Why Co-signing a Loan is the Best Way to Help Your Kids Borrow for College

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I know, you love your child and want the best college for them.  They worked so hard but are a little – or a lot – short of affording their dream school.  Don’t fall into the parent trap of borrowing heavily for college at the expense of your retirement.  You can help them without hurting yourself.  Here’s how to find the middle ground.

Start by framing the discussion like this: college loans should be the last resort, not the first option.  First, look to savings to reduce future debt.  Even if you start late in high school, it’s ok because bills will continue to arrive four or more years down the road. Saving a dollar today beats borrowing one tomorrow. Here’s an article on college affordability and a podcast.

Next, look for free money: gifts from relatives, grants and scholarships that do not have to be repaid.  Here’s an overview of need vs. merit based aid, and a drill-down on grants.

Finally, determine if you or the student can contribute earnings while the student is in-school racking up those bills.   When savings plus free money plus current income exceeds the cost, no loans are necessary.   Be sure to account for all four (or more) years the student will be a college student, if there is a gap between expected cost and available resources, then it’s time to consider loans.  For most students, the Federal Loan program is by far the best option when you consider the interest rate and repayment terms.  One problem: the amount that can be borrowed is capped.

Let’s assume that the student takes a government loan but a gap still remains between the cost of college and the sources of money. Now all eyes turn to you (or perhaps grandparents or other relatives) for help.

The BEST ADVICE:

  • Co-sign a loan and make sure it has a co-signer release. Many private loans now have a feature to permit you to be dropped from the loan once your child establishes their own good credit.   With this type of college borrowing, you effectively lend your established credit profile to your child so they can be approved for a loan at a time they would not qualify on their own.   Once a good repayment record on the loan is established, the student should contact the loan provider to release you, the co-signer, from future obligations to pay.  Co-signer release is a terrific feature because it permits you to help your child borrow when they need your help. And for you to be released from that obligation when they get on their financial feet.

If there’s no way around it and you have to be the designated borrower, you should:

  1. Shop around. Many parents with good credit can receive substantially lower interest rates on private loans from banks, finance companies or state agencies than the Federal PLUS program.
  2. Be VERY wary of the Federal PLUS Loan. Parents with marginal or bad credit may be eligible for a Federal PLUS loan, but be wary.  The credit analysis used to approve a PLUS loan is minimal and the amount that can be borrowed is very high (the full cost of attendance).  Sounds good?  It’s not.  It is a toxic stew. The government regularly makes large loans to people who will be unable to make the payments.  This is a ticking time bomb waiting to explode.   Also, some parents falsely surmise that they will transfer their PLUS loan to the student in the future.  That is not possible under the terms of the PLUS loan. It is a Parent loan, not a student loan.
  3. NOT borrow from your retirement accounts to pay for your child’s college. It sure sounds good to “repay yourself” the interest that accrues on a loan rather than paying a bank, but it is a terrible idea. Why?  Every dollar you withdraw from your retirement account is one less that can earn interest, dividends or appreciate to grow your retirement savings – and at a time when your retirement is fast approaching.  Just as young families are instructed to start saving early to benefit from compounding, older savers should avoid touching the nest egg because you (we) are running out of time to grow the account. This is no time to stretch.

If you’re a data hound and seek some data about parent (and grandparent) borrowing, check out the Consumer Finance Protection Bureau’s recently released “Snapshot of Older Consumers and Student Loan Debt.”

Like many data analysis, this one can be used to support both sides of an argument.   Here, (a) older (age 60+) borrowers are under stress and (b) older borrowers are doing ok.     The CFPB report compares the 10 year period 2005-2015.  The data in parenthesis is 2005 data as cited in the report:

Older borrowers are under stress:

  • Consumers age 60+ is fastest growing segment of the student loan market
    • They owe $66.7 billion
    • There are 2.8 million older borrowers, (up from 700,000)
    • They owe on average $23,500, (up from $12,100)
  • Delinquencies are up from 7.4% (2005) to 12.5% (2015)
    • 37% of borrowers over 64 are in default
    • 40,000 have Social Security benefits offset (8,700 in 2005)

Older borrowers are doing ok:

  • 73% is borrowed for children or grandchildren – indicating a choice to help rather than being burdened by their own debt.
  • Fewer than 31% of older borrowers owed federal loans (867,000 of 2.8 million)
    • Fewer than 7.5% held PLUS Loans (210,000 holders)
  • Of 2.8 million borrowers, only 1,100 lodged loan complaints with the CFPB

What does this all mean?

