Credit Cards and College: A Dangerous Mix
by Heather Koerner on 05/12/2009 at 8:34 AM
Student loans are just one of my buttons.
If you've read Boundless at all, you know that. I've heard many pro-debt arguments, but can't agree with any of them:
- Student loans are "good" debt because they're an investment (Me: No, it's still unsecured debt)
- You simply cannot go to college without them (Me: No, there are dozens of things you can do to eliminate the need for student loan debt — most of us just don't want to do those things)
- Student loan debt is worth it to earn a professional degree (Me: According to one Nellie Mae study, professional students experience "the greatest levels of burden" and "debt levels are high enough to make even their relatively high starting salaries appear inadequate.")
Bottom line: Ask just about anybody who has taken out student loans two questions:
- Should you have taken out less debt?
- Are your life choices limited now because of the debt you have to pay back?
I'll bet you my Boundless t-shirt (not really), that the answers are Yes! and Yes!
Still ... as much bad as I've seen student loans do, the damage does not even compare to the damage done by credit cards. And you combine credit cards with education debt and you've got one serious mess.
That's why a new study by Sallie Mae does not bode well. The study looked at the credit card behavior of college students. Here's some highlights of the study:
- The average credit card balance for a college student last year was $3,173 (higher than ever before).
- Only 17 percent of college students pay off their balance monthly; 82 percent carry balances and incur finance charges each month.
- 40 percent of college students have charged items knowing they did not have the money to pay for them. (Ummm...)
The point of the Sallie Mae study was (as they put it) to "underscore the importance of educating college students about using credit effectively, weighing their spending decisions and considering their source of borrowing."
I think they're right to sound an alarm. There is just no way to justify putting college expenses on credit cards. The benefit will never overcome the cost. (Just click onto bankrate.com to see how many months it takes to pay off a single charge of $3,000 while only paying the minimum payment. Hint: That child you haven't even had yet might be graduating high school.)
But I can't agree with Sallie Mae that our emphasis should be on teaching people to "use credit effectively." I've seen and heard about enough broken homes, working-to-pay-off-the-student-loans mommies and got-no-choices-for-the-next-ten-years lives to say wholeheartedly — It isn't worth it. Just don't use unsecured credit.
If you can only afford college with credit cards, then you can't afford college right now. That doesn't mean forever. But it does mean for right now. And if you're already running on the hamster wheel of repayment (for loans or credit cards), take heart. Fight that debt for all you're worth and get that millstone off your neck.
Trust me. That diploma feels a whole lot better without Sallie Mae or VISA cracking the whip on your back.
1. obewan said the following at 8:46 AM on May 12:
One of my college roommates lived on 5 or 6 credit cards during his associates degree program in auto mechanics. He just kept transferring balances from one card to the next to pay off debt, but got deeper and deeper in debt as time went by. He was lucky his degree plan was only 2 years.
When he graduated, he re-enacted a famous movie scene. He walked into a service station, handed the owner a gun, and laid down his 6 credit cards on the counter and said: "If you need a mechanic, I need a job." I guess it worked. LOL
2. Texas Craig said the following at 9:35 AM on May 12:
Heather:
I couldn't disagree with you more about student loan debt! :-)
While I do agree that students should be more judicious in taking out loans and should be better managers of their finances while in college (to limit their spending), for many college is simply not an option unless student loans are available.
And, I doubt you will find many 18-year-olds who can find a job that will allow them to sock away the $15,000-20,000 (or more) needed just to finance tuition and books for one year at many colleges, let alone try to save enough for four years of college.
In effect, your proposal simply allows the wealthy to continue to stay wealthy, because it denies the poor and lower middle class students the opportunity to further their education in the same manner as the wealthy, thus creating a continuous cycle where the wealthy stay wealthy and the poor stay poor.
Certainly, there are things that can be done to save on costs (living at home or going to a local community college - but what if there is no college or community college in your hometown?)(delaying school and getting a job - but what decent-paying jobs allow an 18-year-old to earn and save enough to afford college the following year?)
Ultimately, I am very thankful for student loans, because it allows many to better themselves in our society, and makes for a much more egalitarian society. And, even $500 per month in student loan payments is very manageable if one willingly cuts down on unnecessary expenses (cable TV, eating out, buying new cars, etc.)
That's my $.02 on that. :-)
3. Texas Craig said the following at 9:45 AM on May 12:
Oh, and to answer your questions:
1. Should you have taken out less debt?
Maybe. I could have, but I don't feel bad about the amount I took out. I worked all throughout college and graduated with only $500 in student loan debt. But, my mom also paid all my tuition. When I went to law school, I took out almost $60,000 in student loans over three years for all my expenses. I don't feel bad about that amount.
2. Are your life choices limited now because of the debt you have to pay back?
No. Even when I quit my job and took a job paying 75% less, I still had ample room to manage my student loan debt. My wife still stayed home with our kids, and I still was able to take the job I felt God calling me to (the one with the 75% pay cut!). But, I had to make other choices - we downsized houses and cut our expenses. But both my wife and I have not regretted that at all. And, we would have had to do that regardless of whether I had my student loan debts.
4. Megan said the following at 9:46 AM on May 12:
I agree that using credit cards for college debt is a bad combination ... but what's wrong with student loans? Yeah, going to a private school rather than going to a state university closer to home for less and wracking up loads of debt is rather irresponsible ... but really? No student loan debt? At all?
Give me solutions to the issue, rather than just ranting about no debt.
5. NeedACatchyName said the following at 9:55 AM on May 12:
I think I post this every time there's a thread about paying for college, but it's so important that I think it bears repeating.
Depending on where you go to school and what your major is, there is an office on your campus that you need to visit labeled "cooperative education" (co-op). This is especially true if you're a science or engineering major, but every major should at least check and see if they can do anything for them. Anyway, in co-op, you usually alternate semesters of working full-time in your field with going to school full-time. It does add a little time to your graduation date, though with proper planning, this can be no more than a semester or two. What you get in return though far outweighs the extra time in school. Co-op jobs typically pay way more than your average student minimum wage jobs, and many positions offer tuition assistance and benefits. I know many people who have supported themselves through college and graduated debt free with relative ease by working a co-op job. And the work experience is incredibly valuable. Not only do you get to "test drive" your potential career, but employers LOVE getting resumes of people who earned relevant work experience while in college. I can speak as someone who's been in the engineering field for a while that co-op/internship experience is the best way you can make your resume float to the top when applying for a job. Especially in a recession, it's by far the best way to increase your chances of landing a good job out of college. I really can't think of any negatives. Quite frankly, I tell all potential engineering/science students that I know that the single best decision they can make in college is getting a co-op/intern position in their field if such a program is offered.
6. Alison said the following at 10:02 AM on May 12:
Heather,
I couldn't agree with you more. I just wrote my final exam from grad school on loans. (I would be happy to send you my paper.) There is sooo much misinformation about student loans that drives me crazy!! Your blog only begins to address the problems with loans. I'm really concerned about the amount of debt students are taking out to take school.
7. Mark W. said the following at 10:08 AM on May 12:
Sidestepping the student debt issue to talk about credit cards for a second...
The most important financial lesson I ever learned from my parents was "Never ever ever ever ever ever ever buy anything, other than a house, that you can't pay for in cash, in full, right now." If you keep that rule in mind, credit cards can be wonderful. I use my credit card to pay for literally everything I buy, racking up free hotel stays and frequent flyer miles in the process. In addition, I can defer payment on everything I buy for about a month, which allows my cash to sit in the bank and accrue more interest until I pay my bill. Obviously trying to use credit cards to borrow money you don't have is a quick trip to debt hell, but if you're disciplined and never carry a balance, credit cards can be excellent tools to maximize your finances.
8. DannieA said the following at 10:20 AM on May 12:
You know what? I'll have to agree to disagree on your student loan debt rant to a small degree!
If we believe that God calls us to specific fields, some fields require a longer stay in school and sometimes one needs student loans.
(I'm not talking about taking out thousands upon thousands mind you....sometimes the local state university will do more than Harvard or princeton)
I have to echo Texas Craig on that one. My parents barely made it financially and definately didn't save anything to help me with college, so I was on my own. Yes I took loans, but I made sure to graduate in 4 years and take only 2 for grad school (needed it in my field)...paid it back and now own a home and don't live from paycheck to paycheck.
NOW I WILL agree with you on the credit card fiasco with college students. I learned the hard way and nowadays I have a credit card but have it tucked away only for vacation use (to rent a car etc....then pay it off from money I saved for vacation) other than that, if I don't have the money to buy it with (this includes making payments on it) THE WHOLE AMOUNT then I don't need it or I need to wait.
This is why I firmly believe that students in high school need a personal finance course and this should be a call to parents to really talk about finance and show their children how to balance a checkbook and make a budget...and MAKE them get a job in high school so they can practice before going to college.
9. Mike Theemling said the following at 10:23 AM on May 12:
Heather,
I am often in agreement with you about most financial issues, but I believe that you are over-simplifying the situation saying that college "isn't worth it" if you need to take out a student loan.
Your two questions are somewhat misleading.
1. Should you have taken out less debt?
This question is implying that the lower amount of debt should always win out against the higher debt, and that is not always true.
For instance, which is the better "deal"?:
A) $20K of SL debt graduating from an in-state law school
B) $50K of SL debt graduating from Harvard Law
Just about anyone would tell you B) is better for the person in the long run (mainly because for the most part major firms hire from top law schools and ignore state schools).
I agree that one needs to weigh the utility of a degree with its cost (e.g. paying $50K extra for a degree in Journalism usually isn't a smart idea), but one cannot assume that lower debt is the "better buy".
2. Are your life choices limited now because of the debt you have to pay back?
This question is almost a red herring. It's implying that having less choices in life is always a bad thing. Well, marriage (and by extension children) definitely limits your life choices but few say that marriage "isn't worth it".
Yes, being in debt does incur some limitations. It may delay major purchases, and can add stress in your life. But again, you focus on what people lose when going into SL debt and not on what people can gain as a result of it
You also said:
"No, there are dozens of things you can do to eliminate the need for student loan debt — most of us just don't want to do those things"
Ok, I'd be really curious to hear what these "dozens" of reasons are. You need to list 24 at least.
I can only think of a handful things that someone can do to go college sans student loans:
1) Happen to be born into an extremely rich family
2) Pick up a sports scholarship
3) Pick up a scholarship based upon your race or some other factor you cannot control
4) Pick up an academic scholarship (but pure academic scholarships which pay for everything are extremely rare. Most are based upon need and academics)
5) Attend a military service academy like the Air Force Academy in Colorado Springs
6) Join the military (and even then the GI Bill usually doesn't pay for everything)
7) Work for years in a job before college or during college (which since you don't have a degree to begin with means you will be working a very long time)
Mentioning the credit card debt siutation is comparing apples and oranges. Credit card debt is often used for consumer products and services, not for tuition and room/board (unless it's a bridge payment until the SL check comes through). I agree that the attitude of frivilous spending and large SL can to go hand in hand, but not always.
