Friday, March 06, 2009

Debt Rule of Thumb for Students

Are too many students overborrowing?
"A good rule of thumb is if you borrow more than your expected starting salary, it's going to be hard to repay your debt, and if you borrow more than twice, you're at a very high risk of default."

I think far too many students look at student loans as free money. It seems like parents, lenders, and other adults in the students' lives should be doing a much better job informing them about the perils of too much debt and the difficulty of paying off massive loans. This is particularly bad when students don't take into account their expected future earnings.

One of my profs in my PhD program encouraged us not to fear student loans and to look at them as cheap money. I always felt like this type of blanket advice presumed far too much about the future.

I may err on the side of being too debt averse, but this propensity has helped keep me from getting into any sort of deep financial mess while in school. When taken too far, debt can be a form of slavery -- restricting future options and financially handicapping students for years (decades?) to come. With the current financial crisis, now more than ever is a time to be extra-careful with those student loans.

(HT Center for College Affordability and Productivity)

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