Borrowing for Education

Will going back to school for another degree pay off? How to weigh the pros and cons of taking out student loans to finance your education.

Higher Education as an Investment

One common reason people pursue higher education is to increase their lifetime earnings, the total amount people earn over their life. Many careers with high salaries require advanced degrees, and people often assume that higher education will lead them to earn more. In the U.S., this is usually true: the median earnings of someone with a bachelor’s degree are almost double the earnings of someone with only a high school diploma.

However, on an individual basis, deciding whether higher education is a good investment depends on many factors including your field of study, the university, and your access to career opportunities.  You can estimate the Return On Investment (ROI) of a degree by researching how much graduates from different institutions and different fields earn after graduation.

Costs of Higher Education

The costs of higher education include tuition and fees at a particular institution, living costs, and the opportunity cost of forfeiting income now so that you can earn a higher salary after you graduate. If you need to take out student loans to pay for your education, consider how much the payments will be after you graduate, and how much interest you will pay on your loans over the loan period. 

For example, Casey graduated with $18,000 of student loans at a 4% interest rate. She currently earns $60,000 per year. Her student loans will cost her $2184 per year, for a period of 10 years. If she had not obtained a bachelor’s degree, she would earn about $40,000 per year. Even if she subtracts her loan payments, she still earns $17,816 more annually than she would have without a degree. For Casey, going to college was a worthwhile investment.

Financing Higher Education

For people who do not have the cash to pay for higher education costs, there are several ways to fund higher education costs including grants, scholarships, tuition remission, and student loans. 

Grants are money for tuition or living expenses that governments or universities give to students based on their financial need. They do not need to be paid back.

Scholarships are money given by universities, organizations, or even individuals to fund education. Sometimes scholarships are based on financial need, but they can also be merit-based, which means students must have certain achievements to qualify for them. They often come with requirements but they do not need to be repaid. 

Tuition remission is when someone who works at a university is exempted from having to pay tuition. This is sometimes offered to graduate students who work at the university as researchers or teaching assistants while they earn an advanced degree. 

Finally, any remaining costs that students cannot pay out of pocket must be borrowed as loans.

Choosing Higher Education Programs

When you are applying for higher education, whether it’s an undergraduate degree, a graduate degree, or a certificate program, there will be many financial factors to consider. Once you have been accepted by different universities, you can compare the financial aid packages and tuition costs of the schools or programs. 

For undergraduate programs, public universities often have lower tuition costs than private colleges. Many people opt to attend 2-year community colleges and transfer to 4-year colleges to save money. However, for students with higher financial need, some private colleges offer better grants and scholarships, and a few elite colleges with large endowments meet all the financial needs of their students without loans. 

For graduate programs, there is usually less financial aid available to fund your education, so you need to determine whether you can save up money for higher education costs or take out loans to fund your degree.

How Student Loans Work

Each country makes its own rules regarding student loans. 

Some countries, such as France and Germany, have low tuition rates at state universities, lowering the need for students to fund their education through loans. However, students still may need to take out loans to cover living expenses. 

In Australia and the UK, payments on student loans are based on the borrower’s income after graduation and don’t start until borrowers make a certain salary

In the U.S., students who qualify for financial aid can receive subsidized loans. The federal government pays the interest on these loans while you are still a student, so you are only responsible for interest after you leave school. Students can only borrow up to a certain amount each year.

Risks of Student Loans

The main risk of student loans is that you may borrow more money than you are able to pay back while affording the lifestyle you want. This risk is especially high for students who do not finish their degrees because they will still need to repay their student debt even if they do not earn a higher income.

Having large monthly student loan payments can make it more difficult to save for other goals such as buying a home. If you default, or are unable to pay back your loans, you might have your wages garnished, meaning that your loan payments will be taken directly out of your paychecks.

Another risk of student loans is that if you do not make adequate monthly payments, your loans will accumulate interest, leading them to balloon into even more debt. This can negatively impact your creditworthiness, preventing you from borrowing money in the future.