Do I believe that college tuition costs are out of control? Absolutely! Do I believe that some students don't weigh the cost of the degree they are pursuing compared to how much they expect to earn paying it back? Definitely. But does that mean that if you can't go into college and come out with a zero-dollar tab that you shouldn't go at all? Of course not.
10. Keith said the following at 11:10 AM on May 12:
At the community college I attended for the first two years of my degree, the student council became aware of the harmful affects of credit cards and credit card promotion on campus. So they voted to run the credit card companies off campus - They were banned from promoting on campus. I was really impressed that non-Christians could see the danger of credit card companies and had the integrity and leadership to take the initiative. They were an example to me.
11. JenR said the following at 11:13 AM on May 12:
I'm one of those folks who went through school without getting a student loan - of course, I didn't do college like a "normal" person, so perhaps it won't work for everyone.
I mean, who wants to go the community college route, right? Uncool. Except that I was taking community college courses while I was in high-school -- my high-school paid for at least six courses, also counted towards my high-school credits. Also, I took about a dozen CLEP and/or AP courses that effectively traded in for a dozen general credit courses. So by the time I graduated high school, I had about 30 credits under my belt.
Then I wasn't sure where I wanted to transfer to go to a "real" college, and since I had already amassed half an associates degree, I finished getting the associates - which my parents did pay for, even though I was working a couple of jobs. And I think my parents wanted to keep me around for at least another year, since I was barely 18 and pretty clueless about the world.
Then I moved to Europe (along with my parents - so, I suppose you have to be willing to live with your parents if you don't want to incur housing costs). I worked three part-time jobs to pay for the rest of my degree (and any other expenditures - not the least limited to travel expenses incurred for studying in various European cities). One of my jobs was office-flunky for the University - which didn't pay much, but it gave tuition assistance for half my classes.
180-some credits later: no student loans, no debt, just a whole lotta learnin'. No having to live with expensive monthly reminders that humanities degrees don't exactly command high-salaries, even if the degree was a ton of fun to get. *grin*
As for credit cards, I've never had one. My parents learned a lot of financial lessons the hard way, so I've learned from their mistakes (not to say I won't make or haven't made any of my own). I have a debit card that is my primary card, and an Amex charge card that is only used for emergencies or when my parents need me to ship something over to them (originally given to me by my parents years ago, the bill still goes to them - you better believe I'd have a good explanation and a reimbursement check if I use it).
Admittedly, I didn't go to a very posh school, and I've never experienced that traditional college life of dorms and parties and thousands of students my age - but I wouldn't change my college experience for the world.
Or thousands of dollars in loans.
12. Ronnica said the following at 11:16 AM on May 12:
I got student loans to pay for most of my undergrad degree (my parents paid outright for my master's), and I'll be starting to pay them off here in a little bit. If I knew what I know now, would I have still gotten them? Maybe not. However, I wouldn't have been able to go to the school where God re-found me (it was an out-of-state state school) without those loans. The experience of growing in my faith is worth any amount of money, to me, though I'll readily admit God could have done it anywhere.
13. JenR said the following at 11:28 AM on May 12:
Oh, and after reading some comments (particularly #9), I just wanted to mention that my parents are not rich (finances were always tight when I was growing up); I never received a scholarship (unless you consider the high school paying for a few of my community college classes); and all the part-time jobs I worked paid pittance (which is why I had three) - but they were flexible to allow for my classes, which is what I cared about the most.
14. Darren said the following at 12:12 PM on May 12:
Don't worry Heather, you can't give out this advice enough. It needs to be said again and again, if for no other reason, then the notion of easy credit is so pervasive and pernicious.
Both me and my wife financed our professional degrees on the back of student loans and credit cards. The irony is that I quit my job to go to college to pursue professional advancement, only to make less money overall after graduating (after we pay all our bills).
Having all of this debt does in fact limit your options. We now have a "mortgage" without actually owning a house. Pretty lame, right?
I think that part of the problem stems from the expectations of my generation. We want to obtain career fulfillment and satisfaction. We want the job of our dreams . We think that having that extra expensive degree will help us get there. But instead of the job of our dreams, we end up with a nightmarish debt.
15. BDB said the following at 12:19 PM on May 12:
The funny thing is, Sallie Mae is in deep financial trouble. The government is in the process of
eliminating all the jobs of people who work for student loan companiesconverting to a government-run student loan operation. I'm sure it will work just as efficiently as, say, the DMV!Cite: here.
16. Texas Craig said the following at 12:20 PM on May 12:
NeedACatchyName:
I concur with your comments about cooperative education opportunities. I was a co-op in college and took off two semesters and a summer to work with IBM on a paid co-op (internship). In addition to that, I worked all throughout college while taking classes. I would encourage all students who can to explore co-op opportunities.
JenR:
Your experience sounds very cool, actually, and very smart. But, you mention something in your post that a lot of people might not have: supportive parents. For example, a young man that my wife and I were a "big couple" to (the couples equivalent of big brothers/big sisters) was raised by his single grandmother who had very little income. His dad was in prison and his mom was strung out on drugs and not involved in his life. Even the opportunities you discuss were not necessarily available to him. But, you do give some great examples for those who can take advantage of them.
17. BDB said the following at 12:46 PM on May 12:
While I agree that student loans are definitely abused, and can seriously affect later life choices, my answer as to whether they are worth it is: it depends.
If a woman's goal is to be a stay-at-home mom, then I think it's wise to avoid student loans at all cost. Get the education, but avoid the debt.
The availability of scholarships, fellowships and other forms of aid varies by program. For example, there are lots of programs for women and minorities, and there are substantial programs for those studying math, science and engineering. If you have those skills, go for it and get the scholarships.
Typically, MBA programs are not eligible for most of the scholarships. It is assumed that the graduate will be making plenty of money, therefore needs no assistance. The math does not work out for everyone. If you go to a top-10 school, this is probably true. If you're doing an online program from no-name university, don't take out loan to do it.
As a rule of thumb, those who are scoring in the top 10% of the SAT and GRE tests can probably benefit from completing their education faster via student loans. These are the same students who are likely to be eligible for some scholarship or fellowship assistance.
Note I said "finish faster." That means finishing your undergrad in 4 years or less - not dragging it out to 5 or 6 as is common at state schools. It means finishing PhD coursework in 3 years straight through and getting a job while working on the dissertation - probably a teaching job at a community college with the master's degree you get enroute.
Leverage via loans is one of the few ways that poor students can advance. A good school will help someone develop the skills and discipline to perform well. Not everyone gets that support from their parents. I think particularly of kids who "graduate" from the foster-care system. Their college graduation rate is only 3%, compared to 30% of the general population. Mom and dad simply aren't there. They may have no alternative to using loans to cover mom and dad's normal contribution.
But it's definitely not worth it to use student loans to spend 5 years partying while barely getting by in class. That's irresponsible.
In all things regarding financial provision, consider carefully your options and pray about them earnestly. God may have a way to reduce your debt burden, regardless of where you are today. Try not to be too distracted by those people whose grandparents are paying tuition for them. God can come through for college students the same way he does for faith missionaries - as long as they are obedient and do what He tells them to do.
18. Heather Koerner said the following at 1:20 PM on May 12:
Well, this is a vibrant conversation, huh? :)
Seems like we all agree on the "credit card fiasco" (as DannieA put it so well). That's good.
Differing opinions on the student loans, though. No surprise there.
Although some think I am ranting, others think I am oversimpifying and others think that I am denying the poor and middle class the opportunity to better themselves, I stand by my advice, guys.
Student loan debt is unsecured debt. The only way you can pay it off is the same way you pay off a car loan, credit card debt or furniture finance plan--you work.
So when you take out the debt, you are presuming upon the future that you will have the ability, the opportunity and the resources to pay that debt back. The Bible guarantees us none of those and, in fact, strongly discourages us from taking on debt.
Randy Alcorn puts it well when he says:
Like I said in the OP--that doesn't mean college necessarily has to be off the board. Just that the timing/place/way you pay will be adjusted to eliminate debt.
Mike T. (#9): Mentioning the credit card debt siutation is comparing apples and oranges. Credit card debt is often used for consumer products and services, not for tuition and room/board.. If you click on the link to the study, they give more specific data about your concern.
19. BDB said the following at 1:40 PM on May 12:
Reading Randy Alcorn's biography, I don't see anything that qualifies him to evaluate the potential benefit of education for a specific individual, using debt as part of the mix or otherwise.
Better to pray about it very specifically.
20. NJB said the following at 2:14 PM on May 12:
Heather writes: Student loan debt is unsecured debt. The only way you can pay it off is the same way you pay off a car loan, credit card debt or furniture finance plan--you work.
If I understand the distinction correctly, car loans and furniture finance plans are generally considered secured debt, not unsecure debt (since there is something to be repossessed if the debt is not paid). Credit card debt is unsecured debt. Is there a distinction that you’re trying to make, or are you just talking about debt in general.
Heather continues: So when you take out the debt, you are presuming upon the future that you will have the ability, the opportunity and the resources to pay that debt back.
That is not unique to unsecure debt, the same applies to buying a house, no? (Incidentally, can I use that argument to avoid having children—after all, it presumes that I will be able to care for them in the future, and I’m not God. Hmmm, marriage doesn’t fare to well under this criterion either.)
And the Alcorn quote doesn’t help you.
You’re assuming that all student loans are only taken out because of “greed, impatience, or presumption”—a very broad brush to paint with.
21. J. said the following at 2:28 PM on May 12:
Heather, I assume you are a college graduate. Care to divulge how your education was paid for? :-)
22. Thomas said the following at 2:32 PM on May 12:
I have to totally respectfully disagree with Boundless on this issue, as long as they continue to make it some universal advice applicable to ANYONE confronting the choice of taking student loans. It really depends on the person and the situation, God gives us the gift of discernment for a reason! Otherwise we would all be boundless clones or something.
For many people, yes boundless advice would be good, but for many others, not at all. If someone has the intellectual capability, and has a desire to do work in say something like engineering or the sciences or medicine, then getting a degree even with taking out student loans could very well be worth it.
So boundless would tell this young man that he should not go to UC Berkley, MIT, or wherever, and work for minimum wage for many years (4? 5?) saving up enough to go to college? Or he could take student loans, find some part time work to pay for his living expenses, and get a job that pays 75,000 to 80,000 right out of school (yes, that's about how much many of my peers got out of BS or MS) and pay off his debt in 2 years time and then contribute generously to his church.
Or what about the many Christians who have callings to become doctors? The debt is pretty crushing, but most doctors will earn 130k+, and frankly, to suggest that potential doctors wait 10 to 15 years before getting their medical degree while working in some job that requires no college education is pretty bad advice.
Bottom line - this boundless advice is not applicable to everyone, and it is harmful to suggest that it is.
