PAY IT FORWARD: The Education Finance & Income Share Agreement (ISA) Blog

 

Paying for College: Why We’re Doing It All Wrong

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The dream of higher education, and what that means for subsequent generations, is starting to feel more out of reach for many students today, because of the mountains of debt that’s often required to complete a program.

However, accessing loans to fund a degree program is just half the battle. Often, students struggle with completing their programs and drop out, with substantial debt and no degree to show for it. In other cases, students are able to complete, but struggle to pay back the debt obligations that they have accrued. For students from lower income backgrounds or under-represented minority communities, the uphill battle to fund an education can be even worse.

There are a few reasons why student debt is a unique form of consumer loan.

  1. First, one tends to take on these loans at a very young age, usually 18, an age at which most people are not even allowed to purchase alcohol. Basic finance concepts like interest accrual can be virtually unknown to most young students taking on such loans. So really, you are buying a complex product that you do not know much about, not the least of which is what you owe. A financial aid advisor once told me that some students think that student loans that are part of one’s financial aid package offered by the school do not have to be paid back.
  2. Second, student debt is the only form of consumer loans that are effectively non-dischargeable through personal bankruptcy. This means that no matter what hardship a student claims, the bar to remove student debt obligation is so high, that very few can reach it.

Student debt, when taken on in excess, can corrode both quality of life and short- and long-term financial well-being. Research continues to show that excessive student loans can negatively impact various facets of life, including:

  • Savings and retirement plans: Research, using the Survey of Consumer Finances (SCF) data, finds that high levels of student debt lead to lower savings for retirement and a higher incidence of borrowing from retirement plans. With more of the income going towards paying back student loans, there is less income going toward savings for the short and long term. This research also suggests that student debt is also affecting older individuals, presumably who take out or co-sign loans for their dependents. The negative effects of student loans on these individuals is even more devastating because they have limited time to save for retirement.
  • Wealth building through portfolio investing: Financial advisors often suggest that individuals take higher levels of risks by investing in stocks and riskier investments earlier in life. This is because the average rate of return of the stock market is higher than those in safer assets (like CDs) in the long term. With student debt, many face a choice between paying off the debt or investing. It does not help that, by the time that one has paid off their debts, they are already at an age where the compounding long term effect of portfolio investment has substantially diminished – so the lack of early investment seriously hinders one’s ability to build wealth over time.
  • Ability to effectively find jobs: New research suggests that student loans may actually hinder students from accessing key internships, which usually pay less than other part-time positions, but help create strong resume experience for full-time positions. When loan repayment becomes a major decision driver, immediate wages can often overrule long-term growth and sustainability. This in turn reduces job placement quality and increases the time needed for career development.

There are major correlations between burdensome debt and mental health struggles, relationship problems, and even the pursuit of passions. So what options do students and their families have beyond just student debt? Here, are a few options to consider:

  • Negotiate – Particularly when you are entering a college or program. Schools are much more likely to lower prices and offer more attractive scholarships at enrollment rather than in later years. Feel free to be aggressive and ask for significant scholarships or grants. What do you have to lose?
  • Take all available grants and scholarships – FAFSA filing can give you a good idea about federal grants you are eligible for. In addition, you may be eligible for state grants. Federal work-study is a proven way to earn money while on campus, while also building a strong network.
  • Seek out a “no-loan” financial aid school – more than 80 schools have implemented policies to reduce debt burden while offering similar financial aid packages to students. Consider applying to schools with such policies.
  • Income share agreements – ISAs are an alternative to loans that allow students to have their tuition paid and then students repay the ISA based on an affordable percentage of their future income for a fixed period of time, up to a maximum cap without incurring interest. ISAs may not be appropriate for everyone, but can be particularly useful for gap funding in later years, as they are more likely to be available for students that will graduate sooner rather than later.
  • Alternative education models – Coding schools are demonstrating that it is not necessary to spend six figures to earn six figures. Non-traditional coding schools, certification and licensing programs, technology and trade schools are all options if you are so inclined. They have shorter durations and lower costs. User beware, however, that there is significant variance in the quality of such schools. Proper research and diligence is key. Also, keep in mind that while more employers are considering such qualifications as sufficient, most employers still seek out college graduates with an undergraduate degree.
  • Estimate the program’s return on investment before joining – With the average student carrying $35,000 in debt over 23 years after leaving a program, it’s important to pursue a program that is beneficial and valuable. Now, with the availability of major level income data from College Scorecard, you can better understand your overall return on investment. More needs to be done with respect to ROI calculators, but things are definitely improving.

Funding one’s higher education is at a critical crossroad. As students and families weigh the long-term impact of debt, they are seeking alternatives that not only reverse the trend of burdensome debt, but proactively add value for the student’s future.