When Does Student Debt Make Sense?

Direct Subsidized Federal Loans Will Not Make You A Captive


Yes, debt can be a dirty word, but the Federal Direct Subsidized student loan certainly does make sense, assuming that a college degree has a monetary value in that the lifetime income potential of college graduates is far higher than non-graduates. Student debt is often vilified by the media who believe our students should not graduate with the burden of paying off debt in the years after college, when salaries are, more than likely, least likely to allow for repayment. This is true for all types of debt outside of the Direct Federal Subsidized Loan, which is considered part of  financial aid in most circumstances.  Many college financial advisors and financial planners believe that direct, subsidized student loans should not be considered financial aid. However, I am not in agreement with this and believe that direct subsidized federal loans offer an excellent piece of the financial puzzle for filling the gap between Cost of Attendance (COA) and Expected Family Contribution (EFC). This is because of the very liberal repayment terms that have been put into place over the last two administrations. The current guidelines say that the undergraduate student only needs to make payments of 10% of their income after deducting for living expenses. This is called income-based repayment. (IBR) Furthermore, after 10 years, any remaining balance is forgiven. The argument that this will result in greater government expense at a time when deficits are out of control and student debt has risen dramatically is really irrelevant to the issue of students taking on debt under the current scenario. If Federal, State and Institutional grants cover the entire gap, more power to you. This is what we hope for as College Financial Planners. But, if there is still a gap after grants, do not fear the Federal Direct Loan. This is a case where the end justifies the means.