There’s Debt Then There’s Debt

Student debt gets a lot of attention these days and rightfully so. As a country the total bill is over a trillion dollars and growing. Buzz TodaySource: The Wall Street Journal “Young people are racking up larger amounts of student debt than ever before”

The debt is real and a serious issue for both the borrowers and our nation. Here is why.

Under current law, our federal government only has so much money it can lend to college students. I know this seems counter intuitive in our world where the federal government just keeps on borrowing and borrowing as though the bank account is without end. It’s not. In the case of student loans it is easy to see the problem.

A college student can borrow only a specified total amount of loans. When those have all been used, there is no more to borrow. This defines a total amount that the government can lend in total. Over a trillion dollars of that lending capacity has been used. There is a trillion less that can be loaned in the future.

We have already looked at why this is a serious issue for the borrower in the earlier post titled “Debt”. But though we have talked about one aspect of the issue, let’s return to look at it from another perspective. You can reduce the amount of debt needed to earn your degree in the first place.

When you buy a house, you consciously take action to manage the amount of debt you take on with the purchase. In the case of the house purchase you have professional help. The bank is looking over your shoulder. They will not allow you to take on too much debt. They do this by looking at your credit score which tells them about your repayment history. This is to help them determine if you are a good risk which means they have data that shows them you are likely to repay your loan back.

In the case of the home loan, the bank also looks at your personal income. This is to give them (and you) data on how likely you are to have the money to repay the loan. This protects them… and it protects you. It does so by protecting you from your temptation to take out more debt than you can handle.

No such factors exist when it comes to student loans. You are on your own.

Beware, the temptation to take on more debt than is manageable is real. Millions have already fallen into the trap.

So, when it comes to debt, not all debt is equal. Beware. Look hard before you leap into student loans. They can bite like no other.