Are Student Loans Worth It?

are student loans worth itStudent loans have become a hot topic lately. Tuition costs keep rising year after year. As a result, students are becoming burdened with increasing amounts of student loan debt. Many have or will become so indebted by their student loans that it will seemingly take a lifetime or more to pay off.

In fact, the rising cost of tuition and resultant massive student loan balances are becoming such a hot topic that politicians are starting to weigh in and promise reform. Meanwhile, the media doesn’t hesitate to call out countless examples of people who are crushed by student loans.

Whether or not legislation is passed to change the student loan landscape remains to be seen. Even if the laws do change in some fashion, there is no guarantee higher education will become any more affordable. In the meantime, anyone interested in attending college has some important decisions to make.

  • What college should I attend?
  • What should I major in?
  • How am I going to pay for college?
  • Is a post secondary degree like an MBA worth it?

The biggest question of all likely is: are student loans worth it?

If you think about it, that question essentially boils down to whether or not you should attend a particular college for a particular degree or not. In other words, how much will your career earnings be based on the cost of obtaining and financing your degree at a particular college or university. So…how does one figure that out?

Calculate the Return on Investment for your Student Loans

Your education is an investment. It is an investment in yourself. Before an investment is made, due diligence should be done to determine if the investment is worthwhile. One of the ways you can evaluate an investment opportunity is to calculate the Return on Investment or ROI.

The formula for ROI is pretty straightforward:

ROI = (investment gain – investment cost) / investment cost

In this case, your investment gain is your future career earnings above what you would have made without your degree(s). The investment cost would be the cost of your education and should include tuition paid and the full cost of your student loans over the life of those loans (including all the interest you’ll be paying).

Let’s take a look at some simplified examples:

Scenario 1 – Rodger Dodger wants to attend Cowboy College to major in bronc riding. He will graduate when he is 25 years-old and he estimates he will earn an average of $10,000 a year more with his degree over his career. Roger will retire at age 60. He will finance all of his tuition through student loans that carry an interest rate of 6% with a 30 year repayment term. The total amount of student loans taken out are $50,000.

Scenario 2 – Sassy Smartalec decides to go to Sarcasm School. She too will work for a 35 year career. Her increase in income over not having a degree will be an average of $5,000 a year. When all is said and done, her student loans will be $80,000 and will be financed through private student loans with an interest rate of 8%.

student loan roi

Rodger might be onto something. Sassy might want to reconsider.

Determining if Student Loans are Worth it

The truth is, you do not really need to sit down and figure out a forecasted ROI % for your student loans. Even if you did, you would have to make some pretty big assumptions which would preclude you from ever being able to calculate a precise ROI. After all, how can you really know how much you will earn over the rest of your career?

What is important is the concept behind ROI. What you need to do is take the ROI logic and apply it to whatever combination of career choice, college, and student loan options are available to you.

Above all, do your research. Investigate what the earning potential is for the degree. Talk to others in the profession to get their input. Tally how much it will cost to attend a specific college. Make the decision to go to a different program if the school you are looking at is too costly. Dig into the student loan options available and educate yourself on the loan terms and what it all means.

You might want to choose a different path in life if you are contemplating taking out $100,000 of student loans to earn $35,000 a year once you have graduated!

Once you have evaluated all available information and made reasonable assumptions where needed then you will have a better grasp on if student loans are worth it for your particular situation.

And, remember, it is not the end of the world if you do become mired in student loan debt. You can still come out on top…eventually. We were and we overcame a massive amount of student loans. But we struggled for a while and the path to becoming debt free was rough. If we had not taken great lengths to aggressively attack our debt, I can only imagine how miserable our situation would be. Take my word for it – if you can avoid getting into student loan hell – DO IT! Make informed, rationale decisions about your future. Your future self will love you for it.

What are your thoughts on if student loans are worth it? If you are contemplating taking out student loans, does the ROI logic make sense? What other criteria should be considered when figuring out if student loans are the right way to proceed?

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4 Responses to Are Student Loans Worth It?

  1. DC @ Young Adult Money September 3, 2015 at 9:02 pm #

    Student loans are a tough issue. I feel like a lot of bloggers (myself included) like to look back and evaluate whether student loans are worth it, but unfortunately people who are actually dealing with this issue typically aren’t the ones reading personal finance blogs. Hindsight is always 20/20 so I think anyone who is already out of college is pretty biased. Student loans helped me graduate faster and get a job in finance. If I didn’t get a good job out of school, though, I would probably say they aren’t worth it.
    DC @ Young Adult Money recently posted…7 Common Financial Myths – ShatteredMy Profile

    • Mr. Utopia September 3, 2015 at 9:43 pm #

      True, it can be easy for college graduates and personal finance bloggers to sit back and make it sound so easy to figure out. In reality, there are a bunch of unknowns and uncertainties that can make the decision to take out student loans for a particular school and degree tough to make. If the prospective student is at least giving the alternatives some thought and keeping an eye toward the future, then it’s a victory. So many blindly pick a school and major with no thought about how much it will cost relative to how much they will earn in their career. That’s the sad and scary part.

      • DC @ Young Adult Money September 4, 2015 at 6:05 pm #

        I think probably 99%+ of prospective college students don’t spend ANY time considering the debt that comes with a college loan. Maybe even 99.9%. It’s unfortunate but it’s the truth, not sure how that will change.
        DC @ Young Adult Money recently posted…10 Financial Benefits of HomeownershipMy Profile

        • Mr. Utopia September 7, 2015 at 8:21 pm #

          I’m not sure how high the percentage is, but, yes, it’s probably pretty high. I do believe there are prospective students out there with the foresight to at least step back and question the bigger picture of taking on such high student loan balances. Of course, the percentage increases for those considering grad school. The only way it will change is by continuing to try to get the message out there. It’s an uphill battle for sure, but one that’s worth it even if it only saves a minority of students from financial purgatory.

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