The Psychological Effects of Loan Debt

Taking out student loans? Check out these potential challenges as you make your decisions.

Saw some other studies about woman who are putting off (or opting out of) having children because of student loan debt. We are fortunate enough to be able to cover my D’s undergraduate degree, but now she’s toying with applying to graduate school. We have made it clear that anything beyond an undergrad is on her dime. Unless you are pursuing a career that absolutely requires additional credentials to gain employment, WHY would you saddle yourself with debt? I think it will take being out in the work world with her peers who are struggling to pay loans while trying to feed, clothe and house themselves before she realizes what a gift she’s been given.

Unfortunately the pain of borrowing is delayed.

Many points are right on. “First Choice Fever” and “Whatever s/he wants!”

We’re constantly hearing things like, “but s/he’s worked sooooo hard, s/he should get to go where s/he wants!!” And “we’re going to make it happen.” …which is why US parents are drowning in debt paying for college.

Can Dave go in and correct that typo?

I am keeping the above as a keyboard shortcut and will be posting it over and over and over again. :slight_smile:

I was extremely bothered by a parent who said that she was cosigning a lot of debt ($150k) for her daughter who had a life-long history of anxiety. What? What a recipe for a total breakdown for this daughter once she has loan payments due and not enough money. And the career goal is often modest-paying (journalism). I couldn’t help but think of the S-word, but pray that never happens.

I am of the opinion that HS students are on the whole poor judges of the affect of indebtedness. They typically have not had to provide for themselves, pay bills or manage debt. Debt and the responsibility to pay it back is at best conceptually understood and has never practically affected them. This is why it is so important for parents who should understand this to set boundaries financially. Parents who abdicate this responsibility to their children do them a huge disservice.

"Many points are right on. “First Choice Fever” and “Whatever s/he wants!”

We’re constantly hearing things like, “but s/he’s worked sooooo hard, s/he should get to go where s/he wants!!” And “we’re going to make it happen.” …which is why US parents are drowning in debt paying for college."

In my opinion this kind of thinking is short sighted. Going to college, regardless of the college, is not the end goal. Their hard work has just begun if they wish to get their degree, become employed and become a productive member of society. Little of that is dependent on the college, nearly all of it dependent on the student. The major beneficiaries of going into that kind of debt is the schools, the lending institutions and the collectors. The losers are the students and parents who end up indebted or the tax payers who will subsidize those who don’t pay their federal student loans.

Students that have graduated college and are in careers w/o school debt often still have difficulty with managing finances. SIL had $40K in school debt but only paid the minimums during 3 years of FT work (despite his parents advising him to pay it off). Since marrying my budget savvy DD, they have paid down $10K and have it paid off on a reasonable time table.

The transition to college and what students believe they will do in college major and career is a challenge.

If parents doesn’t have a clue on how to give guidance, look to families in similar situation with older kids that have navigated the waters well.

Many people cannot retire because they haven’t put away any money, and maybe have lived above their means, or had bad luck/bad health, etc. Lots of contingencies to making it through the mine field life can hand out. They haven’t worked out getting out of debt nor improved cash flow enough to have a successful retirement.

Cannot have ‘entitled’ children when you cannot afford it. There is way too much information out there about the problems with a large amount of student debt for UG degree, or even graduate degree with limited income.

Many HSs want ‘bragging rights’ on various colleges their students go to, but those HS counselors and staff are not paying the tuition or going into the substantial debt.

Many HSs have ‘personal finance’ or similarly titled course that is Dave Ramsey videos and workbook. DD2 had this semester course, and it did educate her. DD1 was more of a ‘natural budget-er’ with her saving and spending patterns.

A number on paper with payment down the road doesn’t ‘hit the pavement’ until one is paying the payments and not making a dent in the total amount of the debt for many years. I work with someone that got her doctorate (for college teaching) and is retiring at age 62 - will still be making payments on the $100,000 student loan, and she says she will probably be still making payments until she dies (she is not paying much on the principal, evidently, and I imagine it is not a low interest rate). They will have the house paid off by then, but income stream is pretty set from retirement plans/SS. I think she is making a mistake by not paying down the loan and making sacrifices on how they are living, but some people do take risks. I do think she believes her health will be better age 62 to 65 w/o the job.

Sometimes, the first time a kid has to face financial limits on his/her choices is when choosing a college. That can be quite a shock to those whose parents previously provided every need and want with no apparent cost limits.

The shock can be even worse if the parents delay the cost reckoning until April of senior year, perhaps because they want to delay telling the kid that s/he will face cost limits for the first time. Or the parents themselves have debt based spending habits and encourage more debt.

“Since marrying my budget savvy DD, they have paid down $10K and have it paid off on a reasonable time table.”

