Student 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%.
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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