The Great Student Loan Lie

photo of student loan applicationWhile we’re talking about the many problems caused by student loan debt and how to address it, I think we need to start at the beginning and address a basic falsehood.

Student Loans are not financial aid. They are debt, plain and simple.

Let’s Play “Let’s Pretend”

Colleges, banks and the government may all collude to dress loans up as financial aid, but student loans are long term debt obligations. They come with compounding interest, repayment plan options and the interest is tax deductible.

Sounds like it has all the makings of a typical financial contract to me.

Student Debt Equals Aid?

Ever had a mortgage company tell you that they are giving you financial aid at the closing table?

No, I didn’t think so.

Instead, they give you pages & pages of disclosures about how much you are going to pay and how the compounding interest will significantly increase the total amount you will eventually repay.

And you need to prove that you have a reasonable chance of repaying the debt.

Not so with Student Loans:

Are you in school?

No income?

No job on the horizon?

No idea how much you will earn after you graduate?

No problem.

We’ll loan you money and you won’t have to start repaying it until after you graduate. Of course, we’ll start charging and compounding the interest from the initial date of the loan so at graduation you’ll owe more than you think you are borrowing.

But hey, no worries, we’ll just add that to the balance of your loan (capitalizing it) and then charge you interest on that too.

Who Wins?

From my vantage point, the financial aid recipient is actually the lender who receives the interest. The rest of us lose.

Student loan debt is a major problem for students and for our economy. The debt hampers graduates’ ability to save, to buy homes, to invest and to begin building solid financial lives. And that ultimately impacts economic growth, the housing market and all of us.

I was very lucky. Thanks to my parents and a true Financial Aid package I came out of college and graduate school with no debt, so I started my professional life on an even financial footing.

The jobs market was really lousy, but at least I didn’t start out behind the financial eight ball. What I earned, I could use to begin to build my financial future.

No Simple Solutions

There are many issues related to this topic that need resolution, including addressing the absurd cost of obtaining a higher education in this country.

But maybe if it wasn’t so easy to pretend that debt is financial aid, universities and other educational institutions would have a more difficult time filling all those freshman classes. And then they’d have to address questions such as why tuition cost increases are far outpacing inflation.

So let’s be honest and admit our complicity in letting the government and the education establishment redefine “debt” as “aid.”  By encouraging students to borrow significant amounts of money without any guardrails or a real world understanding of how much time & effort it takes to pay back thousands of dollars in debt, we undermine their future and fail a very basic financial planning test.