I find it interesting that debt can also affect potential relationships. Would you marry someone who has $10’s of thousands of dollars in debt? I suppose it would depend on why, their career choices and the commitment to paying down the debt. Two people with significant college debt can easily bring multiple hundreds of thousands of dollars into the relationship. I don’t know the legal ramifications of marrying into that kind of debt but that would scare the crud out of me and I can’t imagine it being good for the relationship.

My spouse and I both had loans when we married- me for grad school, him for both undergrad and grad. It was a big, big number, and many of them were high interest (remember the late 70’s and early '80’s?)

We weren’t afraid of it, and it was fine for the relationship- we understood that we weren’t jetting off on ski weekends or to the Caribbean like our unmarried co-workers; we lived modestly to accelerate our payments; I went back to work immediately after my kids were born (no extended maternity leaves; those loans weren’t going away by themselves).

The day we paid off the last loan we immediately opened college savings accounts for the kids and put the exact amount we had been paying for the loans into savings. We didn’t buy the house the realtors or mortgage companies said we could “afford”; we drove the junker cars until the repair bills made them uneconomical.

Really- it was great. It has set us up for a healthy retirement because even as “DINKS” (what double income, no kids couples were called back in the day) we lived on one salary and used the other for either debt repayment/acceleration, or after that- savings and investments.

Too much debt is a terrible thing. But I tripled my income after only 18 months in an accelerated grad program. Tripled. Spouse had been earning more before grad school, but was on a fast track professionally, so the payback was fast as well.

You have to do the math. The media loves the story of the kid folding sweaters at the Gap who has 100K in loans. But the reality is the CPA earning a nice living paying off her loans every month, or the marketing manager who takes his annual bonus and applies it to the loans who will be debt free within a few years. The majority of kids who take out loans pay them back responsibly.

These are the words that @ucbalumnus also posted a few years ago and they hit the nail on the head. Now I’m keeping them to quote from.

These times are often also the first time a parent has to face financial limits after always buying and providing for their child’s every whim and desire. Sadly, too many are desperate to make all those unpleasant feelings go away by signing up for any and all loans. Of course, worse feelings then come a few years down the road when the painful loan payments commence.

An engineer I know is struggling because his daughter wants to go to the same school her boyfriend already attends, even though it is more expensive. She has gotten some great offers at other colleges. Her dad has a spreadsheet and has shown her how much more debt she will be in, but she doesn’t seem to get it. :frowning:

She doesn’t want to “get it.” She wants what she wants.

I hope dad holds firm. She’s not going to want to be paying back that debt after she and BF breakup.

As a parent with an S19 in his sophomore year and a D17 getting ready to become a freshmen in fall 2019, I could not agree more with the comments above. But I have noticed one thing - our S19 got into a state university with a small scholarship - about 20% of COA. Me the Dad, paid the remaining 80% and wanted to do this for all of his 4 years in college, thanks to all the savings (read as scrounging) in my working life to ensure a debt free education for the children. But then I noticed that S19 did not value the debt free education, despite all our parental advice on " save while you can, don’t spend more than you earn - ever, etc.) His student jobs earnings were frittered away on pointless purchases. That is when we the parents, decided that he needs to have a student loan - to understand the value of the free tuition he was getting from Mom/Dad’s Bank. So my point is - some debt is needed for every student to get their financial priorities right in life, else he/she graduates with an “entitlement viewpoint” which could land him/her in serious financial difficulty later in life. So I filled out the FAFSA and got him into a student loan during his junior year. Need to wait and see if the monthly loan bill helps or hinders. But sometimes I wonder if we did the right thing…

@ssundar100 I have been trying to explain to my D19 about a similar concept. We will come up with $10K a year for school. Plus she has a 529. Now if her COA requires less than our $10K I won’t just hand it over to her, but her life will be more comfortable. I might send a few more dollars her way for say a spring break trip, but if I am paying the full $10K that is it. It is capped there. One way I am trying to show her this is I never include the cost of books on the COA. Her books will be her responsibility.

As with anything, a lot of this is case by case. I hear a lot of finger wagging and holier than thou in terms of financial discipline and budgeting. Like Motley Fool and Bogleheads, CC tends to draw in those who are staunch researchers, budgeters, and savvy people. Not a typical cross-section of the college attending universe by any means.

Some random thoughts:

I went to college in the 90’s. My parents knew nothing of college, and I had to do all of the work myself. This was both excellent and terrible. Excellent in that I gained a ton of independence, learned many things (the hard way), and grew up faster than many of my peers. The downsides of course were that I made a lot of mistakes … I only applied to schools that were far below what I could have attained due to a lack of confidence and understanding of the situation. Undersold myself there. Made financial mistakes, and borrowed a lot.