23. Tamara (from Canada) said the following at 2:53 PM on May 12:
Serious consideration should go into choices about taking on student loan debt, but I have to add my voice to the ones that are saying that it's not always a bad thing.
You say there are many things you can do to avoid debt when going to college . . . maybe there are. Co-op terms? . . . they didn't exist for my degree. Work until you save up enough money? . . . To do that I would still be juggling two low wage retail/fast food jobs, 8 years after graduating high school to have so far been able to save the money to pay tuition for half of my degree. How is that beneficial or helpful to my future?
I went (for the first part of my degree) to a local college and lived at home. I also worked through out all four years of my degree. When I did choose to go to a more expensive school (namely a Christian one) for the latter part of my degree I did all that was possible to keep my expenses as low as possible. Even still, there was no possible way I could avoid some debt. My parents were unable to help me out themselves in any way other than allowing me to continue to live with them.
In answer to your questions:
1. Should I have taken out less debt?
-Some people might try to tell me yes. My answer would be no.
2. Are my life choices limited now because of the debt I have to pay back?
-Only in terms that I can't just pick up and go travelling for months at a time. Because I did what I could to minimize my debt, my loan payments are small enough that I can live comfortably and take vacations, and still have enough to not only pay back my debt faster but also have a financial cushio should something happen to my car, or my job, or my ability to do my job.
Overall, no, my life choices are not limited now because of my debt.
24. Heather Koerner said the following at 2:54 PM on May 12:
BDB (#19):I disagree. Better to search the Scripture for overarching biblical principles (in this case, Scripture is clear in discouraging debt).
NJB (#20): Lots of questions. Here goes: Cars and furniture would not qualify as unsecured debt because their value tanks after purchase and could not be sold to cover the debt. Most would consider a house secured debt, but as you point out, that's not always the case. I advise putting a 20% down payment so as to protect against market downturns, but even that's not foolproof. No, it's not an effective argument against marriage or children.
J.(21): I am. Um, okay. Undergrad: academic scholarship; work study and worked as a day care teacher, math tutor, grader, office cleaner and receptionist at an electrician's office; lived like a poor church mouse; bummed many rides off people. Grad: graduate assistant and took out one loan my final year to pay for my last semester and my wedding. Stupid!
25. BDB said the following at 3:17 PM on May 12:
Let me be a little more specific to provide some guidance in the student-loan decision.
Frankly, most schools expect students to have some "skin in the game," through a combination of working, loans, or both. An education is an asset, and the Biblical principle for constructing assets was laid out by Jesus in Luke 14:28-30:
28 For which of you, intending to build a tower, does not sit down first and count the cost, whether he has enough to finish it— 29 lest, after he has laid the foundation, and is not able to finish, all who see it begin to mock him, 30 saying, ‘This man began to build and was not able to finish’?
Let's say that Student A is highly motivated, well-prepared, with strong test scores who intends to pursue an engineering profession. If this student gets into a top-flight school (MIT, CalTech, Harvey Mudd), and they offer a financial aid package that is 80% scholarships and grants and 20% loans - about $20,000 in loans for a 4-year degree. I would counsel such a student that it would be a mistake to forego the opportunity of a top school. They will challenge them to grow much faster and likely will have much, much better opportunities upon graduation.
The reality is that Student A can finish general education coursework in one year at a private university, compared to two years (3 if classes are full) at a community college. Such a student could easily become discouraged by delays and a lack of challenge. Remember that one's peers will also challenge you to work harder. If your peers just want to be in college to party, it will drag you down, too. (Especially if you get assigned to be on a team with them!)
Student B already knows they are called to be a teacher in the public school system, and needs a credential to be able to do that first and then homeschool her kids later. Again, a private school, including many private Christian schools, will likely be able to get a student through all the requirements in four straight years - compared to 6 or 7 years for someone going the community college/state college route. Again, look for a financing mix that is 20% loans or less.
On the other hand, Student C, without strong preparation, with so-so test scores, who isn't sure if they want to be a pre-school teacher, or a nurse, or something else, might do better to begin at a community college. It's a much less expensive way to explore the different options.
If you're looking at a financial aid package that is more than 20% student loans, consider a less expensive/prestigious school that may be willing to give you a better deal. Don't graduate with $100,000 in loans if you have no idea why you're doing it. E.G. did God specifically tell you to take out those loans?
26. KJ said the following at 3:29 PM on May 12:
I assume some of those methods for getting a college degree without debt involve taking time off to work...which is not an option for everyone. I was an education major who literally raced against changing graduation requirements (imposed by the state where I attended college) for all four years, taking classes out of order and carrying an unreal courseload in order to finish before the requirements changed. Had I taken off a year (or even a single term) to work, I would have been subject to the new requirements and had to start all over again - and even though my situation is a little bit unique, the fact still remains that there are some very employable majors out there that require that you stick around for the duration and not do the school-for-a-year, work-for-a-year plan that some advocate.
I knew I was getting a ball and chain when I signed on the dotted line for those loans, and lived simply until they were paid off. The Lord did not bless me with a husband or children during that time (even though I might have wanted one or both of those blessings) and so I didn't miss out on being able to stay at home with little ones while paying off my loans. Also, to have assumed that loans were out of the question because all I really wanted was to be a mom would have left me sitting in my father's house twiddling my thumbs for over a decade after high school...or perhaps working a degrading, minimum-wage job (think fast food) which is about the only career to be found in the area where I live if you don't have a college degree or technical skills.
I feel that loans, used wisely, are a way that God provides for some people to get an education to be able to do more for Him.
27. BDB said the following at 4:04 PM on May 12:
Here's a New York Times article where Justice Scalia outlines some of the frank realities about what opportunities are available for those who don't attend a top school.
It varies a lot by field. Community colleges are very good at some things - particularly for entry-level nursing and medical assistant type jobs. Most of those fields have a lot of "steps" where you can go to school some, work for a while, go to school a little more, jump up to the next step, etc.
The professions do not lend themselves to this approach. There are tests required in fields like engineering, architecture, teaching and accounting. These are all-or-nothing tests: pass and you begin your profession, fail and you're not qualified. The longer your undergraduate preparation takes, the harder it is to remember what you learned at the beginning. Pre-law and pre-med programs also result in tests to gain entry to a graduate program. It's much harder the longer you wait.
Business, on the other hand, works the other way. It may actually be better for someone to work in business for a few years first. Then they go to school to learn the principles. Many MBA programs REQUIRE five years of business work experience before they will even consider your application.
But the most important Biblical principle is still God's specific guidance. As Jesus discusses in Luke 14:31-32:
31 Or what king, going to make war against another king, does not sit down first and consider whether he is able with ten thousand to meet him who comes against him with twenty thousand? 32 Or else, while the other is still a great way off, he sends a delegation and asks conditions of peace.
One guy who took a much bigger military risk was Gideon in Judges 6 & 7. Note that he was following God's specific leading.
28. S said the following at 4:24 PM on May 12:
Should you have taken out less debt? No
Are your life choices limited now because of the debt you have to pay back? No
I graduated from college in 1998.
I bought my house in 2002.
I pay my credit card bills off when they arrive.
I just called today to refinance, and when they did my credit check, my FICO score was 806.
So, yes, the student loans were a good idea.
29. Texas Craig said the following at 4:25 PM on May 12:
Heather:
I like Randy Alcorn and I think he has some good advice. But, at the same time, the issue of unsecured debt, etc. is out of place in the way it is being used here. My undergraduate degree was in finance, and then I went to law school, so I am somewhat familiar with the concept of unsecured debt. The term means debt that is not secured in any way by a specific item of property. So, car loans and furniture loans, and boat loans, etc., are all secured. Now, that does not mean the items will not depreciate, nor does it mean the lender does not have legal rights to go after the borrower if the property's sale is not sufficient to cover the debt.
If you want to be intellectually and morally consistent, you would have to acknowledge that home loans and car loans are no different, except in what we "frequently see happen" in the value of the assets. But, that does not mean that biblicaly the principle is any different. Just as there is no guarantee that a person will be able to earn enough in the future to pay off a student loan or a car loan, there is also no gurantee that the person's house will hold its value, or that an act of war or terrorism will not destroy it (look at your insurance policy - no coverage for acts of war or terrorism). So, are you presuming upon God by having a home mortgage if you do not have the funds to pay it off if something happened to your house that was not covered by insurance?
I find the distinction between houses and cars and boats, etc. to be more about what is considered good financial planning, rather than a biblical directive. Biblically, I can find no justification for distinguishing between mortgages and other loans. Rather, that seems to be a creation of the modern-day Christian financial planners who know that neither they nor their readers will likely ever agree to a principle of no debt whatsoever. So, they throw us a bone about house debts (which can be justified financially, but not biblically).
However, once you allow house debts, it is hard to argue against student loan debts because education generally provides a good pay-off on your investment - in the same way houses generally do not depreciate. In fact, I would venture to say that home foreclosures and student loan defaults are probably not much different from each other. Moreover, if you are talking about limiting one's options (as your initial post addressed), then certainly mortgage loans limit you as much as student loans! Not only do they tie you to a specific locale, but they also are going to be higher in amount usually. And, if you account for the impact of property taxesm insurance, etc., I would say that home mortgages are far more limiting on our options than a student loan.
So, while you are entitled to your opinion, I think it is misguided. :-)
30. Amir Larijani said the following at 4:31 PM on May 12:
I'm with Heather on this one. Student loan debt is absolute poison. Especially if you are an aspiring SAHM. The math simply is not on your side.
If you graduate from a 4-year school with $30,000 in student loans, you're going to have to work several years to pay that off.
It can adversely affect your marital prospects, or force you to accept things you might not otherwise have considered--such as artificial contraception--if you do marry, as you struggle to pay down those loans.
By the time you get those loans paid off, your best childbearing years may be behind you. I guess that's ok: you can always take out a second mortgage to pay the fertility specialists to give you an in vitro baby. Oh, did I say anything about selective abortion?
If you suffer a health-related debacle, your capacity to pay off those student loans will also take a hit. If you have a complicated pregnancy, or a child with profound birth defects, that $500 per month will become an albatross.
If the economy goes completely south and you lose your job, you will not be getting a bailout.
If your capacity to service your debts takes enough of a hit, you could find yourself seeking bankruptcy relief. Except that student loans are not dischargeable. If you die, student loan folks can actually go after your estate to collect.
As for credit cards, they are poison times ten. But colleges don't mind having the credit sharks on campus, because those credit sharks put big bucks into the coffers of the colleges.
There are alternatives to student loans. Going to a 2-year college and learning a trade will give you earning power that baccalaureate grads would dream of having.
I know plumbers and electricians and auto mechanics--educated at the local community college--who have jobs that are as recession-tolerant as any. I know women--dental hygienists--who aren't hurting over not having a bacc degree.
In fact, I know homeschoolers--with no college--whose kids could wipe out anyone from public school.
