Don’t use graduate school to defer your student loans
Dear Pete,
My son graduated from college in May and hasn’t been able to find a job. He’s living at home with me and has roughly $55,000 in student loans, which he’ll have to start making payments on in January. We’ve discussed having him go back to grad school in order to wait out the job market, so he can get a job worthy of his degree. Plus, if he does this he’ll be able to put his loans in deferment, thus relieving the need to pay on those loans for the time being. Do you think this is a good idea?
Beth; Berkeley, California
When I think about all the different challenges different groups of people are going through right now in the face of a global pandemic and America’s deep recession, young adults at the beginning of their careers always find their way to the top of my list. Of course, this doesn’t mean I don’t empathize with all other groups, it just means this particular group has some incredibly ugly challenges which are more easily quantifiable.
Collectively, the group of people who've finished their planned final year of schooling always find themselves at the whims of the jobs market. During periods of low unemployment, they somewhat seamlessly integrate into the workforce, and during periods of time in which jobs are as difficult to find as disinfectant wipes, the recent grads are flooded with regret and too much time on their hands.
When jobs are sparse, it’s very difficult for young people to launch their careers. It’s especially difficult when student loans are part of the equation. Starting your career with a negative net worth, while challenging, has become part of the American experience whether we like it or not. However, doing so in a depressed job market is truly frightening. It forces you to distill your problems down to the most essential level.
Beth, your son, and arguably millions of other recent grads’ primary challenge, isn’t the lack of jobs. I know it feels that way, but when you boil-down his challenges, a lack of income isn’t at the root of his problem – his $55,000 in debt is the problem.
To better understand why, let’s take a look at a hypothetical peer of your son, who also can’t find a job. But for this person, student loans aren’t an issue. She doesn’t have any. Like your son, she’s living at home with her mom, yet she doesn’t have the pressure of student loans forcing her hand. Theoretically, she can wait out the job market, and be no financially worse for the wear.
Your son can’t wait out the job market because he’s $55,000 in the hole , and his obligation to begin making payments begins in January. He has to act. Which is exactly why you’ve both come up with the idea to temporarily dodge his payment obligations by sending him to grad school. But if you send him to grad school, his financial problems will get worse, not better.
Not only will he take on more debt, but his original $55,000 of debt which he’s trying to avoid paying, will continue to accrue interest. His debt will at least double, as will his payment obligations. And the job market? Who knows. Your son’s lack of employment isn’t due to a lack of education. Adding more education won’t solve his problem.
The best option for your son is to find a job, whether it’s in his area of study or not. Frankly, he only needs to earn enough money to pay his student loan obligation, which will likely be an income-based repayment (IBR) and the transportation costs to get him back and forth to work. As the job market stabilizes, he can try to enter his field of study then. If he were to go to grad school, he’d be trying to enter his field of study at a future time, but he’d have a worse financial reality at that time.
Hiding out from the obligation to pay on debt by taking on more debt doesn’t make any sense at all. The sooner he comes to terms with this, the sooner he can commit to paying the loans, with any sort of employment income, in January.
Starting your career with a negative net worth has become part of the American experience.