Income-based Repayment Plans

In the U.S., Australia, and the UK, there are income-based repayment programs that allow borrowers to adjust their monthly loan payments based on their income. In Australia and the UK, these programs are the default, but in the U.S., borrowers must enroll in these programs.

In the U.S., you can only enroll in an income-based repayment plan if you meet certain requirements. Income-based repayment programs are only available for people who would pay less under these plans than they would under a standard repayment plan. 

If you enroll in an income-based repayment plan and do not earn a high salary after graduating, you can limit your monthly loan payments.  If you make regular payments in an income-based repayment program for 20-25, you will have the remaining balance of your loans forgiven. The drawback of these programs is that if you fail to verify your income each year, your interest on your loans will grow, causing your total loan balance to increase, and your payments will revert to the standard payment, which is higher. 

Student Loan Forgiveness

Each country sets its own rules for student loan forgiveness. In the United States, there are several student loan forgiveness programs available for federal student loans, but these programs are often difficult to qualify for. The Public Service Loan Forgiveness program allows people who work in the public sector such as teachers, social workers, and doctors at public hospitals to have their remaining loan balance forgiven after 10 years of payments. 

If you are using an income-based repayment plan in the U.S, you also may qualify for student loan forgiveness after 20 or 25 years of payments depending on your plan. While this program may seem like a tempting option if your student loans are unmanageable, having a growing debt balance for 20-25 years could negatively impact your life by limiting the amount of money you can borrow and limiting your available discretionary income while you make loan repayments.

Even Higher Education?

Casey owes $18,000 of student loans at a 4% interest rate and makes $60,000 per year. She is considering graduate school which would require her to take out $20,000 in student loans at an interest rate of 7%. She expects her income after she finishes graduate school to be $90,000 per year based on what people in her industry with graduate degrees typically make. Her monthly payment on her graduate student loans will be about $348 for 10 years.

If she tries to save money for her tuition at the same monthly rate, it will take her almost 5 years to save up that much money, and she also won’t earn a higher salary as soon. She should take out the loan because her salary after graduating will increase enough to allow her to pay back her loan and still make more than she does now.

[1]  Elka Torpey, “Education Pays, 2020 : Career Outlook,” U.S. Bureau of Labor Statistics (U.S. Bureau of Labor Statistics), accessed August 20, 2022, https://www.bls.gov/careeroutlook/2021/data-on-display/education-pays.htm

[2]  Jason Delisle and Alex Usher, “Australia’s Student Loan Problem Is a Teachable Moment for the U.S.,” Brookings (Brookings, March 9, 2022), https://www.brookings.edu/research/australias-student-loan-problem-is-a-teachable-moment-for-the-u-s/

[3] Federal Student Aid, accessed August 20, 2022, https://studentaid.gov/understand-aid/types/loans

[4]  Federal Student Aid, accessed August 20, 2022, https://studentaid.gov/manage-loans/repayment/plans/income-driven

[5] https://studentaid.gov/manage-loans/repayment/plans/income-driven

[6] Jason Delisle and Alex Usher, “Australia’s Student Loan Problem Is a Teachable Moment for the U.S.,” Brookings (Brookings, March 9, 2022), https://www.brookings.edu/research/australias-student-loan-problem-is-a-teachable-moment-for-the-u-s/

[7] “Repaying Your Student Loan,” GOV.UK, accessed August 20, 2022, https://www.gov.uk/repaying-your-student-loan/what-you-pay#:~:text=Plan%201%20loan-,You%20pay%20back%209%25%20of%20your%20income%20over%20the%20Plan,go%20towards%20both%20your%20loans

[8] Federal Student Aid, accessed August 20, 2022, https://studentaid.gov/manage-loans/forgiveness-cancellation

[9]  Federal Student Aid, accessed August 20, 2022, https://studentaid.gov/manage-loans/repayment/plans/income-driven

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