Even in my field--Information Technology--it is not uncommon to find network administrators, developers, and security experts who were self-trained and who had no college or, at best, a 2-year degree.
The Internet provides lots of capacity for self-education. One does not need a degree to learn Linux, or Microsoft .NET, or interfacing with SharePoint, or ADA-compliant web page design standards. If you wish to become a white-hat hacker, you won't learn that in a classroom.
A whole world of opportunity exists for those who decide to tell the academic establishment to go pound sand.
31. Heather Koerner said the following at 5:02 PM on May 12:
KJ (#26): feel that loans, used wisely, are a way that God provides for some people to get an education to be able to do more for Him.
If God is the same yesterday, today and forever, do you believe He would warn us so strongly about debt in His Word and then encourage us to use it anyway?
32. Rachael said the following at 5:24 PM on May 12:
Wow! Boundless shirts!
33. DannieA said the following at 5:32 PM on May 12:
woo hoo thanks for mentioning my comment on credit card fiasco Heather ;)
As a side note, I don't think you should budge from your position...that would mean you didn't have conviction on it! I received good grades, but because I wasn't in the top percentile did not receive academic scholorships...I took out modest loans (compared to some numbers I've heard of) and they are paid off and I'm relatively young. So my pov is from that side...I also went into a field that survives economic downfall....I think THAT is also a key right there.
Where I disagree is that there is a black and white NO ON LOANS....I think it's a case by case basis.
I love your articles btw...good advice, and I use and print some out to put with my finance books I have...
34. farmer Tom said the following at 6:28 PM on May 12:
Really?
I would agree that this term is commonly used by those who consider non tangible things as having intrinsic worth, but, I consider this a misuse of the language.
as⋅set
–noun
1. a useful and desirable thing or quality: Organizational ability is an asset.
2. a single item of ownership having exchange value.
3. assets,
a. items of ownership convertible into cash; total resources of a person or business, as cash, notes and accounts receivable, securities, inventories, goodwill, fixtures, machinery, or real estate (opposed to liabilities ).
b. Accounting. the items detailed on a balance sheet, esp. in relation to liabilities and capital.
c. all property available for the payment of debts, esp. of a bankrupt or insolvent firm or person.
d. Law. property in the hands of an heir, executor, or administrator, that is sufficient to pay the debts or legacies of a deceased
Carrie Prejean's looks are an asset, Rush Limbaugh's mouth is a asset, and BHO's ability to read the teleprompter ... is an asset, using the definition you are suggesting with regards to a college education.
In reality, all of the above are potential assets, and in the current business climate, they may continue to remain potential assets for a long, long time.
A college student I know personally turned down a starting wage last year of $70k so that she could go back and get her masters. Now instead of a potential jump in starting wage to the six figure range, she has no job, and the potential earning power the masters was supposed to give her, is gone. In 90 days she will be done with the masters program, and the potential asset will be worth .......
McDonald's is hiring (that's big potential bucks), but I'm sure her folks will pay her way before she ever works in a MickyD's. Do you call the fact that MickyD's is hiring, an asset?
35. P&P said the following at 6:31 PM on May 12:
I do agree that taking on obscene amounts of debt is wrong, however I think that in this day and age, you really can't afford NOT to get some kind of education beyond high school.
I've worked with people who have PhDs, BA's, military training and self-taught. Most have been fine employees, but I will say that those who attended some level of college (community or ivy league, it doesn't matter) have a degree of polish that appeals to clients and upper management.
I have noticed both personally and even from posts in this blog that there's some animosity towards higher education in general. Higher education is certainly in need of reforms (especially in the price tag!) but I still think education is the best path to good earning in the long term.
36. Heather Koerner said the following at 6:33 PM on May 12:
Texas Craig (#29):
I'll defer to your education as to what the finance or legal definition of unsecured debt is. But I stand by the idea. If we do not have a way to sell an asset and pay back the loan, we're on dangerous ground. Like Proverbs 22.
I think you raise some excellent points about house debt, but I still disagree that house debt is equivalent to car debt or student loan debt. Cars always depreciate (collectible cars maybe withstanding). Student loans are covered by no asset other than years of work. That said, though, I think we'd all be wise to ask your question: "So, are you presuming upon God by having a home mortgage if you do not have the funds to pay it off if something happened to your house that was not covered by insurance?"
"Moreover, if you are talking about limiting one's options (as your initial post addressed), then certainly mortgage loans limit you as much as student loans!" Amen, brother!
Misguided? Well, I'm attempting to be guided by God's Word. Debt is not sin. But, if God says that debt is bondage and that I should flee from it, I can't understand why I would willingly enter into it.
My concern is that we're starting with our goals and problems (e.g. student loans worked for me or I couldn't have attended college if I didn't have them) instead of starting with God's Word (debt is bondage).
Okie Heather
37. the most frequent Kate said the following at 7:01 PM on May 12:
My background: Undergrad was paid for by scholarships and parents, mostly scholarships. I took 4 years in undergrad and 1.5 in grad and I attended in-state state universities in both cases. I never took out any non-government student loans. Worked part time in undergrad to pay for food. Did not work in grad because I could not find a job that was accommodating to my packed schedule. So, grad school was financed on loans entirely under my name. I have recently obtained my first professional job and my income is going to to be devoted to those loans to pay them down and off aggressively, while we continue living very frugally on my husband's very modest student stipend.
1. Should I have taken out less debt? No, I don't think so. Sure I wish my tuition had cost less and that I had family members who were willing to let me live with them for free during that time! But that is not the cost of education, and that is not the family I have. But I don't wish I would have tried to work in minimum wage or entry level social service work for an indefinite amount of time to "save up" for grad school, since the money one can earn in these positions HARDLY covers living expenses, let alone allows you to save up $40,000. Not to mention the extreme time devotion and stress that would be involved in such work and the detriment that has on one's health and life. By the way, I lived on much less money overall than the school's projected student budget predicted I would, which I thought was interesting because most of my classmates complained about how stringent the budget was and how they needed to be allowed to have more loans.
2. Does it limit my life to have those loans to pay off? Not in a significant way today. I have weighed the risks and I understand that unexpected expenses can occur in the future. This is not significantly limiting our lives today because we enjoy being crazy frugal people. Sure that $500 payment a month would become harder if we suddenly had a huge medical problem or lost all our income, but you can also have your loan payment adjusted to be income-dependent and you can get deferments for certain emergencies and circumstances.
AND you also have to consider that the same circumstances that would sink somebody making a $500 monthly loan payment who is/has been working in a professional capacity would still totally sink somebody who has been trying to live on a minimum wage income anyway, since they are equally likely to be out of work and unable to find it (if not more), and probably don't have as much assets to fall back on either.
Before I went to grad school, FULL TIME minimum wage in MI got you a bit over 12,000 a year (no medical benefits included in that!), which is exactly what my living expenses were when I lived alone for a year in grad school (not accounting for tuition or medical expenses). I was able to stay on my parents' health insurance plan as a full time student so I wasn't paying for health care. I would not have had that benefit had I opted instead to attempt to "save up" with a minimum wage job. So then I could have been running the major financial risk of ending up with a really expensive health condition while uninsured too!
So you could say that, yes, I was unwilling to take that route and attempt to go to grad school without any debt. And I have to say attempt because I still don't believe it surely would have been possible. I also could have gone a PhD route and been fully funded instead of paying for a master's degree... BUT I would have been in school for 4+ more years rather than 1.5, (not as conducive to family planning) and the degree would have been less relevant for the work I really want to do.
Another thing to consider is the rising price of tuition and availability of scholarships. If my parents were unable to pay the difference for my undergrad and I was unwilling to take loans, I would have had to work to pay that difference, which could have meant I would not have had enough time to devote to my studies to keep the scholarships which were really worth a LOT! Or I would have had to wait to go to school and really throw away that opportunity, since those scholarships are only available to people coming straight from high school.
Further, MY scholarships were ultimately worth MORE than those my younger sister got at a similar in state university 4 years later because of how much of the total cost of college those scholarships paid for, since the cost has risen. Her scholarships were also more competitive than mine were. It would be very interesting to look at the benefits of "locking in" that tuition rate and catching the best scholarships while they are available, and then paying off the loan very aggressively so you don't pay much interest... and compare those to the process of working to save up for it and attend school later when it's going to cost more.
Yeah another thing, like BDB mentioned, is that typically when you are working in low level jobs, you are not challenged and you are around peers who are going to be a detriment to your drive to even go to school to begin with, let alone become a professional and excel in a career. And I think it's VERY important not to discount this effect.
SO I am sure you (the author) will find that everything I mentioned is totally irrelevant and invalid and say I should have sucked it up and worked in some crappy low-paying job while trying to support myself "waiting to get married" while saving up $40,000 or so for grad school "someday" to be able to do the work I really wanted to do all along... But I thought others may find it useful!
Whew I have been writing such long comments on here the past couple days.
38. Chris said the following at 7:26 PM on May 12:
BDB writes:
The funny thing is, Sallie Mae is in deep financial trouble. The government is in the process of eliminating all the jobs of people who work for student loan companies converting to a government-run student loan operation. I'm sure it will work just as efficiently as, say, the DMV!
My wife has worked in higher education (and had loans for graduate school). Her experience in dealing with this on both sides (as someone borrowing and someone in administration helping students) is that the direct lending program is much more efficient and easier than the private lenders. Much less paperwork and red tape since you're dealing directly with the government instead of a lender providing a loan backed by the government.
Plus, it's a lot easier for Uncle Sam to get his money back if you reneg on the loan than for a private lender.....
39. JB said the following at 7:28 PM on May 12:
I don't know that this theory about student debt works well on a social level. Medical school, for example, costs about $30,000/year plus living expenses at a public institution (and private schools can easily cost twice that). There are no work-study programs and most schools strongly discourage trying to keep a job while a med student. Furthermore, for the most part only fairly young people who have not spent much time in the working world are willing to invest the better part of a decade in advanced training before beginning their career.
Without student loans, only the independently wealthy and military folks would ever become doctors. That seems like a recipe for having fewer and less well qualified doctors when more and better physicians are in high demand.
40. skp said the following at 7:49 PM on May 12:
As a student, I had to take out loans to complete college even with my parents helping as much as they could. I thought nothing of it and was able to pay the loans off after 3 years of frugal living. I don't regret taking out school loans. It gave me a sense of accomplishment and now I now have a job making much more money than I would have otherwise. The only think I might have changed was to go to a public instead of a private college.
However now that I am a parent, I worry about saddling my children with school loan payments. I survived -maybe even thrived on my experience- so I am not sure why I feel that way.
I guess you just want a perfect world for your children.
I agree with Texas Craig- school loans are sometimes necessary but those taking out the loans need to realize that it will affect their lifestyle post college.
41. BDB said the following at 8:08 PM on May 12:
Credit Card debt, a.k.a. consumer debt, is definitely the worst. It is unsecured.
