Good Reasons to Love Those Darn Student Loans

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Student loansWith student loan default rates rising due to persistently high unemployment rates, it's easy to vilify the seemingly endless monthly payments that follow graduation.

But take a closer look, and you'll find that the news about student loans is more good than bad.

Higher Learning = Higher Earning

In November 2011, unemployment for people ages 20 to 24 who didn't attend college reached 20.1%, compared to 6.3% for college grads. Given my wanderlust and penchant for interesting but low-paying jobs, I know without a doubt that I would be one of the unemployed had I not completed my undergraduate and graduate degrees, even if I had to take out loans to do it.

Patricia Christel of Sallie Mae (SLM) says my situation is not unusual. "People with college degrees continue to earn more and have higher employment rates than those without, especially in this economy," Christel says. "On average, young adults with a college degree are about two and a half times less likely to be unemployed than those who did not go to college."

Don't Be Fooled By Statistics

Federal loans are currently defaulting at an 8.8% rate. But that's the default rate only for federal student loans, and it's an average.

Look at certain subsets of the total group of borrowers, and you'll find factors that cause the rate to vary dramatically: In 2009 (the latest figures available), the default rate for borrowers at public and private schools who completed four years of education hovered around the 5% mark, and was less than half the risk of those who completed two to three years. At for-profit colleges, on the other hand, the numbers were profoundly different: A whopping 15.4% of borrowers who completed four years (or more) defaulted, not so different from the 14.8% of borrowers who only completed two to three years of their studies.

For loans negotiated through a private lender, the default rate tends to be much lower. For Sallie Mae's private education loans, the most recent default rate was 3.7%, down from 5.4% from a year ago. Kirk Bare, head of education financial services for Wells Fargo (WFC), says although Wells Fargo doesn't comment on specific default rates, the bank's default rate is significantly lower due to strict lending practices. "We approve applications where we believe the borrower has the ability to repay the loan according to its terms," Bare says.

Deferral vs. Default

The rising rate of default isn't hard to understand: Graduating into a hyper-competitive employment environment weighed down by student loan IOUs isn't what most incoming freshman had in mind for their future.

Still, there are better ways to deal with the debt -- before, during, and after graduation -- than default.

I paid for my undergraduate education through a combination of work-study, staff benefits (my mother worked at the school I attended), and of course, loans. Like many new grads, I had difficulty finding a job right after I graduated, and my early resume did nothing to ease my parents' minds that I would eventually be a highly functioning, productive member of society.

After a year of questionable jobs, I went to graduate school. That enabled me to defer my undergraduate loans, which were just coming due, until after I completed my master's degree, and take advantage of the graduation grace period for the second time. Then, I spent time in a public service program, which deferred the loans again, and offered me a small grant at the end to help with their repayment.

Jane Glickman of the Department of Education says your goal should be to work with your lender. "The Education Department offers numerous repayment plans to fit a borrower's needs," Glickman says, "including ICR -- income contingent repayment -- that is based on income." If one plan isn't working for a borrower, Glickman says there's no limit to how many times a borrower can change plans.

Looking back, it was almost absurdly easy to defer the loans for worthwhile reasons. Yes, the loans continued to accrue interest, but the 3% I was being charged was worth it for the chance to go to graduate school, or do public service.

Establishing Positive Credit

There's one other reason to stay current on repaying your student loans: A good record will help you reap long-term financial rewards. Despite my less-than-stellar early history with credit cards, my loans helped me establish a record of consistent, on-time payment on a non-revolving balance. I became creditworthy, the rewards of which I still reap to this day.

Now in my 30s, I've paid off the last of my credit card debt and live the life of the urban renter. Since a mortgage, and the long-standing credit it helps establish, isn't in my near future, I'm grateful that my student loans helped me establish credit at a time in my life when that wasn't something I took seriously. With their final payments in sight, I'm almost sad to see them go.

Almost.

Molly McCluskey does not own shares in any of the companies mentioned. Follow her on Twitter @mollyemccluskey. The Motley Fool owns shares of and has created a covered strangle position on Wells Fargo.




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31 Comments

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Tom Jones

Unfortunately the price of higher education at a good university is becoming an impossibility for the average middle class family. But there are
steps you can take to obtain financial assistance, for students who show potential, but are financially challenged to enroll in college.
Go to http://www.grantedu.info to get the assistance and information you need to succeed.

