BY DAVID GORHAM, LIFTOFF FINANCIAL PLANNING

Premise: Student loans are one of the hottest financial topics for young students and their parents. Approximately 20 million students attended colleges and universities in the US last year, and the unfortunate reality is that most of them paid dearly for the privilege. Today, we take a look at student loans, and how to determine if they are an appropriate risk to take.

As a general rule, debt is something you should avoid at all costs. It wreaks havoc on your finances, and is an anchor that can hold you back for decades. This is doubly true for student loans in the US, which cannot be discharged via bankruptcy except in phenomenally rare circumstances. However, the unfortunate reality is that many head off to university without looking at the numbers, and roll the dice on their future.

Per the National Center for Education Statistics (NCES), higher education does correlate with with higher earnings. For individuals who are between 25 and 34 years old, the median salaries look like this:

• $25,400 for those who did not complete high school
• $31,800 for those who completed high school
• $50,000 for those with a bachelor’s degree
• $64,100 for those with a master’s degree or higher

While that correlation leads many to jump into higher education, the reality is that not all degrees are equally valuable. It is naive to assume that the average or median salary of all degrees is equal. Some degrees just inherently pay less than others in our current economic climate. This isn’t a critique of their societal value, but it is an important perspective for such a large investment.

Analysis: Choosing an educational and / or career path can be more than a financial decision, but finance is definitely a core component. When looking at your educational trajectory, you need to consider the following items no matter what:

1. What will this degree pay relative to the jobs that I can obtain with my current level of education?

Looking at the numbers above, the median job with a bachelor’s degree is worth $18,200 more annually than a job that only requires a high school diploma. Assuming you work 2,000 hours a year (40 hours a week for 50 weeks), the prospective jobs need to be worth about $9.10 an hour to make the education worth it. So, if your job that requires a bachelor’s degree is only worth $5.00 an hour more, it may not be a fiscally wise choice.

     2. Will this degree give me access to a job I would not otherwise be able to perform? Am I                           likely to be hired to perform that job?

If your chosen degree path won’t give you access to a particular role in society, its value comes into question. For example, virtually all nursing jobs require some form of specific nursing certification in addition to passing a national board. This means that if you want to practice as a nurse, you will have to obtain some form of education, as determined by your state. On the other hand, say you want to develop software. While there are certainly software development jobs that require a degree, there are a tremendous amount that are more focused on your skill level and your functional knowledge, rather than a particular certification. That’s not to say that a degree in Computer Science or Software Development isn’t valuable, but it may not be the best or most cost effective way to break into the field. While there are examples and counterexamples for basically every vocation, you need to look at what actual benefit a degree is like to give before you take on debt to pay for it.

       3. What happens if I can’t complete the course of study?

Most people preparing to attend postsecondary education are optimistic about their futures, and no one wants to spend time wondering what will happen if they fail. This is a question that no one wants to think about, but it is vitally important to answer. The current six-year completion rate (meaning that you finish your course of study within six years of starting) for college is approximately 58.3%. That number has been slowly increasing over time, but the reality is that you are only a little more likely to graduate than to correctly predict a coin flip.

People fail to complete their course of study for myriad reasons, among them difficulty of coursework, family emergencies, illness, or lack of effort. With that being the unfortunate reality, you need to carefully consider how you would pay back those student loans if life doesn’t turn out how you’d hoped. Because student loans are exceptionally difficult to discharge with bankruptcy, you need to have a plan to pay them back, or perhaps consider an educational path that gives you less risk (meaning borrowing less money). You should look at pursuing a course load that allows you to work full time, attending a community college and transferring to a 4-year university, aggressively pursuing scholarships, or working until you have the funds to pay for school.

In closing, don’t be fooled by common wisdom. Decades ago, having a college degree was an almost certain path to a secure and lucrative career. The modern educational system has failed to keep up with the evolving needs of the market, and it is the students who suffer. Take the time and analyze your educational plans, and don’t fixate on a hopeful salary at the end of a long road.  

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