To me, it’s clear.

  1. Parents should establish a college savings program for their family that is appropriate for their financial situation.
  2. Students should seek financial aid by filing the required forms.
  3. Parents and students should realistically assess how much current income each can contribute to defray costs while the student is in school.
  4. Students should be primarily responsible for taking loans for college. The federal loan program is the best solution for most of them.
  5. If parents are enlisted to help their students with loans, they should contribute by co-signing a loan with a co-signer release.
  6. If parents need to be the sole obligor to borrower for their child’s education, they should shop around, be wary of the federal PLUS program and not borrow from their retirement account.

I can’t help but think of the airline oxygen mask analogy.   There is a reason we’re instructed to put on our oxygen mask before taking care of a child.   Incapacitated parents are of no help to kids.  The same is true for parent borrowing for college.  If you feel compelled to help borrower for a child or grandchild’s education, be sure not to imperil your future well-being.  Co-signing a loan helps the next generation achieve their dream of a college education without imperiling your dream of comfortable twilight years.

How financial literacy helps with college affordability

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There’s no doubt that college is expensive.  Just ask any parent helping their son or daughter enroll this fall, or even file the FAFSA in preparation for next year.  College affordability is at the heart of the issue, but real potential solutions to the problem can be swept away under the daily sound bytes generated during this aggressive political season.  But politics aside, there is no easy fix for college affordability regardless of voter preference, leaving families to decide on their own how to navigate.  Let’s consider how financial literacy helps manage decisions about college affordability.

“It’s cheaper to save than to borrow”: Parents that recently started a family, and even more recently paid off their student loans are very debt conscious, perhaps spurring the trend of greater college savings.  The “How America Saves for College 2016” report from Sallie Mae shows that a full 57% of families are now saving for college, a 9% swing in just the past year.  screen-shot-2016-10-05-at-9-54-01-amIn particular, it’s millennial parents taking the lead on goal setting and developing a plan to pay for college, all hallmarks of financial literacy teachings.  It’s inferred from these findings that new parents recognize the importance of education, but are wary of student loans.  While Washington needs to work out the student loan mess, families are taking control of their savings plans to make a smarter and more affordable investment in higher education.

Using college financial calculators: It’s easier now than ever to make and compare estimates on college costs, student loan repayment and savings, helping families look at the big picture first.  Before zeroing in on a college choice, it’s wise to take a look at a wide variety of options for perspective.  Consider questions like potential financial aid eligibility versus the sticker price of select schools, or if the lowest priced option is really the best fit.  These questions are simplified with use of financial calculators as reasonable comparisons are grounded in logic, ensuring informed decisions on college choice.

Power of compound interest: Long term savers know one big secret. Over time their money can grow with the power of compound interest.  Financial literacy helps families harness the power of compound interest through simple knowledge, like demonstrated with the “Rule of 70”, to show how money can double over time.  While financial calculators help with the details, the impetus behind saving begins with the motivation to start early, rather than later, to make college more affordable.

Identify college value: Know thyself! If financial literacy can teach us one thing, it’s that everyone needs to make their own choices based on their own needs.  Financial literacy helps with perspective on this issue, recognizing that college value really depends on individual factors managed on the personal level.  When weighing the many variables, from majors, school reputation, and internships and compare them to facts like costs, student loan debt and out-of-pocket expenses a pattern is revealed.  Some colleges will be too expensive while others may be a bargain relative to the needs of the student.  Using practical teachings from financial literacy promotes sound decisioning through the process to make the college experience an affordable one.

Three Simple Ideas to Start Fixing the Student Loan Mess

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I’m back from a few days in Washington, DC.   Despite working on Capitol Hill for two years, I’m still struck by the disconnect that seems to exist between our real world and their political world.   These ecosystems need to collide if we’re going to seriously begin addressing the real world student loan debt crisis.  Here are three simple ideas that would help borrowers immediately and could be the basis for a long-term solution to the spiraling college debt problem:

  • Stop categorizing federal loans as “aid” on Financial Aid Award Letters
  • Stop charging students and parents origination fees to obtain federal loans
  • Start requiring the Direct Loan Program to report Annual Percentage Rate (APR) calculations

We know the statistics: there is $1.3 trillion of student loan debt outstanding. We’ve heard the sound bites: college loans hamstring graduates who have taken on piles of debt and are underemployed.  So what’s the answer? Previously I’ve offered my thoughts about college affordability and ways for students to avoid excessive debt. However, there are some factors that are simply out of their control and need to be fixed in Washington. And soon.

