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Avoiding Pitfalls of Student Loan Debt

| May 07, 2018
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How We are Crushing Our Kids with Student Loans (and how to avoid doing so to YOUR kids!)

“Don’t worry about it – There is Plenty of Financial Aid Available”

That’s about the extent of financial advice regarding college that I heard from our kid’s guidance counselors as they prepared to select a college. 

As these well meaning but misdirected counselors tried to match our kids with schools, cost did not ever appear to be a consideration.  My kids were being directed to “reach” schools that were a “perfect match” for them – but would cost over $200,000 for a four year degree.  And there would be no financial aid forthcoming.  Since then costs have only increased, with 4 years at some schools running upwards of $280,000. 

This is a cruel hoax being pulled on our youth – by the colleges, but facilitated by our high school guidance counselors, and enabled by parents who play along with the charade.  The kids are directed toward expensive schools, and go for tours, where they fall in love with the beautiful facilities, are infatuated with pictures of an idyllic campus filled with beautiful smiling young people.  Money is often not discussed until after their “heart is set” on a particular school.  

This is not solely the parents fault, for it is only after applying and being accepted to the college that the parents and student find out what this education will actually cost.  Students may receive substantial merit aid from certain schools, but there is no way of knowing this until after application and acceptance.  As students receive their financial aid awards, the crushing reality hits that the oft promised financial aid for most middle and upper middle class students simply does not exist.  What other product seller is permitted to keep the true cost of their product a secret until after the sale has been made?  Schools and the government should make financial aid and actual cost available BEFORE application and acceptance.

Unfortunately by the time the financial impact is fully disclosed, many parents have also been hooked.  They have become convinced that this school is the only one where their child will be truly happy, where they will thrive and ultimately graduate to the adulation of throngs of alumni in the “real world” who can’t wait to hire them into high paying positions. 

Many parents at this point are faced with a difficult choice.  Either take on a crushing financial burden that may gut their retirement, impose that burden on their children in the form of student debt, or ruthlessly squash the child’s dreams in favor of a less expensive education.  Who would deny their child this dream over something as trivial as money, right?

But the money is NOT trivial.  Student loans are squashing our young people’s futures, and college tuition bills are threatening retirement income security for millions of their parents.  And what is truly disheartening is that the solution is so simple.  Just move the financial discussion to the beginning of the process, and mandate transparency in college tuition pricing.

What Parents Can Do.

The single most important step parents can take to protect both their own financial situation and their kids future financial health is to make sure that your students understand the family’s financial limits.  They should also understand, from middle school age on - that their own efforts in the classroom may be a determining factor in where they will be able to go to school.  Kids need to understand that debt is not a solution.  Parents – as well as teachers and guidance counselors – should be educating kids on the dangers of student loan debt, and how such debt is crippling the lives of so many young.  This refrain should be repeated early and often by parents and by guidance counselors to drive the point home. 

As kids embark on the college selection journey with a good understanding of the financial limits that face them, it will make it much more difficult for the schools to “set the hook”.  Ultimately however,  regardless of how well we inform them, high school students really can’t appreciate the consequences of debt, so it falls on parents to enforce limits.

Parents need to learn to become more comfortable discussing finances with their kids.  If you do not understand your finances well enough to have that discussion – then hire someone to help before you plunge ahead into the unknown.  Financial Pathways is always here to help with tools and resources and experience to make the college funding process easily understandable for all involved.      

Can I afford this school:

Here is a simple logical test to see if you and your child can afford a particular college.  If the answer to any question is NO or I DON”T KNOW then this school may not be affordable. 

Parents: 

  • Is my retirement plan soundly on track?
  • Am I able to find resources to pay for the school without resorting to private student loans?
  • Will I be able to continue saving the money required by my retirement plan even while paying college expenses?
  • If parents will need to borrow, can loans be paid back in full before retirement (assuming a normal and reasonable retirement date!) – or will projected retirement income be sufficient to service the debt? 
  • After paying for four years of college, will my retirement plan STILL be on track? 
  • If relying on loans and or cash flow, is my job position and income stable and reliable until college is complete and loans are repaid?

 Students:

  • Can may parents and I afford this school without taking on any private student loans?
  • Based on the average starting salary in my field, will my loans at graduation amount to no more than one year’s salary? 
  • Will I require post graduate schooling, and have I considered how those studies will be paid for?   If debt will be required, have I considered that debt in the above calculation? 
  • Does my financial aid package require me to maintain a certain GPA?  Am I prepared to change schools if necessary if I can’t maintain the required GPA?

My List of College Planning Never Dos:

NEVER cosign private student loans (parents) that you are not willing and able to take on yourself.

NEVER borrow more than one times your expected starting salary (students)

NEVER enroll in a school until you have figured out EXACTLY where every dollar will come from and the exact amount of debt you will owe when your studies are complete

NEVER rely on special government debt repayment programs (public service loan forgiveness, etc.) which may be rescinded at any time.  

NEVER enroll in a school until you know where every dollar is going to come from, and exactly how much debt you will owe when education is complete. 

NEVER allow yourself to fall in love with a school until you know how the true price and how you will pay for it. 

NEVER fall victim to the belief that there is the only one path to success.  There are always alternatives available.   

 

 

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