The Student Loan Dilemma
Many students are hesitant to take out student loans.
Is improving your human capital through further education a good reason to take on debt?
The Changing Times
In 2002 there was $300 billion federal student loans outstanding in the US.
Today it’s more than $900 billion.
Part of this dramatic increase is due to the extended period of low interest rates which creates incentives for people to take on more credit (loans,) as well as the ability to refinance student loans to secure more favorable terms.
The other reason is that the western world feels more entitled to creature comforts and luxuries than ever before.
Of course I’m generalizing but when our parents went to college their dorms were small and simple. They ate cheap pizza and baloney sandwiches. They saved more of their own money to pay for things instead of using credit cards. And they didn’t rely on the government for financial aid. If they didn’t have enough cash to buy a TV, they simply wouldn’t buy it. Period.
But today young people like myself live in nice apartments. We eat steak, sushi, only drink quality craft beers, and enjoy posting photos of our Bloody Caesars on Facebook for the world to see. Some people even purchase gym memberships on their credit cards, which puts them further into debt.
But it’s okay, because they have to impress their friends right? 😉
There’s a cost to everything. The older generation funded their lifestyles by saving and producing real goods and services. But today most of our lifestyles are funded by debt.
Debt isn’t seen as a bad thing anymore. It’s actually necessary if we want a normal life. As long as we go into debt for the right reasons and not waste it on frivolous spending then every dollar we borrow today will be an investment in our future.
Corporations WANT us to keep spending. Universities WANT more enrollment. Financial institutions make their profits via interest on our debts. Even our governments (despite what they tell us) WANT us to continue carrying debt.
Everyone Wants you to have Debt
If you think it’s better to pay off your current debt than to take on more student loans then prepare to fight an uphill battle. Everyone in the economy from small restaurants, to large corporations and government bodies are against reducing personal debt. If everyone started to pay off all their debts we would create another financial crisis like in 2008. 
The Solution
I think the answer is to just go with the flow and don’t feel bad about borrowing money.
Don’t fight the trend. Go ahead and apply for those new credit cards and student loans. Why limit yourself? 🙂
After all if everyone is in really deep debt, then no one is in really deep debt, right?
Here’s an analogy. If everyone else is speeding on the freeway then it must be okay for you to speed too. In fact, if you adhere to the actual speed limit and drive slower than everyone else then you are more likely to cause an accident!
The majority is always right even when they’re wrong.
In Canada home prices have been buoyed by excessive lending. It’s the highly leveraged risk takers who bought homes with a small down payment and took on huge mortgages that have benefited the most from the last 15+ years – often at the expense of others who were more financially responsible.
In the United States, all the renters who didn’t buy into the housing bubble still had to bail out the mortgage insurance companies in 2008. The reckless borrowing and unimpeded addiction to credit of some people has created moral hazard. Families who did nothing wrong still had to bail out the US banks.
How is it fair to punish the savers for the mistakes of greedy borrowers? It’s not. But unfortunately personal accountability doesn’t mean anything anymore.
The majority wins. And right now they’re inundated with debt. So follow the majority, and you’ll have nothing to worry about as history has shown.
My Personal Take
Debt reduction comes from an outdated mentality. All the cool, young people of this generation are going into debt up to their eyeballs to pay for iPhones, all-you-can-eat sushi, and higher education.
Holding debt is just another part of life and not something you HAVE to pay off anymore. This is the new normal. 🙂
For some of you readers it may appear that I’m doing quite well financially for a millennial. I own a condo, a vehicle, a six figure stock portfolio, and even have some rental income. But the realty is all these amenities and assets I have were acquired primarily using debt and not through legitimate savings, or earned income, or heaven forbid actual hard work, haha.
I’ve joined this new movement of buying instant gratification on credit & have no regrets. Who else is with me?
Debt in order to generate income or reduce expenses over time is good debt.
Mortgage-good
Farmland-good
Reasonable margin debt-good
Student loans-good
Debt for consumer goods-BAD
Debt is debt – There is NO good debt bad debt. Industry uses these terms to suck you in. Run your life like a business. If business is booming, sure borrow, but make sure to pay it down with profits for that day when the business takes a hit and cash flow is low. Want to see if you would invest in you? – prepare a financial statement (net worth and cash flow) each quarter as if your personal life was a business and see if you would invest in you… ideally NW should be rising, as Liquids has been doing, and cash flow should also be rising with the latter ideally rising at a faster rate. It is that simple. Great exercise to keep you honest. – Cheers. – Sorry for the seeming tirade on this, but is really that simple…
@Theo
It’s a good thing I don’t have a lot of consumer debts then 🙂 Only about $4,600 on my credit card left but I plan to pay off the balance by November :0)
@Phil
That’s a great idea 😀 Create a balance sheet and income statement for yourself to track your own finances like a business! Then look at your numbers and ask yourself “would I invest in this.” If the answer is “yes” then perhaps borrowing to potentially accelerate growth will pay off very well in the future. But if the answer is “no” because of slowing growth or years of flat earnings then perhaps paying down debt to free up cash flow is the better answer. It all depends 🙂
You got it. The sky is the limit for you.