In the political world, current efforts are largely focused on relieving over-leveraged borrowers of repayment stress with loan forgiveness programs and income-based repayment plans. Great, but these programs address the problem after it has occurred and leave the root causes untouched.   We need to fix the problem at the source. In this case, before a loan is made.

Transparency and disclosure are all the rage – and rightfully so. But, the federal government comes up woefully short in providing adequate disclosure in two critical areas for the Direct Loan Program:

  • Marketing loans via colleges
  • The total cost to borrowers

Did you know that the federal government:

  1. Permits colleges to categorize federal student loans as “aid” on Financial Aid Award Letters.
  2. Charges borrowers fees but does not disclose an Annual Percentage Rate (APR) for their loan?

In effect, the largest student loan lender — with over a 90% market share — permits itself to market student loans as financial aid through colleges and universities without disclosing the APR. I bet the Consumer Financial Protection Bureau would have a field day with a private lender engaged in these business practices.

Loans as “Aid”

Remember the old story of the wolf in sheep’s clothing? I do whenever I think about a high school senior first encountering a student loan “awarded” via the financial aid process.   Or worse, a parent relieved that their child’s dream college is within reach because they’ve been “awarded” a PLUS loan. A PLUS loan is packaged as “aid” but it comes with big up-front fees and encourages parents to borrow up to the full cost of attendance as long as they don’t have adverse credit — a very low level of scrutiny. Intentional or not, the disingenuous miscategorization of loans as aid no doubt confuses borrowers and leads to some very bad decisions regarding college affordability.

APR not required for a lender with a 91% market share 

According to the College Board, for Academic Year 2013-14, approximately $113 billion of student loans were made. Approximately $9.7 billion of these loans were made by non-federal lenders, mostly banks, credit unions, finance companies and some state based entities.   Few, if any, charge fees to originate the loans, and all are carefully watched to ensure consumers are treated fairly and receive proper disclosures including APR calculations.

Then we have the other lender, the federal government, which made more than $103 billion in student loans.   This monopolistic market share resulted from a long political struggle to replace private lenders participating in the government’s guaranteed student loan program with a nationalized student loan program under the auspices of the Department of Education.

No matter your opinion of the Direct Loan Program, can anyone make an argument to justify:

  1. Why government charges fees to obtain loans when private lenders do not?
  2. Why the Department of Education is not required to disclose an APR?

The Good News – Thanks to the DoE

Kudos to the Department of Education for recognizing the first problem addressed here – student loans nicely wrapped in the sheep’s clothing of a Financial Aid Award Letter.   Beginning in Academic Year 2013-14, the DoE introduced its Federal Aid Shopping Sheet, which asks colleges to CLEARLY show the:

  • Cost of attending the college
  • Amount of grants and scholarships awarded to the student
  • Net Price that the family will pay.

The standardized form then delineates what options the family has to pay those net costs:

  • Work options
  • Federal loan options
  • Other options including non-federal loans

Thousands of colleges have agreed to use the Federal Aid Shopping Sheet but thousands do not. Some likely add to the confusion by providing students with both the institution’s Financial Aid Award Letter and the Federal Aid Shopping Sheet.

Here’s a federal regulation I would support: require all Title IV eligible colleges to use the same form of a Financial Aid Award Letter with simple and clear disclosures so families can easily compare the cost, aid packages and options for filling the gap.   Don’t re-invent the wheel: the Shopping Sheet seems to fit the bill very nicely.

A Final Thought

To end where I started: our political leaders, no matter how well intentioned, seem stuck on a very unproductive treadmill of churning out sound bites about the student loan mess.   They’re spending too much political capital addressing the symptoms of the problem rather than actually fixing it at the root.  It’s time to replace political sound bites with real world actions to help families avoid excessive student debt.  My suggestions:

  1. Require all Title IV eligible schools to use the Federal Student Aid Shopping Sheet
  2. Stop charging students and parents fees to obtain federal loans – the private student lenders do not charge fees
  3. Provide APRs to federal borrowers

What do you think?

 

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John Hupalo is the Founder of Invite Education and co-author of the recently released book: Plan and Finance Your Family’s College Dreams: A Parent’s Step-by-Step Guide from Pre-K to Senior Year

What you need to know about the 2016-2017 Parent Plus Loan

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Summer is student lending season, as many are preparing to handle bill payment leading up to the new fall semester.  This can be a stressful time for parents managing an outstanding balance for college, especially if it’s a larger bill than hoped for.

