March 13, 2010

Creative financing...for a college education?

When the economy drags, and the unemployment rate soars, many people that are laid off or can't find jobs find themselves running to the refuge of the colleges and universities in order to gain skills and/or certifications that will separate them from their peers for better jobs.  What makes this educational voyage possible is the availability of all the loans out there provided by the government and other private investors, such as Sallie Mae.

The costs for a college tuition is soaring - at often double the rate of inflation (similar to healthcare costs) and the demand for loans is increasing at students need more money to cover their tuition, books, and probably to cover some living expenses.  CNN did a study and concluded that the average student graduates with approximately $21,000 in debt.  In addition, consider the costs associated for an advanced medical degree - sometimes these students can get loans as high as $300,000 that have to be paid back as soon as they get their diploma.  Eventually, students won't be able to afford to graduate with career and a boat load of debt.  How can they seriously pay these loans back?

CBS MoneyWatch reports in an article dated 03/12/2010:

"A young worker starting out with a $30k income from their first job and over $100k in student loans is in deep trouble, unless they’re a doctor, lawyer, or Wall Street banker. And even then, it’s no sure thing."

This reminds me of the mortgage bubble that just popped. More and more people wanted to afford a house that they couldnt - so the bankers constructed these exotic loans and derivatives to mitigate risk and allowed people who should've never qualified for a mortgage...qualify for one.  Well the same might become true for those seeking college degrees - more people want one, and the costs are steadily going up.  It will be just a matter of time before these exotic loans and derivatives become available to the student loan pool.

Imagine "interest-only" loans to fund students seeking a medical degree.  Or "negative amortization" loans available for students seeking nuclear engineering degrees or for students seeking to enroll at an overpriced Ivy league school such as Harvard or Yale.  In the near future, there will be more college graduates in the fields of medicine, engineering, business, etc. who will file for bankruptcy than any other generation has done before.  Heaven forbid should they decide to finance/purchase a house and a car after they graduate and begin working and start a family.

Financially savvy people will find ways around the cycle of debt - they will reduce costs and take 2 years of community college first, they'll work through college, obtain scholarships and grants, go to cheaper and just as qualified schools, etc.  Remember the rule of thumb...Don't bite off more than you can chew.


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