February 04 2012 at 3:23 PM Report abuse rate up rate down Reply
chris1011

Teachers overpaid? Here is one teacher's story:

"Teaching is an acquired skill that not everyone can acquire. I have a master’s degree in secondary education, work over 50 hours/ week, and make an annual salary of just over $34k/ yr—no overtime. I chose to join the teacher’s union as an insurance policy because in today’s day in age, it’s not uncommon to be accused of something horrendous simply because a student/ parent didn’t like the grade/ referral you gave their child. I could never afford my own lawyer, so the union provides its members free work-relat­ed legal services. This costs me $40 per month and they send me a new T-shirt once a year —it’s very nice, 100% cotton. That is the extent of most teacher’s union involvemen­t. I didn’t choose this profession for the money or job security, I chose it (like most teachers do) because I wanted to do something that actually makes a difference­—educating today’s children so that they can be part of a stronger America tomorrow. Also, if someone isn't doing a good job, union member or not, they are let go. I just can’t seem to grasp the hostility against public school teachers. Most could make much more money doing something else, but sacrifice a high salary in order to secure the future of our country.

February 02 2012 at 2:04 PM Report abuse rate up rate down Reply
1 reply to chris1011's comment
jaggiins

If someone is not doing a good job TEACHING they do not actually always get removed....Unions make sure of it... Look,,,the cost of school has gone thru the roof an you want to uphold it as needed..I will tell you that I can knock the cost of school down by 1/4th,,by getting rid of one years electives that are waste of time,,and use the actual other 3 years to get your major done. How is that for smart...or maybe,,we need badmittion 101,,, and other activity classes , or dance of Europe/Asian cuiltures 103 or ...you get the picture.

February 02 2012 at 5:30 PM Report abuse rate up rate down Reply
savemycountry911

When are you liberals going to learn to stand on your own two feet? I know.........never.

February 02 2012 at 1:05 PM Report abuse +1 rate up rate down Reply
Gloria

My granddaughter has been paying on her loans..but nothing ever seems to go on the principal.What gives? She has paid over $1000.on just one Sallie Mae loan and she still owes the same 4000. GVCurry

February 02 2012 at 10:39 AM Report abuse rate up rate down Reply
maa2626

never borrow money unless you know EXACTLY how you will be paying it back. If you think you want to be an educator and will be getting a job you might make 40k a year, deduct 40 per cent for taxes and union dues. That leaves you with 24k to live on. That is two thousand( 2,000.00) a month. Folks need to work backwards before borrowing money.
That is what we have done with our three children, they are savers and thriving.

February 01 2012 at 8:21 PM Report abuse rate up rate down Reply
chris1011

Economic theory tells us that growth depends upon three things: growth in technology, growth in our productive capacity – including public infrastructure – and growth in the size and ability of the labor force. Education, while not the answer for everyone, is a big part of both discovering new technology and labor force ability and we need to do more to make education accessible to all.

February 01 2012 at 5:43 PM Report abuse -1 rate up rate down Reply
1 reply to chris1011's comment
savemycountry911

Translation: Gimme, gimme, gimme, gimme. We can't afford to do everything for everyone.

February 01 2012 at 8:03 PM Report abuse rate up rate down Reply
2 replies to savemycountry911's comment
chris1011

It's not a gimme. It's an investment society makes for the betterment of everyone. One can either require individuals to pay for their own education, and then the rich and their children will always have full advantage, or society can be set up where universal education is offered to all, rich and poor alike.

The first way you will end up with an aristocracy that rules over others, and serfs that have no future. The second way is what we aspired to here in America, and that is why we became the richest nation on earth.

February 02 2012 at 12:19 PM Report abuse -1 rate up rate down
savemycountry911

No it's just more GIMME, GIMME, GIMME

February 02 2012 at 12:58 PM Report abuse +1 rate up rate down
savemycountry911

We've had enough Socialism. We can't afford any more.

February 01 2012 at 4:17 PM Report abuse rate up rate down Reply
chris1011

We handle paying for education poorly in this country. That is one reason our higher education schools are full of students from other countries whose education expenses are paid for by their governments.

We don't question spending more on bombs and prisons but consider helping our best get started in life with a good education as wasteful spending that should be cut. Meanwhile, other countries buy an educated workforce. Soon they will set up their own Universities and no longer come to ours, leaving ours to collapse.

We grew to greatness on land-grant colleges and the GI Bill. Will we let that foundation crumble?

February 01 2012 at 2:35 PM Report abuse rate up rate down Reply
savemycountry911

If you can't afford college without it, work your way through.

February 01 2012 at 12:46 PM Report abuse rate up rate down Reply
1 reply to savemycountry911's comment
chris1011

When some parts of society do not have equal opportunity, important potential is wasted. The more people that we have who are able and willing to discover new innovations or contribute in other ways, the better chance we have at discovering important sources of economic growth that benefit us all. Don’t let talent go to waste.

February 01 2012 at 5:41 PM Report abuse -2 rate up rate down Reply
1 reply to chris1011's comment
savemycountry911

Translation: Gimme, gimme, gimme, gimme. We can't afford to do everything for everybody.

February 01 2012 at 8:00 PM Report abuse rate up rate down
savemycountry911

If you can't afford college without it, work your way through.

February 01 2012 at 12:46 PM Report abuse rate up rate down Reply