Mortgage and car debt are secured. Cars depreciate much faster than houses. In both cases, you're trading one type of investment for another.
In the case of mortgage debt, you're comparing it to what you would otherwise pay for rent. Buying too much house gets lots of people into trouble. If you buy a condo and have the same mortgage payment as you'd pay for a comparably-sized rental (after adjusting for the tax deduction), you are probably at least breaking even. For Christians who are regular givers, they can also deduct their church giving along with their mortgage interest. Most people starting out don't give more than the standard deduction. Being able to add the mortage deduction will likely push them over the top, and BOTH tax deductions, added together, make it cheaper to buy a condo than rent an apartment.
Is a 30-year mortgage riskier than an apartment lease? To an extent. Both can destroy your credit if you can't pay on time. In the case of a secured mortgage, in most cases they can't come after you if the foreclosed house sells for less than your balance. Depending on the state, you could still be legally liable for your apartment rent.
But those are starting-out risks. Fifteen years later, the home owner (who doesn't refinance) is in fantastic shape compared to the renter. Yes, lots of things can happen in 15 years - positive and negative. In a normal economy, the house will appreciate in value, and the owner will build up equity - and eventually be able to retire without paying rent. Owning a home is also a great hedge against inflation - renters are wiped out as rents go up, but those with fixed mortgages do extremely well - their mortgage payment remains the same while rent keeps going up. People with fixed pensions can be wiped out if rent goes up faster than their cost-of-living pension adjustments. Assuming they even get a pension. There is risk either way.
While mortgage debt is secured, if you die and your spouse cannot afford the mortgage, they will lose the house to foreclosure. With student loans, they die with you. Car and credit card loans have claims on the estate - any remaining assets such as the car, savings, perhaps retirement savings. This is what life insurance is designed to pay off.
You can buy insurance to hedge against all kinds of risk - including death and disability. The mortgage lender requires fire (and sometimes flood) insurance for exactly this reason. Guaranteed student loans carry insurance for the lender against the default/death of the student, which is why the loans die with you.
Avoiding all risk in life is impossible.
42. BDB said the following at 8:20 PM on May 12:
The other thing to keep in mind is that college costs are increasing much faster than inflation. The undergraduate institution I went through (92% funded without loans) was $20,000 per year. It's not listed at $45,000 per year. That's 15 years of inflation. Absolutely crazy. So, if you straight-line that, it's an increase of $1700/year.
Note that with a financial aid package like that, it was less expensive for me to go to a private school than a state school. I was surprised it worked out that way. But, that's what I had prayed for. But the school made it absolutely clear that financial aid ended after 4 calendar years. HUGE incentive to buckle down and graduate.
43. Leah said the following at 10:11 PM on May 12:
I think it's unwise to write off student loans just because they get you into debt. Debt, itself, is not necessarily bad. What is bad is how it controls you. No matter what you're in debt for, if you can make the repayments easily each month, you're fine. The same is for taking out student loans, a mortgage, or car loans. If you're going to struggle to make repayments and accrue interest when you have to carry-over payments you can't make, you're in trouble because your money is being monopolised by the debt.
An example is my now-husband, who took out a loan for a new (well, second hand) car in his final year of uni. It was a special student car loan- the bank would give you $10k and you didn't have to pay it back til you finished uni and were working. The required repayments were $300 a month. My husband repaid $300 a fortnight. In no way did his debt control him. The same is for mortgages and student loans.
Oh, and student loans ARE investments (or can be). Just like a mortgage can be. Just coz it's debt doesn't make it a non-investment. My parents mortgaged their house to buy a second investment property, and are renting it out. The rent covers the interest on the loan, and nothing else. They have not repaid a cent in the ~8 years they've had the second house. They'll make their money when they sell it.
44. anonymous said the following at 10:30 PM on May 12:
I've just checked out the Financial Aid office page of the Harvard University (Harvard College) website. They have been trying for some time now to eliminate the amount of debt their students carry with them when they graduate. Parents of families with income less than $60,000 are not expected to contribute at all. Between $60,000 and $180,000 the number is roughly 10% of a families income, but there are exceptions. The number of children in a family, a large amount of medical expenses, very little retirement savings, all these things can be expected to lower the family contribution to a student's education. Home equity is not considered as a resource in their determination of a family contribution, neither are retirement assets. Students are not expected to take out loans, these have been replaced by need based Harvard scholarships. For the class of 2008, the median graduating student debt was $8,300. (Eight thousand three hundred dollars.) The average graduating student debt nationally is $20,000.
I know a woman whose son will be attending Harvard next fall. All you single ladies (or married, for that matter) out there with teaching credentials, my friend did something which I believe was extremely clever. She got a job teaching at a very prestigious private school, one with an excellent reputation. Because she was on the faculty, her child was allowed to study there either tuition free or at a greatly reduced price. After getting his basic education at the school where she worked, he transferred to a private school on the East coast for his high school years, (full scholarship) Now he's been accepted at Harvard, as his current private school has long been considered a feeder school for the Ivy League. I know from talking to my friend that he had really good financial aid offers from many other top tier colleges as well. What I'm trying to say is, the top tier colleges are aware of the student debt problem, and are trying to do something about it. Ms. Koerner, I do agree with you. If you are smart enough and capable enough, you shouldn't have to take on a massive amount of debt just to get an education. If you don't have top grades or top test scores, then I really don't see the point of taking on a massive amount of debt for your education.
45. Texas Craig said the following at 11:58 PM on May 12:
Heather (#31):
I agree with you that God is the same today and yesterday and in the future. I also agree with you that it is preferable to avoid debt, and that debt can create bondage. But, I do not agree that the Bible is as clear cut as you seem to indicate.
For example, in the parable of the talents in Matthew 25, Jesus gives the example of the master who gives talents to His servants. At the end of the story, Jesus condemns the servant who buried his talent. Interestingly enough, in his story he says the servant should have at least taken the talent and given it to the bankers so it could earn interest. Why does it earn interest with the bankers? Because they loan it out to others. So, it seems odd to me that God would condemn debt, but then Jesus would integrate the concept of lending and debt into his parable, without condemning it.
So, I do not think the Bible condemns debt that strongly. Rather, i think it points out the concerns about it. To me, it is similar to alcohol. The Bible tells us that wine is a mocker, yet Paul tells Timothy to have some wine for his stomach. So, God warns us frequently of the effects of the irresponsible use of alcohol, but it also is not condemned outright. In the same way, I would say that God has warned us of the effects of the irresponsible use of debt, but does not condemn it outright. And, what God has not clearly condemned, I think we ought not clearly condemn. We may choose to forego it for our own lives, but we ought not turn our convictions into principles for all.
Anyway, I genuinely appreciate your willingness to engage on this subject in a respectful way. I hope you do not feel too "piled on!" This is all just a friendly discussion on the topic. :-)
46. Mike Theemling said the following at 2:06 AM on May 13:
JenR (#11 and #13),
Thank you for sharing your experience in Europe. I'm glad that you were able to work your way through college without having any loans.
But you also have to consider that the relative costs in Europe are not the same as the costs in the United States. I don't know where you went, or how much it cost, but it is not uncommon for the government to heavily subsidize tuition costs.
I also don't know if you got "in country" tuition or not but suspect you did since your family actually moved there. That could also be a factor in cost.
I'm just saying that how you were able to pay for school in Europe generally does not translate well to paying for school in the U.S.
47. Mike Theemling said the following at 2:30 AM on May 13:
Heather,
I agree with Texas Craig (#29) and his arguments which I immediately thought of as well when I first heard your response.
If we try and Biblically argue that "all debt is bad" then we'd be forced to say that we should never pay for a home with anything less than cash up front. Some justify that a home can "increase in value", or you are "investing" in it. Well, a good education can do exactly the same thing. Studies show (and so does common sense) that higher education tends towards higher paychecks. Yes, one can make a bad choice in a degree and cost just as one can make a bad choice in purchasing a home.
It also seems Heather that your main argument against SL debt is that "the only way you can pay it off is the same way you pay off a car loan, credit card debt or furniture finance plan--you work." But isn't true of any kind of debt, regardless of whether it comes from a mortgage or not? Heck, work is almost a given for just about everyone. It's just a matter of what you get paid for it and what that money is used for.
I agree your heart is in the right place, but I just find your logic faulty. By the extension of "avoid all debt" doctrine you'd have to say that Christians should never seek out a business loan when starting a business, or that we should never buy/sell bonds (as that is in a way condoning a type of loan). It's important to be prudent in financial matters certainly, but it's also easy to get carried away and take a Biblical proverb (not a command mind you) to an extreme.
I see investing in education the same as investing in the market. Both come with risks, yet both can be a good use of money if done wisely. Just as makket investing ties up your money that would be otherwise used to buy tangible things, investing in an education is similar: You are upfronting cash now so you can have a greater return on your money later.
48. farmer Tom said the following at 5:48 AM on May 13:
And where exactly in the Constitution is the federal government authorized to make loans for college education?
Without discussing the merits of Heather's argument against going into debt for an education, I believe that Constitutionally the entire government funded student loan program is unlawful.
Government has no moral right to take my tax dollars, and use them to pay for some other persons education.
49. Debbie said the following at 6:47 AM on May 13:
I live in southeast Asia, and earlier this year my credit card saved my life. I had some sudden and severe health issues that landed me in the hospital for 10 days, needing many MRIs and months of drugs and follow-up. Because of my location, I chose to seek treatment at a private hospital, which is far superior to the local hospitals. I have accrued about $8000 in medical bills, and yes, I will be paying them off for many years. But sometimes use of a credit card for real emergencies is necessary. I'm just saying it's not always a black and white issue, is all.
50. Irene M. said the following at 8:27 AM on May 13:
1) Should you have taken out less debt?
Probably. I honestly could have survived without the extra $3000 from one of my loans. At the same time, my last semester in college was incredibly difficult (sickness, family emergencies, etc) and that extra money allowed my to quit my job and save my grades. Now that I'm graduated, I now have that safety net to help me as I establish myself in another city. Most of it is still unspent and will probably just go back to the loan company, but it's incredibly helpful to have that extra money when your family cannot help you out.
2) Are your life choices limited now because of the debt you have to pay back?
No. It's actually expanded my life choices by helping me through a difficult semester and a transition to a new city. It's a strech, but I can pay off my loans in a year. I could certainly do it in two.
As for credit cards, I highly reccomend that students get debit cards. It discourages debt and spending, but you can still buy a plane ticket or book a hotel if need be.
51. Darren said the following at 9:05 AM on May 13:
As I mentioned earlier, I am in Heather's corner on this one.
Ultimately, people need to go into this with their eyes wide open. Often people pursue higher degrees for all the wrong reasons.
1) All of their friends are going to college, so why not join them?
2) Parental pressure, or pressure from other significant people in your life.
3) You don't know what to do with your life and college seems like a reasonable and socially acceptable endeavor.
4) My self-worth and my value as a human being are influenced by whether I attend college or grad school.
