Good Debt, Bad Debt

Posted Aug. 15, 2010, at 5:14 p.m.

For the first time in history, the Federal Reserve reports, Americans collectively owe more on student loans for postsecondary education than they do on their credit cards. The Fed reports that Americans owe $826 billion in revolving credit, most of which is credit card debt. That’s significantly lower than the $975 billion owed in September 2008. Outstanding student loans are $829 billion.

While student loan debt might be seen by most as a sound investment in one’s future, especially compared to the disposable goods purchased on credit cards, there should be a cautionary note added to this story. Student loan debt can cripple a young man or young woman entering the work force after graduation, and too many of those young people are not aware of how much debt they are on the hook for as they doff their mortarboards.

Peggy Crawford, director of financial aid for the University of Maine, makes no predictions about the nation’s credit card debt, but she’s confident student loan debt will increase significantly a year from now and again the year after that. The recession has driven many people to return to postsecondary education and training, and the full student loan impact will not be seen for at least a couple of years, she believes.

While the university works hard to help students find the means to pay for their education, Ms. Crawford worries that students may be too cavalier about incurring loan debt. Typically, she said, students graduate with $20,000 to $25,000 in loan debt. But many owe much more.

Students and their parents may not be planning ahead adequately, thinking about how their degree will correspond with their earning potential. Ms. Crawford said she would never suggest students not borrow if it is the only means to an education, but the questions that go unasked include, “Could you live cheaper? Do you need that new computer?” Too often, students have a sense of entitlement about the things that support the college experience.

“It’s very frustrating as a financial aid administrator,” she said.

Mark Kantrowitz, publisher of FinAid.org and FastWeb.com, had a more blunt assessment of the problem. “The growth in education debt outstanding is like cooking a lobster,” he told The Wall Street Journal. “The increase in total student debt occurs slowly but steadily, so by the time you notice that the water is boiling, you’re already cooked.”

In the past, students had to sign a promissory note each year to renew their loans. Now, the note is signed once and it covers a 10-year period, so students may not be aware of the implications. Federally backed student loans are capped at $5,500 for the first year of school, $6,500 for the second year, and $7,500 for the third and fourth years. Those maximums were increased by $2,000 each in 2006.

Less credit card debt is a good thing for the nation. So is an educated work force; a growing economy depends upon it. But students would do well to rein in those college loans as much as possible.

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