Yahoo Finance 3 Reasons Student Loans Are ‘Dangerous,’ According to Suze Orman
Personal finance expert and New York Times bestselling author Suze Orman argues that student loans are dangerous for a slew of reasons. And with President Joe Biden’s student loan relief program awaiting the Supreme Court’s decision later this year, the topic is on many American borrowers’ minds.
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For context, there are 43.5 million Americans — 13% of the population — who have some form of federal or private student loan debt, according to Credit.com, citing data from the Federal Reserve’s Consumer Credit report.
And the average federal student loan debt is $37,574 per borrower, while the average private student loan debt is $54,921 per borrower, according to the Education Data Initiative. What’s more, 20 years after entering school, half of the student borrowers still owe an eye-popping $20,000 each on outstanding loan balances.
The numbers are even more staggering when it comes to the pace of increases. The average student loan debt has tripled since 2007 and the average overall student debt has increased by 106%.
Orman’s views about student loans come against this backdrop. Here are some of her thoughts, which many experts we talked to agree with.
Students Are Not Prepared To Take Out Loans
“Student loans are the most dangerous loans you can have, bar none,” Orman said in a podcast. “Because 99% of the cases they are not dischargeable in bankruptcy. You can discharge an IRS debt, you cannot discharge student loan debt. And what is so sad about student loans, is they love when you miss payments.”
Several experts agree that young adults are not prepared to undertake such a huge amount of debt — a debt that many Americans will carry for decades.
Michael Collins, CFA, adjunct professor, Endicott College and founder of WinCap, agreed with Orman, saying that he too believes student loans are dangerous.
“Too often, young people take out loans that are simply too large for them to pay back, leading to lifelong debt and strain on their finances,” he said.
Jay Zigmont, PhD, CFP, founder of Childfree Wealth, also said that Orman is “on the right page.” Zigmont further argued that the challenge is that there is successful marketing out there that breaks apart “good” and “bad” debt.
“Student loans are dumped into a ‘good’ bucket, while credit cards are ‘bad.’ The truth is that all debt is an issue,” he said. “We wouldn’t give an 18-year-old a $100k credit line for a credit card, yet we will for a student loan (or multiple student loans). It is not odd to see students come out of college with what is equal to a mortgage payment before they can even get a job.”
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People Ignore the Borrowing Rule
“You are not to take out private student loans, and your child should only take out as much money in student loans as they are going to make the first year out of college. Otherwise, they are never going to be able to pay them back,” Orman said in the podcast. “It’s a travesty that the high school system doesn’t make every student and parent pass a student loan exam before taking out a loan,” she added.
Again, several experts echo this sentiment, saying that while the best investment a student can make is investing in their own education, not all expenditures on building that human capital have the same rates of return.
“One must be realistic when determining what fields to enter and looking at the return on investment in that degree,” said Robert R. Johnson, PhD, CFA, CAIA, professor of finance, Heider College of Business, Creighton University.
Johnson added that it is ill-advised to take out substantial student loans, for instance, to pay for master’s degrees from high-priced universities in fields where the salaries are low.
“I’m not suggesting that students shouldn’t follow their hearts and enter fields in which their passion is high. But they need to be realistic about the cost/benefit relationship of that degree and how that will affect their financial life in the future,” he added.
Too Much Importance Is Placed on Expensive Higher Education and Ivy Schools
“I’ve got news for you: If I had a kid, there is no way they would be going to a $100,000-a-year school, even though I could afford it. We have created a society of the haves and the have nots, and it’s not right,” Orman said.
Howard Dvorkin, CPA and chairman of Debt.com, agreed, saying that employers need to tell young people that an ambitious work ethic is more important than a prestigious degree.
“What matters most is learning, growing, and graduating. Not borrowing, spending, and struggling,” Dvorkin said. “I do my part by hiring the best students from schools you’ve never heard of. And you know what? They’re some of my brightest employees, and many have become long-lasting managers. They’re also less distracted at work because they’re not paying outrageous student loan balances at home.”
Dvorkin added that employers need to convince students — and their parents — that it’s better to be an outstanding graduate at a nondescript school than a nondescript graduate at an outstanding school.
“Until we get that message out, we’ll be drowned out by administrators who want your money,” he added.
And according to Jonathan McCollum, chair of federal government relations at Davidoff Hutcher & Citron, educators too have an important role to play. To protect students and their families from what Orman rightly calls the “travesty” of student debt, it’s imperative for educators, guidance counselors and other advisors to make clear the alternatives that are available, making students feel they have options besides “signing on a predatory lender’s dotted line,” he said.
Are Student Loans the ‘Worst’ Loans?
For other experts, while Orman is right to be concerned about the growing student loan problem in America, her advice for families misses the mark.
“Student loans are simply not the ‘most dangerous loans you can have.’ That title should be solely reserved for payday loans, which typically have an equivalent interest rate of almost 400% and have a long history of causing significant financial harm to consumers,” said Will Sealy, CEO and co-founder of Summer.
According to Sealy, student loans are not inherently bad, as he said, far more college graduates have benefited, both academically and financially, from borrowing a student loan to pay for college than those who have not.
“The unemployment rate for non-degree holders is nearly double the rate for college graduates. While the return on investment of a college degree is slowly declining, it is more important than ever to go to college to ensure a secure middle-class life,” he added.
Sealy noted, however, that the real problem with student loans lies in the lack of financial guidance provided to students and their families that can help them distinguish good loans from bad loans.
For example, understanding the risks of private bank loans versus the many options afforded to them if they instead borrow a federal loan, including the Income-Driven Repayment (IDR) program.
“After graduating, borrowers are able to enroll their loans in an IDR plan that links their monthly payments to their income. If an individual is under-employed or unemployed, the government will allow for payments to be as low as $0 per month, with all remaining debt forgiven after 20 years. Programs like IDR make student loans more manageable, saving individuals approximately $300 per month on their payments,” he said. “Again, student loans are not inherently bad so long as you take the time to learn about which loans are right for you and which repayment plan can set you up for success.”
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