Ultimately, each person needs to make a very personal decision on whether college or graduate school is right for them. What should go into this decision?
1. You should financially map out the period of time in which you will be attending school. How much money will it cost. How many loans will you need to take out. What will your loan payments look like after you graduate. You need to have reasonable expectations of the benefits and the cost of school. Key in all of this, is that you need to be realistic. In fact, it may be best to use the worst case scenario. While in college, as much as you might want to work 20 hours a week, this may not be a practical or advisable given your major or capabilities. Moreover, in considering how you will pay off those loans you need to understand that most who graduate from law school do NOT make a six figure salary upon graduation.
2. While others may voice an opinion on the value of a BA from a certain named school, or the value of a graduate or professional degree, please understand that those people will not be there to pay your debt when its all said and done. Don't get that degree for your parents, your spouse, your future children or for your small group leader at church. Remember, this is your life and your choice. You will bear the burden and the responsibility for your life's choices.
3. Your value as a human being is not based on the initials (ie. BA, MA, MD or JD) behind your name, but by the fact that you're God's child. Yes, this is maybe a little corny to say, but its true and if people truly understood this, then they would be less apt to make bad choices in their life. So many people pursue advanced degrees because they are searching for something. They are looking for meaning, personal fulfillment, a life's purpose or the job of their dreams. This notion is truly a 21st century luxury. Its based on the values of a consumer driven culture and our self-centered notion that I can bave it all and I deserve it all. Ultimately, as Jesus said, we should seek our treasure in heaven.
4. Be honest with yourself. "I'm doing to for God" "I want to be a medical missionary" "I want to be a lawyer serving the poor". All of these are good reasons, if this is why you are really pursuing an advanced degree, but let's be real here. Don't be fake. God know's your heart. If I had a dollar for every time someone said these things, I would be a millionare. Honestly, when most people say these things, they are totally self-deceived. Their reasons for getting an MD, a JD or a PhD have nothing to do with God and everything to do with their personal ambition. Disclaimer: This isn't always true, but it's unfortunately too often true.
The decision to pile on debt in order to go to college is not always a bad decision. It can be the right choice. But, if you do make this choice, make it a thoughtful choice. Question your motives. Be realistic. Be honest with yourself.
52. Shawn Cohen said the following at 9:41 AM on May 13:
Dave Ramsey (www.daveramsey.com) has a lot of good info about the dangers of credit cards. However, credit card companies target college campuses b/c they know that students aren't very finance savvy.
Thankfully, there's some regulating going on that will limit credit card companies from sharking students on campus.
53. farmer Tom said the following at 9:44 AM on May 13:
AMEN
This is a hard hitting, statement and very true.
I've heard the "I'm doing it for God" mantra so often I now consider the person using that line to be a liar. You're doing it because you want to, and you're sprinkling it with God words to give yourself cover.
What does Scripture say? "Proverbs 23:7
For as he thinketh in his heart, so is he,"
You want to become a doctor/lawyer/financial wizard because you desire wealth and acclaim, but if you tell everybody you're doing it for God, then and you can make yourself feel better about your desire for wealth and acclaim.
Quit lying to yourself and me by telling me that you are altruistic, spiritual, and full of virtue, while cashing the big check and living a lifestyle far above the norm. Jesus, in Mark 10 challenged a man of good moral character to give up all he had and follow Him, but the possessions(his riches) were worth more to him than Jesus.
Some of you who claim to be pursuing high paying careers in order to serve God are in fact pursing riches and hope to assuage your conscience by claiming that you're doing it for "spiritual reasons".
54. Hannah C. said the following at 9:58 AM on May 13:
Current college student here...
Credit cards are easy. I pay off the entire balance every month. I'm also the one in charge of paying the utility bill for the on-campus student apartment I live in with three other people (they pay me back, I actually pay the company). I have had a bit of a problem with spending too much; I know it's my fault and I'm working on it. I have to spend some, though. I do have a work-study job which pays for my expenses during the year pretty well, including food.
As for loans - I don't have to take out a loan for college next year. It's the first year that's happened (I'm entering my third year of college). My loans have actually decreased each year because I've gone into cheaper and cheaper housing, and I'm currently in student apartments where you don't have to have the expensive meal plan. This while tuition and housing have both been going up! Last year I got back my entire loan, but decided to put the money in the bank and let it accrue a bit of interest instead of getting my loan provider to take it back. I'm now using that money to pay for a Mayterm class so that I can graduate a semester early if I want.
Could I have not taken out loans? I really don't think that would have been an option. I could have taken out less loans, certainly. But my college offers loans to everyone, I think; I'm far from the only person whose parents can't pay anything because of the large quantity of siblings. That being said, my total debt as of now is $11,000. My parents have said they will help me with loan payments later on if I need it, but I'm not counting on that. Rather, I'm hoping that I can start saving and pay at least a chunk of it back once I have to start paying it back. All the loans I have are subsidized, so there's no interest until six months after I leave school.
I could have gone to a big state university on a full scholarship, everything paid for including housing. I would probably also have hated the environment and gotten a much worse education. My college has MUCH higher academic quality. I've thought about leaving because of the loans I've had to take out, but my parents and my now-fiance have discouraged me from that. And if I were to transfer now I would get very little financial aid. Of course, I didn't have to take out a loan for this coming year, so I have no reason not to finish now!
55. Amir Larijani said the following at 10:23 AM on May 13:
My loans are not student loans, but I'll adjust Heather's question accordingly, substituting "home mortgage" for "student loans":
I should not have taken ANY debt.
I got a fixed-rate prime loan, but--still--debt is debt. The borrower is slave to the lender. Period. Paragraph.
Anyone who says that "homeownership"--holding a mortgage--carries significant advantages over renting, is not taking risk into account.
Granted, I have a job. Granted, I've never missed a payment--and even pay on an accelerated scale.
Still, a bank can always call my loan due--which can happen in an economic collapse--and I can always lose my job, which would impact my ability to service my loan.
Against that backdrop, having a home loan is like trying to run a marathon with a 100-pound rucksack on my back.
In less polite company, I'd add other choice words, but--to make a long story short--yes.
56. DannieA said the following at 12:05 PM on May 13:
wow, lively discussion....
one point I will make. I think people should hold to their opinions on debts but the prime reason for their thoughts shouldn't be labeled as black or white...because there will be an exception to the rule...this will happen with anything that is not absolute truth and can be different on a case by case basis.
on the presumption that a mortgage is an investment because the value may increase? well I took out loans and paid them back...I also work at a school district with with a salary schedule and my pay increases every year....I would say that in this case...it was an investment to take out loans.
that aside...people need to learn to make GOOD financial choices in life.
I will restate that PARENTS need to instill good financial value with their children, and they should know how to balance a checkbook, make a budget, know how to use their paycheck from working...before they are 18.
57. Trisha in AR said the following at 12:09 PM on May 13:
(#2) Texas Craig. I have the same perspective. I came from a family of 7, and while my parents were OK providers, a college education was looked upon as unobtainable - mainly because it had never been done on either side of the family.
Throughout school, I worked full-time while going to school full-time. My income was just enough to cover my monthly expenses. Paying for my education on my own was not an option. So, without Sallie Mae, I would probably be working at a minimum wage paying job and missing out on the best part of my life.
Education is so much more than landing a good job. If I have to pay a lender back for the education, experiences and knowledge I've developed over the years, I am happy to do so.:)
58. BDB said the following at 1:02 PM on May 13:
Amir (#55) wrote:
>>Anyone who says that "homeownership"--holding a mortgage--carries significant advantages over renting, is not taking risk into account.<<
This statement is false.
Mortage debt, like any other form of leverage, is a calculation of multiple types of risk. Interruption of income is one type of risk. Inflation is another. A person with a fixed-rate mortgage will benefit greatly during a major inflation event because their house payment stays the same, while rents skyrocket. Typically, wages rise with inflation (eventually), as do housing values. Using fixed-rate debt in a home mortgage is a hedge against inflation risk, though it increases the risk of negative consequences from a future interruption of cash flows.
>>Still, a bank can always call my loan due--which can happen in an economic collapse--<<
This statement is also false.
A mortgage contract, particularly a first mortgage - cannot be called before maturity. As long as the borrower does not miss a payment or make repeated late payments the bank CANNOT call the loan due.
A line of credit is different. It can be frozen, as many people discovered recently with their home equity line of credit (HELOC). The specific covenants in a line of credit specify which events constitute a default. The reason HELOCs were frozen is that the value of the underlying secured asset - the house - has dropped precipitously in value. When the asset is not worth enough to cover the debt, the HELOC documents give the bank the authority to not lend more money against the asset. However, they cannot call it due unless the borrow defaults and misses a payment.
Some lending contracts include clauses where if the borrower defaults on one thing, it triggers a technical default on other debts. This is much more common in a business setting, however.
Remember that the renter is also a slave to the landowner. There are unfortunately lots of times in American history where the landowner always raised rents to the point where people stayed poor at a subsistence level. Look up sharecroppers to learn more.
59. Irene M. said the following at 2:52 PM on May 13:
Amir brought up a good point on the other page about student loan debt and being a SAHM. Anyone considering taking out loans should seriously think about the kind of lifestyle they want post-graduation. I hope to work full-time for the next few decades, so the extra debt is manageable. But, if you don't plan to work outside of the home or plan to have a particularly risky career (like something in the arts) then you should definitely reconsider the loans.
60. Amir Larijani said the following at 3:15 PM on May 13:
BDB says:
A mortgage contract, particularly a first mortgage - cannot be called before maturity. As long as the borrower does not miss a payment or make repeated late payments the bank CANNOT call the loan due.
Baloney. They certainly can call a loan due, as it is their asset and they have the legal right to make a claim against that asset. It is normally not in their interests to do this, as banks are in business to make money off the cash flow from those interest payments, but--in the event that they are strapped for cash--they can call it due.
Many "homeowners" found this out during the Great Depression.
Mortage debt, like any other form of leverage, is a calculation of multiple types of risk. Interruption of income is one type of risk. Inflation is another. A person with a fixed-rate mortgage will benefit greatly during a major inflation event because their house payment stays the same, while rents skyrocket. Typically, wages rise with inflation (eventually), as do housing values. Using fixed-rate debt in a home mortgage is a hedge against inflation risk, though it increases the risk of negative consequences from a future interruption of cash flows.
Depends on the frame of reference. The bank has taken the risk into account, but the "homeowner" has not necessarily done this.
While the renter is slave to the landowner, it is a lot easier to get out of a lease--without hurting one's credit--than it is to get out of a mortgage.
There are any number of "homeowners", seeking to sell their homes in a condition of financial exigency, who are finding this out the hard way.
61. Texas Craig said the following at 3:27 PM on May 13:
I am with BDB on the mortgage debt issue. It is a contractual arrangement, and the standard mortgage agreement does not allow the mortgage to be called early. I am not sure where you are getting your information, Amir.