We wish!!! 😛 I’m happier going against the crowd and pay off debt 😛
Mortgage is probably the only debt that I would take on in the future (well, another mortgage that is, as I’ve got one already)… I’m not even sure. I can totally see myself living somewhere on a remote island and owning a hut on a beach that cost me like $100, haha!
Watch out guys, we’ve got a contrarian over here 😛 lol, just kidding 🙂 If anything I’m the one who’s going against the grain haha. Other finance blog out there are suggesting ways for people to pay off debt. I think people are smart enough to know that for most of us we need debt to complete an education in a timely manner so we can potentially make more money. We need debt to buy a home, as both you and I have done, to build equity and long term financial stability in a home. We need debt so governments can support the public health care, education, and road systems. Debt is the social fabric that holds the world together. And yet, at the same time, everyone hates debt so much that they’ll do just about anything to get rid of it in their lives. The Chairman of the US Federal Reserve, Mr. Bernanke, understands money probably more than anyone else. And he has over half a million dollars of debt himself. He is a multi-millionaire and he could pay off his debt at any time if he wanted to. But he doesn’t. Hmm, I wonder why 😉
There is no good debt or bad debt. Get it through your heads! Debt is debt. If you have a debt it means you owe someone eventually for the privilege of having their money now you YOLO nut-bars. Great arguments Liquid, almost had me convinced…, and yet when the lemmings leap from the bridge, try not to be in the line (I know you won’t)… Oh by the way I’ll be the lemming sitting down on the waters edge watching you all jump, sipping MY cognac enjoying the carnage =P. Can’t wait for the show. Get with the program YOLO’s, grow-up and live within your means, and we will be all better off. – Cheers 🙂
I was hoping readers would pick up on my hints of sarcasm scattered throughout the post 😀 I’m glad some people did. Yes, there are a lot of YOLO nut bars out there as you put it 😆 who are totally oblivious to what they’re getting themselves into. I use to play those lemmings computer games back in school. I think they taught me a lot about planning ahead 🙂
I find this the oddest article you’ve written. I understand the necessity of debt as a means to expand an asset base. But with the acquisition of debt a person needs a contingency plan. The world is full of risk, none of us can see what will happen tomorrow.
Personally, I structure myself to have a 5 year window to get out of debt in worst case scenario. This gives me enough time to rid myself of debt without eroding my asset base. It’s an escape plan!
There are no rules when it comes to interest rates, and we can’t rely on the good grace of the gov’t!
You said it JR 🙂 We can’t rely on the goverment to make things eaiser for us. I like your strategy. I have a similar one in place, but it will take 6 years (a bit longer than your plan) to completely wipe out my debt in case I really need to do it without eroding my current assets. Hopefully it will never come to that but the risk is always there right? 🙂 Debt is quite an interesting dilemma isn’t it? We both know there are a lot of different kinds of risks in the world. But being wealthy is one way to protect against those risks. Having assets, especially when they’re diversified and plentiful, can provide us with resilience to financial and economic shocks. So it’s vital to build up our asset base 😀 As you’ve mentioned debt is necessary as a means to expand our asset base. So we must go into debt to more quickly build up our financial security, however poorly managed debt can make us even more vulnerable to those worldly risk haha 😆 It’s a catch 22 situation. So I think we should all try to grow our assets by carefully using debt… Read more »
I see an argument about good debt vs. bad debt up in the comments – it’s a touchy subject for sure. I think good debt was something created by lenders 🙂
Lenders will do anything to persuade people to borrow. It’s not ideal, but I guess it’s their job :S
What a refreshing look at the sad old topic of student debt that has ruined the lives of many (I recently read an article about how many people, well into their middle ages, were now bankrupt because of debt that began as simple student loans to finance a bright future). I like the idea of ‘good debt’ versus ‘bad debt’ and I think it’s only good if you’re the one lending 🙂 Now that’s something banks would never admit.
Hi, I happened to land on your blog while researching on the internet. I am interested in applying loan for further studies, but as you have mentioned I am bit skeptical due to unemployment. However, your blog has given me decent belief to move forward with taking a debt.