Saturday, October 31, 2015

Long Term Benefits of Taking on Student Loans

Living in Utah, I've noticed that a lot of people around here are extremely debt averse when it comes to student loans.  So they consider working while in school and many people do. 

I do agree that having the cash ready for school is the best option.  This is why we opened a 529 account for our child.  (Don't do this until you are well on track to retirement first)


If you are a recent HS graduate that's single, no children to support, planning to attend an affordable program, and still come up short with paying for school, my opinion is that you will be much better off taking the student loans to meet whatever you need left to finish school in 4 years, rather than work full-time and take 8 or more years to finish an undergrad.

If you can finish your 4 year degree in less than 4 years, even better.  The concurrent enrollment with HS/community college is something more people should do instead of worrying about their social life their senior year.  AP classes and passing them are good too.  Take it from everyone that went on to finish college, and they will agree with me: At some point in college, you will be glad you took that advantage in HS and got your got classes out of the way sooner than later.  (College classes you want out of the way ASAP are US History, and math and English requirements at minimum.  If you are going on 18 months or two-year LDS missions, you will forget a ton of math if you hadn't taken math since junior year of please take 4 yrs of math during HS for your learning)

For everyone that isn't dropping out to be an billionaire entrepreneur or pro athlete (and congratulations if you are, none of this below will apply to you), the best long term money savings strategy is to get college out of the way as soon as possible and start acquiring real life post graduate work experience.  

Now why would taking out loans be a better option than working through school?  Who wants to leave school with debt? 

Let's consider the following that are true and keep them in the back of your mind:
1. Average wages for someone with no college degree aren't likely to increase much in a span of 8 years. 
2. Average wages for someone with a college degree are likely to increase a lot in 8 years.
3. Tuition costs and fees are likely to increase faster over 8 years than salary increases. 

Should you enroll part-time, the total cost of completing your degree will cost you as much or MORE money in the span of 8 years than for someone who took out student loans for the entire 4 years of school.  

"But Alina I'm working full-time at a company where they reimburse a good portion of my tuition!  I'll keep working there until I graduate" 

The truth is if your annual salary increases are lower than your annual tuition increases, you are losing money and the company tuition benefit isn't that great of a deal.  Jobs are an investment because they compound with interest annually (assuming you are at a decent employer that gives you an annual raise).  Smart investments will always trump the best deal.  While leaving school with no debt sounds great on the surface, getting more bang for your buck in 4 years, even with the loan interest and fees is better than paying rising tuition costs and fees over 8 years.

A student loan facilitates not having to work many hours during the school year just to pay for the cost of tuition. You would need to work just enough hours to meet your expenses such as rent and food, which isn't much for a single childless student.  And if you aren't working, or just working a few hours on campus, there's really no reason to own a car and the added expenses that come with it.  You can take the bus (free or heavily discounted for most college students), walk, or ride a bike to class. 

If you're working full-time during the school year, most of your earned income will go toward to maintaining your car on top of paying your tuition.  Keep in mind that you aren't making rock star wages at this point.  

Ideally you should focus on school and then get a car to facilitate obtaining internships and securing better employment after graduation. 

By not working full-time, you can actually concentrate on what you are really in college for: to study for 4 years.  If you do well in school, you get paid for your grades with semester scholarships.  There are even plenty of scholarships that do not require a near perfect GPA.

Most people think they can't afford college because they weren't awarded a huge scholarship during HS and their life is over.  Not so, there are always scholarships in college.  My first scholarship as an incoming freshman was only $500, just barely enough to cover textbooks. Each year, I kept searching and applying for whatever scholarship I'd be qualified for, and surprisingly, the scholarship amounts got more generous the closer I was to graduating.  My last two years were tuition-free.  Searching and applying for any and all scholarships is almost a second job in itself so several people that work full-time miss out on this.  In addition, you need to be enrolled full-time to qualify for a scholarship.  

So what happens when you have a loan and a scholarship?  The university will take the loan, award you the scholarship, and refund any money left over back to you by mailing you a check.  You set this money aside to pay your rent and other needed expenses or loan payments in the future.  

What student loan averse people fail to consider is that the biggest expense for part-timing your college education is the lost opportunity costs for your wages to increase exponentially after graduating on time.  

As a recent graduate, you could be making less than someone who has been working longer, but still in school.  

To illustrate a real life example: me and my husband.  I took about 4 years to graduate and he did the 8 years or more track.  When we met in 2011, I earned less than he did when I finished nearly two years prior because he had more work experience.  I took out loans to facilitate finishing my degree program on time, while Dave continued to work full-time, be in school part-time with no debt after graduating.  He graduated 6 months before we got married in 2012.  He also began college before I did.  Both of us went to junior/community college first and then transferred to the University of Utah to finish, which did reduce the amount of what we both needed to pay.  Community college and junior college are great money savers, but you need to go in with the intent of transferring to finish the last two years of university.  

Remember how I said it's likely that salary increases a lot within 8 years for graduates?  The chances of your salary increasing exponentially within 3-5 years post college are extremely likely.  The key thing to consider is who experiences this increase first: the one who finished college sooner.  

While you could be making less right out of college, you have a very good chance coming out ahead of everyone that is still working through college.  What ended up happening was that I experienced my 1st major salary increase sooner and outearning my husband right before our wedding in 2012.  He too experienced a big increase to his salary after his 3-5 year post grad mark...but by then I experienced my 2nd major salary increase.  Yep I became the sugar mamma in this relationship ;-)

My first increase in pay made it possible to pay off the entire loan sooner than planned, and avoided paying more in interest.  My last loan payment was when Baby was born in 2013 and a few months later in 2014 was when my 2nd salary increase happened. 

Guys, as long as the total cost of your student loans are less than what you're earning your first year post graduating, you'll be able to pay the loan back without any problem during the repayment period and fulfill your return on investment expectations for a college education. So if you went to an inexpensive program, borrowed all 4 years, got scholarships, and the amount of the loans was $25k, that would mean you would need to earn at least $12.50/hr post graduation to make the loan repayment for 10 years.  

It is important to remember that salaries do not stay stagnant, they increase as long as you keep working and acquiring more specialized work experience.  Most employers value the 4 year degree.  

If you don't have other obligations to consider and want to go to college, your priority should be to finish your degree program on time or sooner.  So do not rule out student loans as a means to facilitate finishing your degree on time. 

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