62. NeedACatchyName said the following at 3:52 PM on May 13:
While I'm certainly not advocating it (I am, after all, the proud "owner" of a fixed-rate mortgage, though it is my only debt), it is possible for "normal" people to buy a first home without taking out any loans on a reasonable time scale. In fact, I know someone who did just this. He basically believed that scripture called for us to have no debt at all, and that the common wisdom that mortgages were "exempt" from this command was faulty. So he and his wife agreed that for the first few years of marriage, they would save money on as extreme a scale as possible in order to afford a first house in cash. They both worked reasonably well paying full-time jobs, and agreed that they would put off having kids until they moved into a house. They also lived in an inexpensive one bedroom apartment in a safe part of town, and cut out all nonessential expenses. I wouldn't be surprised if they were saving more than half of their combined take-home pay. Then, after a few years of saving they had enough money to buy a house, and did so using only their savings. I've lost touch with this person so I don't know what the thinks about this strategy now, but at the time he was pretty happy with it.
Again, this is not something I'm advocating (besides, if I were, then I would be rather hypocritical for having a mortgage), and this particular method could conflict with other goals conservative evangelicals commonly have (having kids early, wife staying at home). I just merely present it as food for thought for those who have ever wondered if it is possible to achieve home ownership without a mortgage on a realistic time scale.
63. Jo said the following at 4:24 PM on May 13:
#62
When I hear things like that I think house prices must be wildly different in America to here... I don't know if that's true, but I can't imagine most 'normal' people being able to buy even a flat outright over here. You're looking at £80,000 for just a one bedroom flat, and that's after house prices dropping massively in this recession. A fairly decent wage I guess would be £30,000 per year, so to get on the property ladder would mean forking out 2 1/2 years worth of salary.
I'M excited because the falling prices mean that when I graduate I'll actually be able to afford to put down a deposit and get a mortgage. The idea of actually being able to buy a house outright is one that's never even entered my head, it's such a fantasy.
I'm not contradicting you, I just think things must be really different over there if buying outright is a serious possibility... am I right??
64. Amir Larijani said the following at 7:11 PM on May 13:
Texas Craig:
Perhaps I didn't word things correctly, as I said the bank can "always" call a loan due. What I meant to say was "in conditions of financial exigency", they can always call a loan due.
At the end of the day, a bank is merely an intermediary between borrowers and lenders. Banks obviously work hard to hedge their risks, which include interest rate shocks, early payment, and defaults. (These matters keep ALM folks up at night.)
But those hedging instruments are only as good as the parties writing those contracts, as we found out with the AIG debacle.
Investors can always demand their money, and the banks must pay. That's what property rights are all about.
If the bank is not sufficiently hedged, or if the bank is unable to collect from the hedging provider--suppose, for example, AIG does a belly flop--then the bank is in a major cash crunch.
In such events, banks can call loans due.
Do loan contracts have provisions that protect borrowers--who are current on their payments--from such calls? Yes.
Are those provisions as airtight as you wish to imply? Not by a long shot.
Depending on how far underwater a homeowner falls--and if you put 20% down, you can still find yourself underwater if the market crash in your area is bad enough--this can trigger a callable event.
If you move to another state to seek work, that can trigger a callable event depending on how the contract is written.
If you have a 4% loan and interest rates spike to near 20%, and the bank ends up in a crunch, that can trigger a callable event wherein they force you to refinance at a higher rate, or face foreclosure.
I have consulted multiple attorneys on this matter.
While such calls are rare--for those who make their payments on time--they are not unheard of in times of severe financial exigency.
This did happen during the Great Depression. Anyone who thinks it cannot happen today, is not thinking this through.
Granted, what I am speaking of is indeed a worst-case scenario, but--unless you have been asleep for the last 8 months--we are seeing the mother of all debacles unfolding.
The bailouts are only creating more rope with which we are collectively hanging ourselves.
There will be a reckoning for all this. How that reckoning unfolds is anyone's guess.
All I can say is I'd rather go through that reckoning period without any debt, than with debt.
And I say that in spite of having made all my payments on time.
65. Heather Koerner said the following at 7:28 PM on May 13:
Leah (#43):"No matter what you're in debt for, if you can make the repayments easily each month, you're fine. The same is for taking out student loans, a mortgage, or car loans."
You're what my father (a homebuilder) calls one of the "payment people" of life. You believe things are fine as long as a payment fits in your budget. I may not be able to change your mind but I hope anyone reading these comments will keep this in mind: Those payments which fit so easily into your budget now can become curses very easily and very quickly.
Texas Craig (#45): Interesting.
"debt can create bondage": I don't see that in the Scripture. It says the debtor is a slave to the lender. I may think my debt is worth it. I may think it's going fine. But it's bondage nonetheless. I always like the imagery of Scrooge's partner in "A Christmas Carol" and how he never saw the chains that were binding him.
"To me, it is similar to alcohol." Like I said, interesting thought.
"I would say that God has warned us of the effects of the irresponsible use of debt, but does not condemn it outright." Agree and disagree. I also cannot find it condemned outright, which is why I pointed out that we cannot consider debt sin (though sinful attitudes such as greed, covetousness, etc. may, and often do I think, accompany debt). But I don't see Scripture call "irresponsible" debt bondage. I see it call all debt bondage.
"I hope you do not feel too "piled on!" I did. :) Thanks!
What I appreciate about your comments is your appeal to Scripture. My hope is that is what this thread accomplishes--that we won't just assume our culture's values about money are correct. Instead, that we would look to our God's Word first and change our behavior to fit it.
66. BDB said the following at 7:35 PM on May 13:
#60 wrote:
>>Baloney. They certainly can call a loan due, as it is their asset and they have the legal right to make a claim against that asset.<<
Allow me to be more specific.
With a 30-year conforming loan on a residential property, the lender cannot legally call the loan due before the term, unless the borrower defaults on the loan covenants. Such loan covenants include:
1) Making payments on time. If the borrower becomes 60 days past due, they might be able to initiate forclosure proceedings.
2) Renting out a house when the loan specifies owner-occupied. In the last year or so, this clause has been invoked. This was one of the things driving the housing bubble in my opinion - people buying a new house with 0% down and renting out the old one - when their mortgage on their old house specified that they were required to live in that house as one of the mortgage covenants.
3) Failure to properly maintain the house and show due care. An example is letting the fire insurance lapse, or failing to pay taxes. Fire insurance protects the lender because they have an interest in the asset.
But barring these types of things, as long as you pay your mortgage on time (on a 30-year conforming mortgage), the lender cannot legally call your loan due.
Read your disclosure documents carefully - specifically the "default" section!
67. Chris said the following at 7:55 PM on May 13:
Amir writes:
Anyone who says that "homeownership"--holding a mortgage--carries significant advantages over renting, is not taking risk into account.
BDB has already made some good points, but I wanted to add something else.
The renter is also at risk. The owner can refuse to renew the lease or dramatically raise the rent. The renter is then forced to move (often at significant cost) and find new accomodations.
You can also find yourself thrown out when the owner failed to pay his/her mortgage and the house is repossessed. Some renters who've paid their leases on time are now finding this out.
Either path (ownership or renting) has risks. But the nice thing about home ownership is that each payment gets you a little bit more of your house. Renting is like leasing a car. At the end of the lease, you own nothing. (Yes, renting can be the correct financial path in certain situations.)
Amir later writes:
Baloney. They certainly can call a loan due, as it is their asset and they have the legal right to make a claim against that asset. It is normally not in their interests to do this, as banks are in business to make money off the cash flow from those interest payments, but--in the event that they are strapped for cash--they can call it due.
Only if such a thing is permitted in the contract. If the mortgage states that you will pay interest and principal monthly, and you do so and do not violate any other provisions that permit them calling the whole balance due, they cannot call it up unless specifically given the right to do so.
If you signed a mortgage like this, you've signed a very bad one.
While the renter is slave to the landowner, it is a lot easier to get out of a lease--without hurting one's credit--than it is to get out of a mortgage.
Maybe where you live. Every lease I signed as a renter never gave me an easy out. According to just about all of them, if I broke the lease, I had to pay the money if no one else was found or have the bill handed over to a collection agency. The only out I had was when I had a military transfer clause put in (most owners near bases will comply with this because military tend to be good renters).
68. BDB said the following at 7:57 PM on May 13:
Jo (#63) the prices in your area are not too far apart from where I live. We call a "flat" a condominium when you purchase it.
For those who wish to be debt free, I'd definitely encourage the condo route. They are much more accessible. I started with a 2-bedroom 2-bath condo, 900 sq ft. Purchased for US$110,000. That's the same size as the house my grandparents raised my father and uncles in. Except they had only one bathroom.
Of course, they also had a farm attached, so the kids were out doing farm-chores, not underfoot inside the house.
69. Chris said the following at 8:06 PM on May 13:
Jo writes:
#62
When I hear things like that I think house prices must be wildly different in America to here... I don't know if that's true, but I can't imagine most 'normal' people being able to buy even a flat outright over here.
I'd argue that #62's example is the exception, rather than the rule. Most people who buy houses in the US have to get a mortgage. Part of what caused the recent problem, however, was that people who shouldn't have been getting mortgages (e.g., could not come up with the 10-20% down payment or were making $50k/year and buying $400k houses) were getting them.
Disclaimer: I never put up 10-20% for my down payment, thanks to my VA loan guarantee!
I'M excited because the falling prices mean that when I graduate I'll actually be able to afford to put down a deposit and get a mortgage. The idea of actually being able to buy a house outright is one that's never even entered my head, it's such a fantasy.
Of course, it can be done, if you save a lot like the example and buy a modest house. One can also work one's way up and take advantage of good markets to build equity and then buy a house outright when one moves. I have a friend who has a very nice house on 5 acres who did this. His first house was a mobile home in your typical low-income trailer park. But he easily paid off his $15k house. Then he sold it and bought a nicer one. Rinse, lather, repeat.
70. Texas Craig said the following at 8:57 PM on May 13:
Jo:
It depends on where you live in the U.S. In San Antonio and Houston (both in Texas), you can still buy decent new starter homes for $140,000. They will be pretty basic and not located in super nice areas, but they will be safe and provide for all basic amenities. So, if you have two people who work making $40,000 each, arguably they could live very cheaply and save $35,000 per year (if they lived VERY cheaply). So, if they saved for 4 years, they could buy a home with cash. So, it is possible, but not generally realistic for most people.
71. BDB said the following at 12:27 AM on May 14:
For some reason, what I wrote about inflationary risk didn't make it into the posted comment. This is important, so I'm submitting it again.
The primary risk with renting instead of owning a house is the risk of an inflationary event - the kind we experienced in the 1970's. My father is a real estate broker, we lived that experience directly.
What happens is that real estate tends to appreciate with inflation. If you pay $100,000 for a house, and a major inflation event occurs, that house ends up being worth $300,000 in inflation dollars.
