Think Twice About Using Student Loans For Trade Schools

Think Twice About Using Student Loans For Trade Schools

A recent New York Times article discussed how trade schools have become somewhat unexpected beneficiaries of the current recession. They have been realizing higher profits and seeing more students, or rather customers, enter the doors. There are several reasons for this phenomenon.

The first is no doubt sticker shock that people are having when they look at the cost of attending a four year college or university. With

yearly costs of $20,000 even at state sponsored schools being the average, it is an expensive proposition these days to finance a four year degree. On top of that many states are raising tuition costs even higher as a way to cut spending. There has been a big shift going on for a number of years to put the burden of financing higher education on individuals rather than the state. And trade schools have also been able to raise costs along with traditional four your schools. People see the earnings statistics showing that people who have certain levels of education earn much higher salaries than others who haven’t continued on with school, and basically they conclude that they too need to further their education. Supply and demand comes into play just about everywhere, and certainly the cost of education is not an exception.

In addition, many people look to the future and see that their peers are having to settle for low paying jobs. Even people who do have a college degree are basically under-employed and must settle for a lot less salary than expected. With so many people out of work, they are happy to at least have something.

Fueling all this is a steady supply of money coming from or being guaranteed by the federal government. Trade schools are now having well over 80% of their revenues financed by federal student loans. So with higher demand for their services, higher prices, and a steady supply of government funds available, it is no wonder that the profits of trade schools are soaring.

Problems occur when students are misled about their prospects for future employment and have unrealistic ideas about how much they are likely to earn, even if they do find a job in the field they trained for. On top of that student loan companies have been notorious for lending too much money. They do this because they know that student loans must be paid back eventually and cannot be dismissed in bankruptcy like credit card debt or even gambling debt. Some of this should stop now that the Direct Student Loan program, which was attached to the recently passed health care bill, is cutting out student loan companies from the federal student loan process.

The profits of trade schools which are mostly funded by federal student loans are so lucrative that the trade schools have begun making private students loans with their own money to students. They do this because there is a requirement with federal student loans that at least 10% of the cost of going to school must be paid by the student or some other private loan source. So the trade schools step in and loan the money to cover this amount, even though they know much of this debt will be written off. They are making so much money on the rest of the transaction that the loss is worth it.

So people need to be careful about borrowing large amounts of money to fund trade school training. It would be best to avoid student loans altogether, but people should at least avoid private student loans as opposed to federal loans. The latter have many more protections for the consumer and also have much lower interest rates.