Student Loans – Are They Worth It?

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student loans are they worth it?

Being a student these days is expensive, there’s no doubt about that. However, how expensive is it, and is it worth it in the long run? In 2012 student debt passed $1 trillion, and it seemed that wherever you turned there was another horror story in the media about destitute students saddled with enormous debt, and unable to find any decent employment. From a societal perspective, the situation doesn’t look good, and the trend is worrying.

As of 2013, total student debt has reached $1.2 trillion, and it doesn’t seem to be looking back. Indeed with total federal debt standing at $16.7 trillion, student loan debt accounts for 6% of this. This is no small figure – only mortgages account for more. [http://www.forbes.com/sites/specialfeatures/2013/08/07/how-the-college-debt-is-crippling-students-parents-and-the-economy/].

This trend can’t continue indefinitely of course, but how much worse can it get, and indeed is it even worth it now to take out a student loan to put yourself through the years of financial difficulty and hard work that is higher education?

While the stories covered in the media would often cover students who åhad landed themselves in over $100,000 of debt it is worth noting that it is the media’s job to cover the extreme situations, and in fact only about 3% of students end up owing so much money. The average student debt as of Q1 2012 was $24,301, and while this is still a lot of money for somebody of normal student age, it’s clearly more manageable than $100,000.

So is getting yourself into about $25,000 debt at such a young age really worth it?

The simplest way of looking at this would be to calculate the ROI or Return On Investment. The ROI is the amount of money that the investment would yield in the long run, and figures for graduate and non graduate earnings are widely avaiable.

The 2012 Work Life Earnings census [http://www.census.gov/prod/2012pubs/acsbr11-04.pdf] states that the average lifetime earnings for a high school graduate is $1,371,000. Compare that to the average lifetime earnings for a college graduate with a bachelors degree of $2,422,000 and you get a difference in earnings of $1,051,000 over a lifetime.

It is worth taking a look through the census – it is short, and there are some illuminating figures contained within, particularly if you’re considering whether carrying your education further than a bachelors degree.

I’m just calculating the following with averages for the moment, as obviously every case will be different, but this should give a general idea.

With interest rates for subsidized student loans currently standing at 3.8%, borrowing the average amount of $24,301, and repaying over the standard 10 year schedule, our student would end up having to repay a total of $29,247.90, $4,946,40 of that being interest charges (if it’s an unsubsidized loan at 6.8%, the total repayment would be $33,558.80, $9,257.80 of that being interest).

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Obviously on the face of it, there is no argument here in a pure ROI perspective – investment (assuming an unsubsidized loan) is $29,247.90 and return $1,051,000 giving a total gain of $1,021,752.10 and a rather substantial ROI of 3,493%.

Of course this only takes into account the numbers, and the national average figures at that. Every student will have different needs, and borrow different amounts; different colleges and cities will cost more or less, different degrees will offer differing earnings potential (engineering and computer sciences, along with finance and business being at the top of the scale). However, what should be clear from this is that on average, the difference is substantial and that in most cases taking out a student loan in order to go to college will pay for itself many times over.

One thing that should be considered is that this is very much investing in your future – you would be paying for your education at a young age when you can’t really afford it in order to reap the benefits in your later years. Most people will struggle financially in college and for some time after. The $1,051,000 extra that the college graduate earns over the high school graduate is over a lifetime, and due to salary rising over the years, most would be in the latter half. A student loan will likely pay for itself many times over, but the majority of the rewards will not be reaped until the later years.

Are higher lifetime earnings the only real benefit to going to college?

Well no, there some other figures that should help you consider whether the years of hard toil and financial struggle are worth it:

Graduates have a lower unemployment rate.

As of August 2013, the unemployment rate for high school graduates stood at 7.6%, whereas the unemployment rate for people with a bachelors degree or higher was 3.5%. That’s less than half, clearly a significant difference.

Graduates live longer.

It might surprise you to find that a recent report from the Center for Disease Control suggests that somebody with a bachelors degree will live an average of around nine years longer than someone without (9.3% for men and 8.6% for women).

Healthier families and less obesity.

The same report found the following:

In 2007–2010, obesity among boys and girls 2–19 years of age decreased with increasing education of the head of household. In households where the head had less than a high school education, 24% of boys and 22% of girls were obese, compared with households where the head had a Bachelor’s degree or higher education in which 11% of boys and 7% of girls were obese.

That’s a third of the obesity level for girls, and less than half for boys.

Obesity in women with a bachelors degree or higher decreased from 39-43% to 25%, although obesity in men did not vary with their educational level.

A student loan is good credit.

This is a minor point, but a student loan is considered in the eyes of lenders as good credit since it’s an investment in your future, this means that as long as you don’t default on the loan, it will actually likely be a help on your credit report

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Is it really all so clear cut?

Nothing is ever clear cut, and the main argument against all of this is that correlation does not imply causation [http://en.wikipedia.org/wiki/Correlation_does_not_imply_causation]. The very fact that our student was considering college put them ahead of most of the people who don’t go, if they decide not to go at this point, do they really suffer such low earnings and unemployment rate? Causation in something such as this is quite difficult to determine, however we can find out the figures for people who go through some college, but not to bachelors level. Total lifetime earning for ‘some college’ are $1,632,000, and the unemployment rate is 6.1%, these figures are better though not significantly better, than those with a high school education. Indeed the fact that the figures are clearly graduated on a rising scale from no high school diploma to a doctoral or professional degree would imply that causation plays a role.

Conclusion.

The level of educational attainment that you achieve has a strong determining factor in expected lifetime earnings, along with various other factors such as longevity, family health and obesity. Assuming that causation is a factor, it really is worthwhile taking on what might seem like a substantial figure in debt when you leave high school, since this is one of the best investments in your future that you can make.