The person who paid $100,000 for a house and has an $80,000 mortgage now has $200,000 in equity in addition to the equity from what they put down for a down payment.
And the critical thing: their house payment, on a fixed rate mortgage, remains the same.
In contrast, the renter will likely see their rent increase by 300% with inflation. Unless they get a 300% raise at work, they will be in deep financial trouble from rent increases.
This is not just theory - this is what happened in the 1970's all over the U.S., and is generally how the real estate market works in California still - particularly in years where more people are moving in than houses are being built.
Is this a complex concept? Yes, and you shouldn't sink any of your money into it until you understand inflationary risk. But it is a real risk, and it's just as risky as potential cash-flow interruptions due to job loss.
It is also increasingly likely, given the massive deficits being planned by the Federal government. Never in my lifetime has the federal deficit been 50% of tax revenues. To borrow that much money is almost guaranteed to create a major inflationary event - it is unlikely that the powers that be can react at the right time to prevent that.
I don't expect anyone under 40 to really remember it. I wouldn't remember it if I wasn't from a real-estate family that reminds me of the possibility constantly. Those who don't take this kind of inflation seriously do not understand economic history - they are just like the people who thought the Internet bubble would always cause profits to grow, or that "housing prices never go down." Massive inflation is an event on par with these other bubbles. Those who own real estate via a fixed-rate mortgage are hedged against this risk.
72. Mike Theemling said the following at 3:31 AM on May 14:
Let's clear a few things up first regarding mortgages and a bank "calling in a mortgage early".
This is what's called a "Demand Note", and unless you have one on your home, then 'No' a bank cannot legally insist you pay up the entire principle if you've been making your monthly payments on time (if you haven't, that's another story).
There is an exception to this however (isn't there always?). In some types of balloon loans, when the rate is readjusted periodically, depending on how the contract is written, technically it could be possible for a bank to call in the loan at that time rather than just renew it for the higher rate. But this is rare for two reasons. A) Chances are the borrower wouldn't be able to pay the entire principle and thus the bank would have to handle the property by itself (something it doesn't want to do) and B) It would ruin the reputation of the bank and no one would want to do business with it. Bottom line: Read the fine print.
However, for some perspective, during the Great Depression many banks did perform more call-ins than there are today. However, you must understand that the rules were different back then.
BDB is correct that HELOCs are something entirely different and yes, your credit line can be cut off "at any time" so to speak.
Amir said:
"Anyone who says that 'homeownership'--holding a mortgage--carries significant advantages over renting, is not taking risk into account."
Of course risk is an issue. Risk is always an issue no matter what option you choose. No one can mitigate risk completely. Even FDIC CD's don't totally mitigate risk if the interest rate does not keep up with inflation.
Home ownership carries risk, but so does rentership. What if your landlord goes bankrupt and you are forced to move out? What if rental rates go up?
What helps offset some of the risk of homeownership are the advantages. Tax advantages for one, but probably most importantly equity. After paying 30 years of rent, you have no tangible asset to show for it. After 30 years of paying a mortgage, you have the value of whatever you paid for it in your pocket. True, the value could not be as high if the real estate value tanks. Or maybe the person who rented took the extra money saved from a mortgage and invested it wisely. But those investments too involve risk.
I'm not saying that home ownership is for everyone or that it's a guarenteed way to wealth (real estate speculation is what brought us into this crisis to begin with). But to say give a blanket "it's not worth it" is I believe, incorrect.
73. Loris said the following at 8:15 AM on May 14:
Jo, #63,
It does sound like housing is much more expensive in the UK. I'm sure part of why housing prices are lower in the US is that there is still plenty of undeveloped land to build on. I can't speak with the experience of some of the Boundless homeowners, but my husband and I are looking for a house right now and a 1400 sq. ft. 3 bedroom, 2 bath new construction cottage on 1/4 acre in my area costs about $138,000. That's a little more than double our combined yearly pay. Buying a house outright is possible, of course, if one is willing to scrimp for years.
74. NeedACatchyName said the following at 9:48 AM on May 14:
In response to Jo at #63:
Texas Craig at #70 described the formula pretty well, and if I had to guess based on real estate values here and the usual incomes for people in their jobs, he's probably pretty close to accurate on the dollar amounts too. Like several posters have said, this is the exception rather than the rule, and it's definitely not for everyone (including me). I really only posted the story to show that it's possible, not that it's necessarily a good idea. :)
FWIW, I don't see anything wrong with getting a mortgage, though I am pretty conservative when it comes to terms. I personally don't advocate anything other than an "old fashioned" fixed-rate mortgage with a minimum of 20% down (and yes, I did put 20% down on my loan).
75. BDB said the following at 5:32 PM on May 14:
Mike (#72) - I was going to bring up balloon loans. They are indeed incredibly risky - sometimes requiring the principal to be repaid in as little as 7 years. Business debt and lines of credit can be structured this way. They typically are only used by those who expect a substantial change in their situation within that time period. For those who are flipping houses, seven years is usually perceived of time. Of course, this was a disaster for speculators as the market crashed because they could no longer sell the property for more than they bought it for. I have no sympathy for these kinds of speculators. It's just another kind of gambling.
For those who are buying run-down houses, refurbishing them, then selling them, they usually expect to be finished in about 2 years. Their refurbishments often significantly increase the selling value of the house - by tens of thousands of dollars in some cases. But they are balancing financial risk (balloon payment) for something they control (their ability to make the rennovations themselves in a timely manner.)
76. BDB said the following at 5:53 PM on May 14:
OK, I have two inflation-oriented examples to share.
Today I drove by the leasing office of the apartments where I lived immediately after college 15 years ago. I asked the current rate for the same apartment I had then.
One-bedroom, 700 sq ft.
Back then: $500/month.
Today: $1050/month.
It's the SAME structure!
Now, for someone starting out, you would expect your income to go up as you progress in your career. It won't double in all fields after 15 years, depending on when you start.
The challenge ultimately comes in retirement. My grandparents have been retired for 30 years. They never expected that to happen. It means a small pension that definitely didn't double. Social Security doesn't increase that fast with cost-of-living changes, either.
So, if they were renting, over 30 years, their rental costs could quadruple. Basically, inflation could wipe them out in retirement.
As it was, they owned homes all along, with reasonable mortgages along the way. In fact, they based their affordable mortgage on my grandfather's salary alone, ignoring my grandmother's nursing income.
But their owned home rose in value with inflation, so their monthly rates didn't go up even while rents were increasing. That home equity then becomes the retirement nest egg.
Interestingly, the annual costs for my undergraduate college also doubled during that time. How interesting.
College costs are inflating much faster than housing. An article today notes that the California State University system has just increased fees by 10%. They've doubled fees in the last eight years. So, state college fees are inflating at twice the rate of rental costs - or private colleges.
It what is sure to annoy some people,they also doubled the cost for MBA students - from last year to this year. Doubling costs in one year! This definitely presents a tactical dilemma for those already enrolled: drop out so the can save up more money for next year, or take out a loan to cover the increase. I'm sure the school is thinking that those soon-to-be-rich MBA students should just suck it up and get loans - who cares about them.
In any case, costs go up every year. So you're really measuring the net present value of a degree vs. expected future cash flows. It's not just a matter of saving up, it's a question of whether you can save faster than the costs of inflation.
77. Amir Larijani said the following at 10:10 AM on May 15:
BDB, Texas Craig:
Here’s the problem: you are thinking inside the box, as you are assuming (a) the law can’t be reinterpreted accordingly in times of financial exigency, (b) Constitutional protections can’t be suspended in times of financial exigency, and (c) the government won’t stop banks from acting within their interests in cases of severe exigency.
I would have considered such thinking pie-in-the-sky myself prior to bailout mania.
(1) Fact is, banks can work with localities to re-assess home values, based on fire sale prices of foreclosures, that adversely affect those who otherwise have never missed a payment. Especially if interest rates spike and folks with low-interest fixed-rate mortgages become a drag on the banks. Such a reassessment can put a homeowner “under water”, and this could trigger a callable event.
That would be a pretext for the bank to offer the “homeowner” a deal he can’t refuse: either face foreclosure or refinance at a higher interest rate. Advantage: Big Banking.
After the Kelo decision, I hardly put such corporate-government collusion out of the realm of possibilities. If government can confiscate private property for private enterprise, then Big Banking needs only to line up a list of potential buyers.
(2) In the event of a monetary disaster—which is getting more and more probable thanks to Bush, Obama, Paulson, Geithner, Bernanke, and their lapdogs in the House and Senate—I don’t put it past banks to push Congress to allow them to index principal values with inflation.
That may seem unthinkable, but—now that our government has assumed the role of overriding contracts between lenders and borrowers—it’s no longer out of the realm of possibility. And the Constitutional protections against ex post facto laws? Don’t count on that helping, as we have established the precedent of our government suspending Constitutional protections in the event of “emergencies”.
Advantage: Big Banking.
(3) Depending on how the mortgage contract is written, there is substantial latitude as to the circumstances that can trigger a callable event. While under normal circumstances, a bank cannot call a performing loan due, a severe financial meltdown—which forces investors to demand their money—can trigger this. Especially if government is not able to honor their commitments.
There was a time when all of this would be considered pie-in-the-sky, worst-case doomsday scenario material reserved for those wearing tin-foil hats.
Unfortunately, we have a government and banking apparatus that has advanced us a quantum leap in that direction. We’ve dumped more money into AIG than we spent on Iraq all of last year, and AIG is still in serious trouble. And that’s just one company.
So, on one hand, there was a time where I would have been in your camp: the premise of banks calling performing loans due “simply cannot happen”.
Looking at (a) the track record of government, (b) the influence of Big Banking and even hedge funds on government policy, and (c) the fact that the little guy is at the bottom of the pecking order, I have zero confidence in our government to uphold the rule of law in the event of a catastrophe.
Ergo, even my mortgage—which is fixed-rate, and on which I pay more than the regular payment—makes me nervous at such a time as this.
Answering Heather again: I wouldn’t have done it.
Are there risks in renting? You bet.
Having broken a lease, however, I can attest that getting out of a lease is relatively easy. (I got out of my lease when I bought my house, and the “penalty” was just the pro-rated monthly rent, as I had gone to a month-to-month arrangement.)
Especially compared to getting out of a mortgage in the midst of a bad market.
Finding alternate living is not always hard: I could always have fire sales, shedding my unnecessary possessions, and find someone with whom to stay, offering to pay rent and share utilities expenses. This is easy if all I have to do is break a lease.
Breaking a mortgage, on the other hand, carries more devastating consequences, as that would impact my employability.
At the end of the day, if you are the borrower, the “asset” does not really belong to you. That is why I distinguish between a “homeowner”—who does not really own the home but is making payments on a mortgage—versus a homeowner, who does not owe money to the bank.
78. Texas Craig said the following at 10:52 AM on May 15:
Excellent points as always, BDB!
Thanks for taking the time to share them!