Save For Retirement or Avoid Student Loans
|September 15, 2009||Posted by Roshawn Watson under Uncategorized|
Student loans are just terrible. As the costs of colleges continue to rise disproportionately to incomes, many graduates keep loans around now almost as long as mortgages. According to Kiplinger’s Personal Finance, the price of tuition and fees at some four-year public institutions have increased by 35% since 2001; CNN reports that the costs of college has soared 439% since 1982. Many students work to help ease the burden of paying for school. If a student is working and has acquired some cash, should he or she use that money to avoid future student loans or invest the money for retirement?
Image Credit: SBA73
Surprising Wisdom From an 18-year old
Recently, WSJ published an article asking this very question. The son of the chief of the Wall Street Journal’s San Francisco bureau wants to use the money he earns for writing a column to avoid student loans. At eighteen, he already has a Roth IRA. His parents want him to take a federally-guaranteed student loan of $5,500 for the first year and invest his money in his Roth IRA. With his parents’ plan, Isaac would end up with close to $30,000 in debt upon graduation. He lamented in the column…
I can see it all like a bad dream: I finish up college and, after the flurry of graduation celebrations are over, I’m left out in the real world with my education, aspirations and a massive pile of debt.
For years, it would hang over me, taking a large chunk of my paychecks hostage and forcing me, while job hunting, to always consider first how well a job pays before thinking of how much I would learn from, or enjoy, the work. Working for a nonprofit, traveling the world or going to graduate school would all be mostly out of the picture.
But this is avoidable for me. I’ve received a large windfall from writing this column, in addition to the money left over from my high-school job. In total, it’s enough to significantly reduce the debt I’ll need to take on, or to avoid it altogether. That is, only if I don’t do something else with the money, like putting it aside for retirement. By deciding to go to college, I piled a heaping mound of financial obligation on my plate. Dealing with this should be my first priority. I don’t quite understand my dad’s obsession with saving for retirement…
I know that the dad is trying to teach a lesson here, but I’m not sure if I
agree with the lesson: invest for the long-term even when it’s to your
short-term financial detriment.
Perhaps a better lesson is invest for the long-term after you have built a good financial foundation (not based on debt).
An Expense The Son Cannot Afford
This scenario is pretty interesting since many traditional students do not have the luxury of being able to invest anything for retirement while in school because the money just isn’t there. I would suggest that neither does this young man. By investing the money and taking out a loan instead of paying the school bills directly, he is functionally borrowing to invest. The problem is, as he pointed out, debt equals risks.
Unfortunately, we generally leave out risk in our financial calcuations.
Although we all hope that everything will go perfectly in school, suppose he doesn’t graduate or doesn’t get a good job after school for some unfortunate reason or because he wants to attend graduate school. He would then have student loan debt and possibly little or limited means to pay it back. Unlike many other debts, you cannot bankrupt student loans, so they really can stay with you forever. This is one of the many reasons why you should build a firm foundation prior to investing, which means avoiding and eliminating debt first. Note that this strategy only works if you plan to get out of debt quickly. Additionally, part of the whole college experience centers on nurturing independence. By encouraging him to graduate with a overwhelming amount of debt, the parents may be prolonging his financial dependence on them.
Agree With The Son With An Caveat
Surprisingly, I almost unequivocally side with the young man with the exception that he needs to reevaluate his timetable for investing. While he definitely should NOT plan on waiting “one of two decades,” as he mentioned, to start investing, waiting until he is done with school and done with student loans is definitely reasonable, especially if it means that he avoids or minimizes student loan debt. This assumes that he quickly pays off his student loan debt though. For example, if he invested the typical student loan payment from age 22 to age 65, he would still be a multimillionaire. Fortunately, the father and son seem to have come to some resolution: the parents will increase their contribution to the school and the son will be able to invest. That works too, but for the rest of us I agree with his grandmother: get your education, then invest aggressively.
Debt By Design
Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.