What You Need to Know About Student Loans

[00:00:00] Eric Brotman: This is Eric Brotman. The host of Don’t Retire… Graduate!: The podcast that teaches you how to advance into retirement rather than retreating. Welcome to office hours where we answer listeners questions about personal finance, retirement readiness, and more. We have received dozens of questions going into our new season and I’m delighted to begin with a question from Shelby who asks, what do you think every student should know before taking out student loans?

Shelby, I love that question. And you know, as we’re getting back to school here for a new season, one of the things that that young people have to grapple with right now, not only is the cost of education, but the rising cost of funds.

So with interest rates going up, we are gonna see student loans actually get more expensive, not less expensive. And of course, college is getting more expensive, not less expensive as well. So there’s a bit of a perfect storm for young people. And before taking out a student loan, you really have to sit down and think about several different aspects.

Number one is, is it really a good investment? And what I mean by that is are you taking a student loan because you’re going to get a superior education or credential or opportunity that’s going to be worth what you’re borrowing. And I know that’s a difficult question to answer at 17 or 18 years old, but there are certain programs, certain schools, certain majors that have better ROI or return on investment than others.

And if you are going to borrow money in order to get an education, you need to make sure the education you’re getting will afford you the ability to pay back the loan you’re taking. And so it depends what kind of career you’re going into. If you’re going into aerospace engineering or finance or law, sure that might work, but if you’re going into education or social work, some of these other fields that are really important, but aren’t necessarily lucrative, you have to think long and hard before you borrow money to do it. So first is what do you plan to study?

Second? Is, is there another way to get a similar or almost the same education without taking that loan? So if you look at school a and school B and school a requires you to borrow $20,000 to get a degree. And school B doesn’t and they’re both the same degree while school a might be where your, your heart is and where you’d love to spend the next four years of your. You have to think a lot about the hole you’re digging for yourself financially.

And so if you can avoid student loans, we almost always suggest that you do, unless it’s truly an investment. Now I will tell you, I feel differently about graduate school than undergraduate school in most cases, because graduate school really is as much a professional expense as it is an educational one.

So I consider that an investment, borrowing to, to further your career at a high level. But I don’t think undergraduate schools a particularly good value, and it’s not a great place to borrow money because you can get out of undergraduate school and still have a difficult time finding a job. And yet suddenly you’re making these loan payments.

And a lot of times that really won’t work out well for you financially, when you try to build financial independence, it’s hard enough starting at zero but when you take student loans, especially for undergraduate school, you’re not starting at zero. You’re starting at negative 10,000 or 30,000 or a hundred thousand dollars.

And that makes financial independence so much tougher to reach. So that’s the second thing.

The third thing I would say is you have to understand how the loan works. Is it subsidized or unsubsidized? And the reason that’s important is that in a subsidized loan, typically you’re not accruing interest while you’re in school.

So that really, what you’ve got is an interest free loan for those four years. Then you start accruing interest on it. So it gives you a fighting chance at being able to find a job without having interest accrue. If a note isn’t subsidized, then interest is accruing as soon as you start borrowing and in a perfect world, you’d be making payments while you’re in school.

And if you could do that, you might not be taking a loan in the first place. So Shelby, I would say, I know it’s a big decision. It’s a hard decision for young people. It’s a hard decision for parents. We all want the best for our kids. And I say that having a middle schooler, who I want to go to any college she gets into.

the, the reality is it, it has to be a good financial move, not just a good move socially or academically, or in other ways, because you don’t wanna be behind the eight ball when you first get started in your career. It makes things very difficult. It might mean you’re taking a job you don’t like because you have to pay the bills.

As opposed to finding something that’s, that’s starting to be your passion. There are a lot of pitfalls of having those student loans and if you’re going to med school or, or getting a, a degree of master’s in finance or something, I get it. And the grad school piece makes some sense. But for the undergrad, I would say, you really need to think about these things before you take a student loan.

What is your earning potential? What is the value of that degree? Is there another way to do it less extensively? Is it being subsidized somehow? Are you getting a return on your investment? Like any other investment you make? And while I understand the social impact of, of choosing a school, you love the reality is I don’t know very many people who go to college and don’t have a great experience anyway.

Even if they wind up at their second or third choice school, whether it’s because they didn’t get admitted or because it was just not affordable. So I hope I answered your question. I wish you luck with what I know is a very big decision financially and personally and I wish you continued success and I, I hope you can avoid the big student loan, but thank you Shelby, for your question.

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Thanks for coming to office hours. Be sure to tune in for new content every Thursday. For now, this is your host, Eric Brotman reminding you don’t retire. Graduate

[00:06:04] Narrator: securities offered through Kestra investment services, LLC. Kestra is member FINRA S I PC investment advisory services offered through Kestra advisory services, LLC Kestra as, an affiliate of Kestra is Kestra is or Kestra as are not affiliated with Brotman financial or any other entity discussed.