Are Student Loans Worth it?

As college students shed their caps and gowns in preparation for job hunting, one thing is clear: student loans might not be worth the risk.

The class of 2014 is the most indebted class in the history of the United States, according to the Wall Street Journal, and after a six-month grace period, their first loan-repayment bill will come due just in time for Christmas.

Look out, mom and dad. Your present will likely be in the form of a handmade card. And a permanent houseguest.

(Gideon Tsang) These bright young faces are a mere decade and a half away from crying in their college's financial aid office. Ah, youth.

Student debt is not just a financial burden one takes on in order to get a good education anymore -- it has consequences that reach far into the future.

"About four in 10 U.S. households (37%) headed by an adult younger than 40 currently have some student debt — the highest share on record, with the median outstanding student debt load standing at about $13,000," according to Young Adults, Student Debt, and Economic Well-Being, a recent report put out by Pew Research Center.

Student loan debt holds graduates back

While no one imagined saving for his or her child's college fund while still paying off his or her own student loans from a bachelor's degree, this is a difficult reality for many graduates in the U.S. Additionally, the research indicates that households with no student loan debt had a net worth seven times greater as those with student loan debt.

The average household headed by a young, college-educated adult with student debt was worth approximately $9,000 while similarly educated households without student debt held a value of about $65,000. That means that in savings and tangible assets like home equity, cars without loans, and other items, people with no student debt are doing much better than their indebted peers.

The most shocking number may be that people with little or no college education (and no student loans) have a higher net worth than their degreed peers. In not going to college -- or only completing two years of college -- the average individual under 40 without a bachelor's degree has a net worth of $10,900. That's not hugely better than the $9,000 those with four-year degrees are worth, but it's an improvement that did not require a four-year investment of time.

As a result of the student debt epidemic, Pew reports "among young adult college graduates, those who took out loans to finance their education are less satisfied overall with their personal financial situation than are those who did not borrow money for college."

Why are graduates with student debt less financially satisfied?

Student loan debt only paints part of the picture. Those who took out student loans generally have debt in the form of car payments, mortgages, and credit card debt at twice the rate of households of similar age and education with no student debt, according to Pew. The former have a median debt rate (excluding student debt) of about $140,000, while the latter come in at about $74,000.

Pew's research also shows that on a debt-to-income ratio, households with student debt average debt equivalent to two years' worth income, while those without were only one year's worth income in the hole.

What this also tells us however is that college grads with student loans are also car owners, homeowners, and generally have enough income that they are comfortable buying on credit. What it does not show is if these indebted but educated folks have a clear path to becoming debt-free.

Still, there may be benefits to taking on student loans

Despite this discouraging news, studies continue to show that earning a college degree is still beneficial to one's overall financial future, career attainment, and job satisfaction. Millennial college graduates who are employed are three times more likely than those whose education ends with high school to report their job is a career or a step toward their desired career, the Pew report The Rising Cost of Not Going to College calculates.

Additionally, the income difference between workers with and without a college education is only growing. The typical young-adult household with a bachelor's earns nearly $60,000, while those without earn only around $32,000. Additionally, the unemployment rate for those sans college degree is 12.2% versus those with a two-year or bachelor's degree, the unemployment rates of which are 8.%1 and 3.8%, respectively.

The numbers paint a pretty clear picture of a nation that is making it harder and harder for its working class to rise above its parents' pay grade, and in trying to do so, take on debt that could have otherwise been avoided.  We can all agree that too much debt is a bad bet, but taking on some in order to lower your risk of future unemployment and improve your life circumstances -- student loan debt aside -- is still a smart decision.

How will this affect students' future?

Taking on student debt clearly makes the path to making a degree pay off much longer. You may earn more money because of your degree but you have less of it due to loan payments.

By taking on student loan debt, you are sacrificing your financial well being in the short term for overall long-term fiscal stability. Taking on loans is a gamble, but one that still may be worthwhile in the long run, not only in terms of financial wealth but also professional satisfaction.

How will this affect colleges and universities?

Might students seek out less costly schools (such as online alternatives) or even skip school altogether? And if so, what would that mean to traditional institutions of higher learning? 

In all likelihood, while the higher education system would suffer in the short term, it would find a way to survive. The current system with its skyrocketing tuition costs and subsequent student loan bills at interest rates as high as seven percent is not sustainable and must be fixed. Tuition rates are among the highest in the world and degree completion rates among young Americans are stagnating or falling, according to a 2012 report by the Advisory Committee on Student Financial Assistance written to Congress and the Secretary of Education . 

The burden of paying for a college education now falls mostly upon the students whereas previous generations saw a larger public investment insuring students could attend college through funding such as the GI Bill .  This change in circumstances has not yet changed schools' price points, a fact graduates bemoan when they finally understand what their education truly cost.

Sandy Baum of the Urban Institute writes, "The best way for young people not born to affluent parents to secure their own financial well-being is to go to college — and be savvy about it. They should make wise choices about where to go and what to study, borrow carefully and moderately, and finish their degrees." 

Indeed, there is still a happy medium between taking on $50,000 in loans from Sallie Mae to go to a top-tier school and going to a community college because it's (a) affordable and 9b) close to home. A clever Fool knows when to take on loans to get the most for their money, when to scrimp and save, and when to take a middle path that will allow them to earn a decent education that will take them far in life.