Are Student Loans a Racket?

Its raining money

Enter the phrase “Student Loan Racket” into any internet search engine and you will get a long list of web sites with diatribes about the “trap” of student loan debt. Most of these are extreme rants about how victims can now only get approved for bad credit installment loans, but they do have a core of truth. The fundamental truth about student loans is the same as the truth about any other form of debt. The less of it, the better.

Student loan debt has value that other forms of debt do not. A college education opens doors to jobs and opportunities and enhances students’ lives by creating broader horizons than they could have without college. However, the fundamental truth of all debt still applies. The less of it, the better. So the key is getting the level of education students need while taking on the least possible debt doing it.

There are a number of ways to minimize college cost and college debt.

The first options require some planning. The sooner parents and grandparents start saving for college, more time the funds have to accumulate, the more will be available by the time college rolls around. The same compound interest accumulating over time that makes debt so bad makes savings good.

Academics are also important. The better grades a student can get, the more merit-based scholarship options will be available. Scholarships are also available for athletics and specialty activities. Parents and students should research scholarships and scholarship matching services, and exhaust all the grant and scholarship options available before they consider taking on loans.

Another excellent way to save money is to be frugal about it. Take at least the first two years of college locally. Attend community college or state university, rather than for-profit schools to minimize tuition expenses. Keep living expenses down by staying in the family home. Work part time while in school and pay tuition in cash, rather than using student loans. Work full time and take evening classes.

Evening classes do not have to be expensive or poor quality education. Within the past few years, several online programs have begun offering courses from the best professors at Ivy League colleges for little or no cost. A local public college education, supplemented with a few certificates of completion for courses from these high caliber schools, should make any new graduate’s resume stand out.

After exhausting all of the aid, savings, work and frugality options, students may still need to consider taking on student loans to complete their education, especially if the student wants a graduate degree. Approach with caution. Student loans have some important red flags that do not apply to most other forms of debt. Student loans cannot be discharged in bankruptcy. No statute of limitations applies to collection of the debt. Debt collectors can garnish tax refunds and social security benefits. The loans are not covered by the Fair Debt Collection Practices Act.

Again, the less debt of any kind, the better. In the case of student loans, this is worth having said three times now. Once that debt has been acquired, it will never go away until it has been paid off. Most student loans require the student to have a cosigner (usually the parent), so parents should be as cautious about student loan debt as the student should be. Put bluntly, cosigned debt will not die, even if the student does. Some parent cosigners have taken out life insurance policies on their indebted child to protect themselves.

The student loan industry may or may not be a racket, but it is definitely a very bad industry to be excessively indebted to. Maximize the value that a college education adds to later life by limiting the amount of student loan debt that comes with that education.

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