Paying for college – The benefit and the burden of student loansSubmitted by Financial Planning Solutions, LLC on November 24th, 2017
I’ve had a few conversations with parents recently about paying for college. Many seem resigned to scraping together as much as they can and then borrowing the rest, or vice versa to preserve their lifestyle. Unfortunately, there is often little thought put toward the future impact of these decisions. Parents tend to make the decision based on what they believe will work right now without considering the long term impacts.
Paying for college starts with deciding how much you, the parents, are going to contribute, how much your child is going to contribute and how much will come from other sources such as scholarships/grants, loans, work or other family members.
Most parents remember what their parents did for them and typically want to carry that through with their own children. For example, if your parents somehow found a way to pay for 100% of your education, you will likely want to provide the same benefit to your own child(ren). However, if your parents made you work to save money for most or all of your college expenses, you may feel that this approach will give your son or daughter a vested interest in their own education.
There is no right or wrong answer here. While paying 100% allows your son or daughter to start their careers without the burden of student loan debt, some students may not appreciate the investment the same way that those who had to contribute to it do. On the other hand, students that graduate with 20 years of loan payments may have to delay or avoid buying a car, house, saving for retirement and other important financial decisions.
For students who graduate into high income careers, having some student loans may be manageable. However, a recent study by Fidelity Investments indicates that student loans have become a major problem for students. Collectively, about 44 million Americans carry student loan debt and owe more than $1.4 trillion.1
With one year at a private university in the Northeast running between $55,000 and $68,000/year, that’s a total of $220,000-272,000 for four years (if they finish in four)! The monthly payment on a $220,000, 20-year student loan at 6.5% is $1,640 or almost $20,000/year.2 Now you can see how borrowing everything for college can be a show-stopper for students who borrow.
We suggest starting at the beginning by carefully considering how much you and your child plan to contribute towards the cost of college. Then carefully review the costs and restrictions of each loan type.
Seem daunting? Give us a call. We’re here to help.
1 Federal Reserve Bank of New York and MarketWatch, 2016 www.marketwatch.com/story/every-second-americans-get-buried-under-another-3055-in-student-loan-debt-2015-06-10.
2 Don’t laugh. Unfortunately we have met at least one bright college graduate who, for various extenuating circumstances, is now carrying over $250,000 of student loan debt at age 26. While many students will not pay full price, there is no reason—with proper planning—for a student to begin their career with this amount of debt. The interest rate on student loan debt varies depending on the type or loan but the interest rate on most unsubsidized loans is in the 6-8% range.
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