The Benefits of Debt

By Hightower Westchester on July 8, 2016

College students have steep learning curves.  In high school, they are tasked with doing well academically, participating in extracurricular activities, complying with the rules of their parents’ homes and, possibly, having a job.  Once in college, they must decide what to study, how many credits to take, and other important decisions, while adapting to a new setting and learning to manage time, communicate with professors and administrators, network with peers, and manage finances.

A key aspect of finances for many college students is student loans.  In most cases, scholarships, grants, income, and savings are not enough to cover the cost.  Oftentimes, students are required to borrow money in order to pay for college.  In fact, 70% of college graduates leave school with a loan, and the average amount owed is about $30,000, according to a survey by Lendedu.com.  This accumulated debt includes direct subsidized/unsubsidized loans, direct PLUS loans as well as state and private loans.  All of these different types of loans offer different interest rates and terms.  Yes, universities and loan institutions offer counseling but let’s be honest, students are either not attending or not retaining the information.  Unfortunately, this happens all too often but it does leave an opportunity for parents and/or guardians to educate.

It is useful to teach our children about the dangers of debt.  But we also need to make it clear that debt can be a useful tool.  It is very important we teach our children how to use these tools safely.  Whether the debt is for college, technical school, or graduate school, the loan is more often than not merely an investment likely to pay for itself many times over.  We need to provide consistent, positive guidance so when our children are old enough, they can use these tools for their own benefit.

When applicable, we need to demonstrate that we can go into debt and bring ourselves out of it in order to build a strong credit profile.  We show creditors on paper our resolve and ability to meet our obligations, thus keeping our cost of credit low.  Taking on debt allows us to reach our aspirations and to acquire assets that are of value to us such as a house, education, reliable transportation or starting a business.  These are many things that define the American Dream, many of which are difficult to achieve without debt.

Student loan debt in the U.S. is particularly troublesome because it is so large.  According to the Federal Reserve, student loan debt in the U.S. exceeds $1.3 trillion, outpacing both credit cards and auto loans.  Yet it helps millions obtain higher education, and is completely acceptable when the total debt is limited to no more than the student’s expected first year salary upon graduation.  It can be dangerous for those who don’t finish college; it leaves them with debt and without a degree and in worse financial shape without prospects for a well-paying job.

Some of us use debt irresponsibly, and then you add in the Great Recession, which was a vivid and destructive event that left many individuals and families financially scarred.  We can learn from Great Depression babies, who grew up to be avid savers and cautious spenders.  They made sensible use of debt while figuring out how to keep their savings/spending controlled.  We can use rules of thumb to help us, such as walking away from impulsively buying shiny objects and sleeping on it to see whether they are just as appealing the next day.

A healthy skepticism about debt is good, and it is what we should teach our children.  If you think you can sidestep this entire discussion by keeping silent, you are doing them a disservice.  Parents, if we do not discuss the positives and negatives of finances, we leave our children defenseless to figure it out on their own.

Richard Flahive – Senior Wealth Management Analyst – HighTower Westchester
914.825.8639 – rflahive@hightoweradvisors.com