Good vs. bad student loans

Is student loan debt bad? With new college graduates being allegedly crippled by debt, you might think so. However, not all debt is necessarily bad. Businesses expand by borrowing. Families take out a mortgage to buy a house. And students take out loans as an investment in their future earnings and job satisfaction.

Ideally your students would pay for their college education exclusively with grants, scholarships and savings, but that is just not the reality. So, how can you help your students and their families make wise borrowing choices?

In the world of student loans, some are better than others. Direct loans are federal loans with better terms than private ones. Interest rates are much lower — fixed at 4.66 percent for undergraduates for the 2014-15 academic year — and may be tax deductible. You do not need a co-signer. And the repayment options are far more flexible than they are for private loans.

Direct Unsubsidized Loans. Interest on these loans begins to accrue immediately. So $12,000 in unsubsidized loans could easily amount to $13,000 or more in debt after four years of college.

Direct Subsidized Loans. The federal government pays the interest while you are in school (must be at least a part time student) and for the first six months after you leave school. So $12,000 in subsidized loans is still only $12,000 in debt after four years of college.

How can your students limit their student loan debt to Direct Subsidized Loans? First, they could consider attending a community college for the first two years. Average tuition is less than the borrowing limit for subsidized loans, which is significantly higher in the third year of college and beyond. And if you would like to transfer those credits to a bachelor’s degree program, many community colleges have articulation agreements with local four-year colleges.

The one factor that makes any student loan a bad one is failing to graduate. If a student loan is an investment in your students’ future, dropping out is like the bank foreclosing on a mortgage. But in this case, you still have to pay off the loan on the “house” that you lost.

According to U.S. Department of Education data, 21 percent of dropouts who entered four-year colleges in 2003-04 had more than $10,300 in federal student loan debt in 2009. This number does not include private loan amounts. And without that college degree, the ability for dropouts to repay their loans decreased by an average of $16,000 to $20,000 per year.

When it comes to the likelihood that your students will graduate, choice of school is an important consideration. You should research and compare school graduation rates. There are a number of colleges with graduation percentages higher than 80 percent. On the other hand, there are some colleges, most of them public, with graduation rates less than 25 percent.

A little guidance early on can help your students and their parents make their college investment a good one.