Student Loans and Trade School- A Bad Recipe?

An article appeared in the New York Times recently which discussed how many trade schools are making big profits during this time of recession. It seems they are the beneficiaries of several factors. One is the soaring costs of higher education in general. Students who might otherwise attend four year colleges or universities are having some sticker shock with the high prices, which are today at levels that would have been unthinkable twenty years ago and which continue to increase even higher as states cut back on education funding to cut costs. Another factor is that many people in today’s economy have to settle for very low paying jobs, and they see training in trade schools as a way to learn a trade and have at least a moderately decent future.

Fueling all this is the fact that well over 80% of the revenues realized by these for-profit trade schools come from federally guaranteed student loans. Many prospective students for trade schools are told two things that influence their thinking. One is that the school has developed relationships with people in whatever industry is concerned, and that it is common for the school to locate a job for students upon graduation from the trade school. The other thing they are led to believe is that they will earn a salary that is unrealistically high. Of course these discussions are not guarantees, but it is not hard to see how a person who wants to believe the words they hear actually does.

Like tuition at other schools, the cost of trade schools has also gone up substantially, and this naturally helps the for-profit trade schools as well. It now costs over $40,000 to complete a two year course to become an electronics technician, for example. A student who uses federal student loans to finance that level of tuition will end up with payments of over $400 per month for a ten year payback period. A salary level that would make payments like that be reasonable would be in the $50,000 per year range. There just aren’t that many jobs with starting salaries for newly trained electronic technicians that pay that much. Obviously if the person has difficulty finding a job at all or has to settle for a salary of much less, like perhaps $25,000-$30,000 for example, his debt load might be too much to handle. If the person lets his student loan debts go into default then big problems await. It is not within the scope of this article to discuss the consequences of defaulting on student loans, but suffice it to say that neither federal nor private student loans can be dismissed in bankruptcy. And student loan companies are notorious for lending too much money for just that reason. They know the borrower cannot escape the debt and will eventually have to pay it off one way or the other. In fact they make more money on loans that default than they do on those that are paid off normally, so it is not too hard to figure out their motivation.

The trade school debt story can get a lot worse. There are quite a few smaller trade schools that operate for a while and suddenly disappear. The students are left holding their student loan debt and no trade skills with which to find gainful employment to pay it off. It is not unusual to see these operations open up somewhere else under a different name and organizational structure.

So if you are considering using student loans to finance training at a trade school, it is best to be wary. At least try to attend one of the larger ones that will be around tomorrow. Some of these are billion dollar per year businesses. The best advice is to borrow as little money using student loans as possible. And stay away from private student loans- the risks with federally backed student loans is large enough.