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Student Loans and Good Decisions

28 Apr 2022  

Last week I moderated a panel discussion at Kellogg on personal finance with three successful Kellogg alumni. It was a great session; the panelists shared their learnings about saving, spending, working with a partner and making career shifts.

For me, the most surprising part of the discussion was about student loans. All three panelists had taken out loans to pay for their Kellogg MBA. They were still paying off the loans, some years later. And all three had no regrets.

The Power of Student Loans

Education loans get a lot of attention these days, and many people lament that students have to use debt to fund their education.

But as my panelists illustrated, there is nothing wrong with student loans. In a sense, a student loan is like investing in technology or capital equipment; it is an upfront financial commitment that will yield positive results for years to come.

The panelists I spoke with were all nervous about the loans, but they were convinced that a Kellogg MBA would add value, and that over the years they would recoup the cost. For all three, this is what happened; the degree led to opportunities that generated funds and returns.

Having loans isn’t a bad thing. The panelists were steadily paying them off. They weren’t obsessed with them, in a Dave Ramsey fashion, living on rice and beans and beans and rice. The loan payments were just one part of their financial situation. They balanced vacations and house purchases and retirement saving and loans. It all worked fine.

The Problem

The problem, of course, is that people often make bad decisions when it comes to taking on education debt.

Does it make sense to get some loans to fund a Kellogg MBA? Probably. The MBA degree generally leads to great financial returns.

Should a student take on $100,000 in debt to become an artist? That is more debatable. Artists sometimes don’t make a lot, and an art degree won’t necessarily change the situation.

Is a college degree worth $150,000 in debt? That is debatable, too. It is possible to get a college degree at a very modest cost. Is a particular school worth the extra spending? That is a tough decision.

Who Is to Blame?

Now it is easy to blame the student for poor decision-making. Some people say, “Why did you take on all the debt, anyway? This is all your fault.”

I think this is not fair. Expecting a high school student to make a complex, long-term financial decision just isn’t reasonable. Financial literacy is low across age groups, and the idea of $100,000 in loans is hard to grasp for a teenager who hasn’t ever made more than $200 a week.

Colleges certainly deserve some of the blame. Admissions and financial aid officers have a big incentive to get students to enroll and take on debt if necessary to cover the tuition. Ultimately, the college is rarely responsible for the loans; the U.S. government now holds most student loan debt.

The U.S. government has responsibility, too. By making loans readily available, the federal government makes it easy for students to take on too much debt. It enables the process.


So how do we solve the student loan problem?

A few things clearly won’t work. Making loans more available is the wrong move. Shifting all the loans to the federal government is a bad idea, too. When the people making the loans aren’t responsible for them being paid back, loan quality will suffer.

Talking about loan forgiveness isn’t helpful, either. What is the best way to get someone to take on too much debt? Suggest that maybe the loans will be forgiven one day.

The recent government move to pause loan payments is a debatable idea, too. It encourages people to take on debt and not pay it back. It also helps people who clearly don’t need the help, like my panelists. They are all doing just fine financially, and presumably now even better with the pause in loan payments.

The best approach? Help people make better decisions. One way is to share accurate salary data. What do people who graduate from the film or social work program typically earn? How does this compare with the cost of the degree? What do students from one college make compared to another?

Another useful piece of information concerns colleges. What share of students take on debt? What percent of these students struggle to pay back the loans?

If students made more financially driven decisions, schools would need to respond. A school might decide to reduce tuition. This might require some cost-cutting by the school, which wouldn’t be so bad.

Ultimately, student loans aren’t evil. Education is an investment that pays off. But the system will only work if people make good decisions, and they have access to information that will help them do that.

2 Responses

  1. Jeff House says:

    Tim, very thought provoking commentary. I like your ideas and believe greater transparency should always be the goal. Unfortunately, there is still a strong aspect of supply and demand (particularly at the top tier colleges like Northwestern that can keep hiking tuition with impunity regardless of major). Personally, I’m more interested in trying to target better financial education at an earlier age. Candidly, I can’t understand why this isn’t compulsory like math or English.

    • Tim Calkins says:

      Hi Jeff—Well said. I completely agree that financial literacy is a huge need. The studies are really incredible: many people don’t understand simple concepts like the time value of money, ROI, etc.

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