Exercising Caution on College Loans

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Commentator Liz Pulliam Weston says that many students take out loans to pay for college, but if they are not careful, the debt can hurt their financial life for years or decades. Weston is the author of Your Credit Score: How to Fix, Protect and Improve the 3-Digit Number that Shapes Your Financial Future.


Many college students can't get enough scholarships, so they take out loans. But before they take out loans, commentator Liz Pulliam Weston says students have a responsibility to make sure they can afford to pay them back.


College kids are often told that it's OK to go into debt for their education because student loans are an investment in their future. But some people are going way too far. They're coming out of school with massive student loan debt that prevents them from launching their adult lives. Instead of saving for retirement or a home down payment, they will struggle for years, even decades, to pay off what they borrowed for school, and that's if they can even begin to pay the money back.

This is an extreme case, but I talked to one single mother who went back to school in her mid-30s and who has since watched her unpaid student loans swell to a hundred thousand dollars, thanks to interest and fees. Her lender now wants payments that would eat up a quarter of her modest income for the next 35 years.

With a mortgage, there are limits to how much you can borrow. A lender factors in your ability to repay based on your income. Not so with student loans. There's no relationship between your future earnings and how much debt you're allowed to take on, which is how we get people borrowing $120,000 for a PhD to land a teaching job that pays $40,000 a year. The problem is only going to get worse as tuition continues to skyrocket.

Here's a good rule of thumb: If your total student loan debt exceeds the amount you expect to earn in your first year out of school, you're borrowing too much. Students of modest means have to realize that some schools are simply unaffordable, and they need to look for less expensive ways to get their degrees. These days a college education is critical for getting a decent job. But unless you're careful, the loans that should be getting you ahead in life could instead be what's holding you back.

NORRIS: Liz Pulliam Weston is the author of the book "Your Credit Score."

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