Getting more from your student loan investment
June 08, 2012
Young people are known for going their own way, but college students may regret bucking one recent trend.
At a time when most forms of consumer debt have been declining, the amount of student loan debt outstanding has been rising rapidly. With tuition costs soaring at many colleges and an interest-rate hike potentially around the corner, how can you ensure the return on your education investment is worth the cost?
Doing some homework before you finalize your course of study may be the key.
Getting 'payback' on your student loans
Paying for education is often said to be an investment in the future, but an investment is only as good as the return you get on it. One way financial professionals assess an investment opportunity is to measure the payback on the investment -- the amount of time it will take for the investment to earn the amount spent on it. A good payback is obtained by minimizing what you spend for an investment and maximizing its earnings.
Here are five ways you can improve the payback on your investment in student loans and other educational expenses:
- Check job prospects. When choosing a career, you should have some idea of the job demand and salary potential of that career. The Bureau of Labor Statistics has extensive information on hundreds of careers.
- Understand the demand in your area. Not all careers are equally in demand everywhere. Unless you are open to relocation, make sure you know which careers are likely to have jobs available in your part of the country.
- Research your financial aid opportunities. Maximize grant and scholarship opportunities before you turn to loans, because grants and scholarships don't have to by paid back. Check out www.fafsa.ed.gov for extensive information from the federal government about financial aid.
- Make sure you pursue a relevant degree. Look into the job market in your chosen field, and talk to hiring managers where possible, to see which degrees they look for when hiring, and which schools they respect.
- Consider spending a year working before college. The logic is simple: Savings accounts pay you interest, and loans charge you interest. The more money you set aside upfront, the more you'll be on the plus side of that equation.
Student loan trends
Weighing your college education's benefits against its costs may be more necessary than ever today. Recent first-quarter data from the New York Federal Reserve Bank demonstrates just how rapidly the student loan debt problem is growing:
- Student loan debt grew by $30 billion in the first quarter, to a total of $904 billion. That projects to an annual growth rate of nearly 14 percent.
- Student loan debt is the only form of consumer debt to grow since late 2008, and has passed credit card debt as the second most prevalent form of consumer debt, trailing only mortgage debt.
- Student loan debt has grown by 275 percent since 2003. This is the type of stat that makes student borrowing really look like a bubble. The idea of more and more people pursuing an education is nice in theory, just as the idea of everyone owning a home seemed during the housing boom. At some point though, the numbers indicate that there is just too much money being thrown at too little value.
- 90+ day student loan delinquency rates are up 42 percent since 2003. That trend is another familiar pattern from the housing crisis.
In many cases, young people have turned to colleges and vocational schools as an alternative to facing a hostile job market. While this can help you obtain skills that make you more competitive in the workplace, that only helps if you learn skills that are in demand and choose a college with a respected reputation.
Handled pragmatically, an investment in education can help you increase your earning power over the course of your career. However, without the right planning, racking up student loan debt can leave you spending too much of that career trying to dig out of a hole.