Student Loan Debt is No More Noble than Credit Card Debt

by JT McGee

I’ll never forget one of my college roommates.

He was a real piece of work. The kind of ADHD kid that made for a perfect lab rat-like social experiment with each passing day.

He was always excited about anything. Everything, actually. And I could watch him pace the apartment living room for hours as he consumed every last can in a Dr. Pepper 12 pack. Everything he did was chaotic, yet so rhythmic.

Boom!

Did I mention he also had a knack for making an entrance?

Every day the door would fly open as he returned from class, smacking into the cheap wooden furniture lining the walls of the room. I winced every time he walked in. I felt bad for that little plywood chair, decked out in the finest coverings a doctor’s office supply company could find.

One day he was particularly enthusiastic about flinging the door open. It was student refund day – the day when checks are distributed to students who overpay their tuition balance.

“A $2,600 refund! WHOOOHOOO!” he exclaimed, somehow over the sound of the door crashing once again into the spare blue chair.

“Oh man,” I thought to myself. My eyes still fixated on my computer, I braced for impact.

I asked casually, “A refund?” Up to this point, I had no idea that a distribution of any kind from a university is considered a refund. The more you know…

“Yeah man! It’s the second month of the semester and everyone gets their extra money back.”

I sat and thought about this for a moment. How is he getting a refund? Wait – wasn’t he complaining about Sally Mae in one of his Dr. Pepper-induced laps around the living room a few days earlier?

“Dude, you know that’s not a real refund, right?” I had finally worked up the courage to ask.

“What’s that mean?”

“Well, if you borrow for school, that’s just loan money that you have left over. You have to repay it eventually.”

A smile disappears from his face.

“Oh. Yeah. Yeah man, I totally know that,” he replies.

“Look – I’m not trying to tell you what to do. I just wanted to make sure that you understood that’s borrowed money. If you spend it today, you’ll just have more to pay back later. It’s none of my business, but I just had to say something.” At this point, I’m squirming in my chair.

“Aw yeah man, I got it – it’s cool.”

Thirty seconds passes as he walks to the fridge and grabs another Dr. Pepper before sitting on his favorite victim, my beloved blue chair.

“Dude – I’m going to get an Xbox 360. Oh and my truck needs a new stereo. And man I heard about this great game that my friend has for Xbox. It’s going to be dope. Wanna go to Game Stop? Dude – let’s go to Game Stop!”

I bet you can guess what happens next

In a matter of a few days, I’m fairly sure he had spent every last dime of his refund. A new Xbox, countless games, some new gizmos and gadgets lined his truck.

I’ll never know what happened to the guy. We moved out for the summer and haven’t seen him since. That was a few years ago.

But what I do know is that this is just an anecdote. I know there are surely many more people who never used a dime of their money for anything other than school. I’m sure there are people who added pocket lint to their daily Ramen, just to add a little more fiber.

I’m sure it seems that way. But just as is the case with financing depreciating assets, it matters not what you believe the source of funding to be. If at any point you have outstanding debt, everything you purchase is, at a minimum, partially funded by existing debt. Every last Keystone beer or handle of Kamchatka vodka – even if paid for by money you receive from working wages – is still financed if you have student loan debt. This is accounting 101 stuff – the weighted average cost of capital. Any business grad should have a full point knocked off their GPA for falling for this common fallacy of “paying cash.”

And this is where I find it difficult to feel sorry for the new 1% – the 1% who have $150,000 or more in student loan debt. I can’t find it in me to feel sorry for the 5%, either – the people with $75,000 in debt. Nor for the average – the people who have $20,000 in student loan debt.

Just because the source of funding is attached to a supposedly noble goal does not make it any more defensible than any other. I don’t know of too many people who want to buy everyone an Xbox 360, beer, and tacky dorm room posters as part of public policy. But 93% of Occupy Wallstreet protesters and 33% of the public at-large want just that, so long as it’s sold under the guise of educating America’s future workers.

{ 8 comments… read them below or add one }

funancials April 4, 2012 at 12:24

Dude let’s go to gamestop just about sums up my first few years in school. I currently owe around 7k in student loans. I remember receiving 2 refunds freshman year. I was so confused by them that I called my dad and he explained everything fully. I ultimately used them on books.
True or false: your time value of money post sparked my debt and mortgage post which then sparked your points and student loans posts?

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JT McGee April 4, 2012 at 19:32

Hey man, $7,000 isn’t bad at all. Your dad’s a good guy – saved your life!

Haha – so true, man. The whole mortgage points thing has bugged me for awhile (I seriously thought I wasn’t understanding them because they seem so obvious) and your article reminded me of it.

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Darrell @ Debt and Buried April 4, 2012 at 15:05

I couldn’t disagree more! Student loan debt in general is noble, despite the fact that it can be misused. You can use a gun to hunt for food or shoot up a school. Or you can use your car to get to work and feed your family or mow down a bunch of pedestrians when you’re drunk.

For the most part, student loans have made the American middle class, allowing people to get a leg up when their parents couldn’t provide. Too bad it’s now turned into something unrecognizable.

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JT April 5, 2012 at 13:30

Noble enough that you should pay for my education?

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Darwin's Money April 4, 2012 at 21:32

Student loan debt for a degree in demand with a good GPA – a necessary evil for many young kids; credit card debt – tough to ever justify and makes one question how you got there to begin with. What puts the two on equal footing is when naive kids (at their parents’ behest) “follow their dreams” to pursue a degree in [fill in the blank usless degree], especially at a pedigree school, only to realize immediately upon graduation they will never work in the field and never earn enough to justify it.

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JT April 5, 2012 at 13:31

I guess if we’re going to put them on equal footing we should promptly pay off everyone’s credit card at the same time we forgive every balance on a student loan. 😉

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PK April 5, 2012 at 10:59

Let’s say a theoretical person has loan debt at a reasonable interest rate? Couldn’t they just be leveraging themselves in a reasonable way, as discussed in your previous articles?

I’m thinking if your buddy instead came inside and logged into his brokerage account and bought $2,600 in stock. Not as bad, I think (albeit, he could lose it. But it’s not a guaranteed loss like the games)!

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JT April 5, 2012 at 13:31

That’d be the best way to do it. If you win, you keep the proceeds. Lose? Oh well – there’s always student loan forgiveness!

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