Students have taken on about $1 trillion in debt to attend college and graduate school. Taking on debt should actually be a business decision. Fortunately for many colleges, students fail to understand this.
In business, debt is good when it helps the company make money. This can be evaluated with a return on investment (ROI) calculation. In short, if the cost of the debt is less than the profits generated from the proceeds of the loan, the debt is good. If the ROI is less than the profits the company will earn by using the money from the loan, the debt is bad.
College education also has an ROI. Payscale.com has used salary information to find the ROI for more than 1,500 schools. These values can be compared with the cost of student loan debt.
Interest rates on student loans were recently set at 3.9 percent for undergraduates this fall, 5.4 percent for graduate students and 6.4 percent for parents funding their children's education through loans.
For now, most schools are worth the price of the loans, since 80 percent of colleges have an average ROI greater than 3.9 percent.
Only 24 percent of colleges offer an ROI greater than the 6.4 percent interest rate parents will pay on new loans.
In the future, rates on student loans can increase to as much as 8.25 percent for undergraduates, 9.5 percent for graduate students and 10.5 percent for parents.
Higher rates will make college loans unprofitable for most students. Only seven colleges out of 1,511 have an ROI greater than 9.5 percent. Only 41 colleges show ROIs topping 8.25 percent.
Student loans are not sound investments in all too many cases. If interest rates rise, there will be a crisis as graduates find themselves struggling to pay off a bad investment.
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