this — take on enough student loan debt to get a college education.

This is new. It used to be that most people who ruined their finances did it one of the old fashioned ways:

1. They suffered a sharp drop in income (such as by losing a job)
2. They incurred a large, uninsured expense (such as losing a lawsuit)

I suppose, in a sense, student loan debt is just a special case of the second, with the large expense being the cost of going to college. But student loan debt is special in a lot of ways.

First of all, it's the only kind of debt still out there where lenders will send you money without any regard for how you might be able to pay it back. (And why should they care? Usually, the debt is guaranteed by the federal government. Plus, you can't escape it, even in bankruptcy.)

Another way it's unusual is that the very first loan — often arranged before you even turn 18 — sets you on an irreversible path. Oh, it's not completely unchangeable — you can change your major; you can even switch to a different school — but if you change your mind and decide that you'd rather not go deeply into debt, you're left without the degree that was your main hope for earning enough money to pay the loan back.

It's as if you'd borrowed money to buy a car without realizing that, in practical terms, you'd committed to buying seven more cars over the next four years — and if you decided you'd rather not, your first car quits running but you have to pay for it anyway.

So, what are you're choices? Here are my thoughts:

The Old Usual Route

The standard advice has long been to pick the best college you can get into and borrow whatever it costs to get a good education.

This may still be a good choice — particularly if someone else will pay a lot of the money, so that "whatever it costs" doesn't put you in debt for the rest of your life.

So this is still a reasonable option for plenty of people. In particular, it's a fine option for rich people. (And we're not just talking about the 1% here. Probably the whole top 5% can afford to send their kids to the college of their choice with little or no borrowing necessary, if they want to bad enough.) It may also be an option for people with mad skills in one area — sports, music, anything that catches the eye of someone with scholarship money to dole out.

If this is you, you hardly need my advice. Carry on.

The (Now, Sadly Risky) High-Reward Route

If you really want to do something that pays really well, you can just grit your teeth, borrow the money, and then hope that all goes well and you earn enough money to pay off your debt.

There are a lot of jobs that will earn you enough money to cover those monthly bills. The old standbys of doctor and lawyer have the downside that you come out of college needing several more years of further study, but there are others. Any of several flavors of engineer will do the trick.

Because the truth about student loan debt hadn't been so apparent until the last few years, a lot of people took this route without looking at how much money they could earn with degree that they'd spend all the money earning. This is why there are so many people out there with degrees in English or social work suffering the ungentle ministrations of our modern debt collection system.

If this is you, my advice is that you only go down this route if you really want to do whatever it is you're being trained for. Don't do it because someone said petroleum geologists make good money; do it because you're really interested in rock strata. And then only do it if you're prepared to take the risk. If anything goes wrong — if you don't like the work, if you can't do it, if you guess wrong about there being good paying jobs a few years from now — you're screwed.

The "Not Going to College" Route

If you don't go to college, you can jump right in doing something to earn money.

Of course, that's also the rub. How will you earn that money? If you jump in waiting tables, working at a gas station, or moving furniture, you'll start earning some money, but there's not really much of a path up from there.

If you like the idea, try it for a summer. Then, look around. If you're where you want to be, fine — you're all set. If not, it's probably not too late to go to college.

But what if you have some much more interesting way to earn money? What if you want to do something creative or artistic? What if you have a great idea for starting a business?

In that case, it might well make the most sense to just jump right in and do whatever it is. Maybe you'll be able to make a living at it, and maybe you won't, but it's harmless to try. It's harmless, that is, unless you run up a lot of debt. Then you're screwed just like you'd borrowed the money to go to college, except you don't even have a degree.

The Cautious Route

Probably the safest thing to do is to minimize your borrowing by getting the cheapest education possible — go to community college for two years, then transfer to a state school where you can pay in-state tuition.

This is not a bad option. It used to be that there were a lot of gradations of schools, with a wide range through the middle, but I think the advantages of a mid-tier school over a bottom-tier school are smaller than they used to be. (For a lot of reasons, beginning with the Internet.)

You don't get a better education by going to a better school; you get a better education by using your time there as an opportunity to transform yourself.

What you get out of going to a top school is mainly better contacts. Unless your plan requires those contacts, don't bother.

Already Down that Road?

If you've already picked a route — or, more accurately, parents and guidance counselors and some high school kid picked a route and now you find yourself on it — your options at this point are limited.

If you're still in college, you're on the "potentially high reward" route. If it's not too late, make it a priority to get a degree that will help you earn the money to pay off the debt.

If you're out of college and — for whatever reason — you're not earning enough to pay your expenses and cover your debts, your options are limited. Do look into options for restructuring the debt. And don't forget that Wise Bread is full of tips on living large on a small budget — which is probably your best remaining option.

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