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For the past several weeks, we have been talking about debt. I used the analogy of debt being like digging a hole in your back yard. In short, asset backed debt means that the dirt you used to dig the hole is right beside the hole. If something bad happens, you can fill the hole back in with the asset. Think mortgages. You buy the house with debt, but the house is an asset that you could sell to pay off the loan if need be.
Unsecured debt is when you go into debt, or dig a hole, but the dirt is trucked away. If you need to fill in the hole, or pay off the debt, there is no dirt in sight. Think credit card purchases for a fancy meal. The meal is gone. You can’t sell the meal to pay off the debt. You are going to need to go and find more dirt somewhere else to pay off that loan!
When college students dig the hole of student loans, where is the dirt? Is the degree they are getting a solid asset that could easily fill in the hole that debt creates? The answer is kind of. Less than half of people who get a degree work in the field they studied for. I have a degree in Bible and another degree in Worship Arts. I have just started using these degrees, but for the past decade, I have been in the insurance industry. I fit the category of half of the population that went into debt for a degree that we’re not directly using.
Should you go to college or not? That is the great debate. Is college useful anymore and if so, is the degree and the income that it promises worth going into debt? It’s time to allow wisdom to guide our path as we think about whether or not this debt is backed by an asset or is unsecured.
What degree are you contemplating? It is possible to get a degree in Bagpiping. This ancient instrument is extremely cool and I’m sure there are many parades that would love to have you march with your droning pipes. But is it worth $120,000 of student loans? If you dug a $120,000 hole, how long would it take to fill that back in based on your bagpiping expertise? What are the opportunities for someone who has this sort of degree? What is the likelihood of a consistent paycheck? And if there is a consistent paycheck, how long would it be before you made enough money to pay off your $120,000 loan? If I had to guess, quite a while. This would be very risky. This loan wouldn’t be very secure. If I am using wisdom and I really wanted to major in bagpiping, I would try to get as many scholarships as possible and would be extremely hesitant to get any loan at all as this loan would be scarily close to a fully unsecured loan.
What if you’re contemplating a law degree and after applying, got into Harvard? Harvard Law graduates who get jobs at law firms, can make just over $200,000 on average their first year out of school. From there, their salaries only go up, and potentially, over $1,000,000 a year depending on their career trajectory and field of practice. What if you needed to take out $120,000 of student loans in order to get this degree? Would you think that it is a different consideration than the same amount of debt for a bagpiping degree? Absolutely! Why? Because that specific education actually has a rather predictable return on investment. Is a Harvard Law degree a 100% secure asset? No. It is not a house. It isn’t something that can be sold at one time to fill in the hole of debt. However, does it provide a more secure path towards filling in the hole? Absolutely. The dirt might not be right beside the hole, but there’s a dump truck full of dirt on its way that will be here in a year or two.
Again, I’m not telling you that student loans are either good or bad, but I am saying that all student loans are not created equal because the education they are purchasing is not created equal. For those who are considering student loans, you should really consider the likelihood of earning a wage that could easily pay back the loans you are taking out. If there is not a strong likelihood that you’ll use your degree or that your field of study will produce a predictable salary in line with paying that sort of loan back, then you should be very cautious in taking out student loans.
Zach Santmier is the owner of Trumble Agency, Inc. and the author of the personal financial course, Increase. He focuses on helping families escape paycheck to paycheck living so they can freely pursue their ideal future.
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