Having said that, I left college in 1998 with over 40K in student loans. According to inflation calculators, this would be like 60-70K in debt today. I remember the loan payments weren’t easy, but they weren’t impossible either, and by 7-8 years the balances were low enough where I paid them off early. My career was in technology, and I was seeing raises each year. In the end, it was an absolutely fine investment (40K loan for a Comp Sci degree). My other choices were going to even worse schools. Hard to say how that would have went.

For our first of 3, we’re looking at a combination of things:

  1. Listing out all of the colleges accepted to, with merits, net costs, and rankings. We’re not going to equate a school ranked 40th in the nation to one ranked 110th, at the same net cost.

  2. Realizing that college isn’t ALL about the rankings, by any means, and some fair schools have excellent programs in given majors. This could allow for a better financial deal. Potential employers might rank your school higher based on a strong major/reputation.

  3. Splitting the cost between parents and student, skin in the game. A mixture of (a) 529 type savings, (b) some of the parents cash flow, © student loans, and (d) student paying for expenses and books through their own savings and/or work study.

  4. Major matters. If you want to major in art, philosophy, dance, social work, and so forth, I will guide DD to find schools that are cheaper, and better “fit” than prestige. If she is going into medicine, law, advanced technology, advanced politics, and so forth, where college pedigree is a MASSIVE factor in terms of job options post graduation, and they tend to more than pay for the debt, more money can justifiably be borrowed. It is what it is. For us, DD’s major choice is middle of the road (either Environmental Science or Agricultural science), and we’re going to lean harder on the science /tech side of that and less on the academic side. So financially we’ll aim for a happy medium in terms of loans/prestige.

I’d love to find a school that was a very good school and allowed for free attendance, but we’re not in that boat. So we will be working the phones (negotiating if we can) and mixing the forms of payment between the above. We’ll factor in major, try to educate the kid on how debt really works and feels (and pitfalls). My DD has been good about this in some ways, she has said “well which ones are the cheapest?”, but understandably, as a 17 year old, it’s virtually impossible for her to really know how a 45 year old parent who has been through good, bad and ugly financial times feels.

I have a max number in my head of loans (~60K over 4 years) which I will allow her to take on. Ideally we can do better than that. As mentioned up above, it will depend on the school.

She can’t take on $60k in loans from one source. She can get about $30k in direct loans (with interest accruing while in school). That will be one payment. Use the repayment calculators to get what the monthly payment on that will be. I think the current interest rate is 4.5% but it changes every year on July 1. Repaying $30k @ 5% over 10 years is about $300/mo.

The rest, if you want them to be in her name, will be private loans with you co-signing. The direct loans and the private loans cannot be combined, so she’ll have a second payment every month. It is likely her rate would be a little higher, but figure another $300 per month for 10 years.

i suggest you not do the calculating in your head but write it down and show your daughter. I assume your daughter has never paid rent, utilities, bought groceries, made car payments, paid insurance, paid for an unexpected medical bill out of her own budget. It takes a lot of money just to live, and add a $600 student loan payment? Ouch.

@twoinanddone Yeah, I hear you. Familiar with the direct and the co-sign split. It is what it is. The country/government is broken, and this is where we are right now in 2019. Perhaps in 10 years the country will wake up and fix this issue, but until then, you have three choices:

  1. Be in the wealthy top 2%, and college cost is a non issue
  2. Go to a good college to give yourself a chance for a good career trajectory, and borrow
  3. Go to a weak/cheap school, and hamstring your chances at success

Obviously there are exceptions to all the rules, but this is the bulk of it.

If you plan to be an actor, an entrepreneur for example, these rules don’t apply. But there are many careers where your choice of college and pedigree will be a large driver in your future success, at least in the first quarter/half of your career.

If things go as expected for us, we can probably pay the secondary co-signed loan ourselves, or even help when its needed. If she gets into local state flagship, we can probably reduce that loan amount quite a bit - rooting for that.

And you are right, like almost all 17 year old kids, she has no real concept of bills or money. She’s only made a few bucks at an hourly wage and has no insurance or bills to really pay, outside of her own spending (clothes, games, etc). There should be a full one year HS course in Finances for all US students, complete with honors options. She did have a class where they made her do all the research of a budget, from car payment and insurance to apartment rental, based on a salary. A good exercise, but should be an in depth course for a year. The country would benefit tremendously … probably at the expense of the predatory college loan/credit card/car loan industry.

There’s no way I would have let my D take on $60k in debt. That’s just too risky. I’m a firm believer that the school doesn’t make the kid. My D knew early on that we’d be merit chasing and she never got that dream school or prestige obsession in her head. As a sophomore, she’s already reaping the benefit of her wise college choice. She’ll not only graduate with no debt, but she’ll also have banked a nice chunk of money just from her scholarship and internships. It is freeing.