July Parent Plus
Few more weeks, then back to school!

Even after scholarships and financial aid are made available, it’s not uncommon for families to rely on a Parent Plus loan to supplement the remainder of the bill.  Here are a few key things to consider when applying.

Interest Rate: For the 2016-2017 year, Parent Plus carries a 6.31%.  This is actually a lower rate when compared to prior years in this federal program.  It’s also a fixed rate loan meaning that the rate will not go up or down.  There has been ongoing discussion about the pros and cons of fixed rate loans given the very low interest rate environment of the past several years.  While locking in a fixed rate provides the security of a very predictable repayment process, if the fixed rate is rather high, it also guarantees the interest costs during repayment. It’s a matter of personal preference, but Parent Plus is only using a fixed rate.

Origination Fee: 4.276% This is an area of concern as a 4.276% origination fee seems pretty high for most consumers, especially when compared to other financial products. (Imagine if a mortgage had a similar fee…) The fee is taken out of the gross loan amount, actually reducing the loan disbursement to the school.  So if you apply for a $10,000 disbursement in the Fall semester, $427.60 is deducted from the amount, leaving $9,572.40 to pay the account.

Credit Criteria: The only requirement is that the parent borrower not have “adverse credit history.” This is defined as not having any 90+ day delinquencies on more than $2,085 in debt and not having any loan defaults, bankruptcy discharges, foreclosures, repossessions, tax liens, wage garnishments or had a federal student loan write-off during the past five years.  This allows for many to gain approval for the Parent Plus loan, as the application approval does not depend on the borrowers actual credit score or debt-to-income ratio.

Who is the lender? The lender is the Department of Education through the Direct Loans Program.  This is a government based student loan program.

What happens if denied?   When a parent is denied for Parent Plus, the student becomes eligible for an increase in Direct Unsubsidized Loans in the amount of $4,000 for freshman and sophomores and $5,000 for juniors and seniors.  Immediately inform the office of financial aid of the circumstances to coordinate the increased direct loan in the student’s name.  This has been an especially helpful way for some students to gain additional funding to cover a small balance when necessary.

More Parent Plus Tips:

Run a loan repayment calculation to estimate costs: It’s always a good idea to be aware of of future loan payments to make sure they fit in the budget. For example a $10,000 Parent Plus loan at 6.31% would require monthly payments $112 and cost about $3,509 in interest. If your a parent of a new freshman, take those figures and project them over the next 4 years.  You can quickly estimate about $40,000 in total loan disbursements, about $450 per month in payments and about $14,000 in total interest over total repayment, and that’s if the interest rate stays at 6.31%.  Remember to always look at the big picture of debt and consider what’s needed for the whole education, not just one year.

Increase the Parent Plus loan amount to compensate for origination fee: As noted earlier, the origination fee is deducted from the gross loan amount, reducing the actual disbursement to the school.  If using Parent Plus, make sure to increase the loan amount so that it can still cover the bill even after the fee is removed.  This avoids an end of semester problem of having an unpaid balance that everyone thought would be covered by the Plus Loan.  Some families end up scrambling for an extra $500 in cash just to pay that bill and get cleared for next semesters registration.  Instead, make it easy and apply for a larger loan.  If the school receives more loan money than needed, they can send the excess in the form of a refund check to the parent, and they can then make a payment to Direct Loans to lower the loan balance.

Compare to private loans or home equity: You have options.  Private loans are provided by banks and financial institutions and may offer an appealing program for some families.  They do have more stringent credit standards using the student as a primary borrower with a parent as a cosigner to establish approval. Some families prefer the private loan because it allows the parent the opportunity to utilize a cosigner release from the application once the student borrower makes a certain number of on-time payments after graduation. Not all lenders offer cosigner release, so pay close attention and compare during your application process. This differs from Parent Plus, that remains only in the parent name until repayment is achieved.  Home equity is another option for some families, especially where low rates can be made available.  This should be handled with care, as putting up home equity comes with it’s own unique risks as well.  Additionally, the debt would only remain with the original parent borrower, there would be no easy way to transfer the total debt back to the student like in a private loan with cosigner release.

 

 

 

 

 

3 Tips for Smart Student Borrowing

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When it comes to paying for college, the process can seem overwhelming. There are so many financing options out there and you might be feeling lost about how to choose the correct ones for your family. The key is to equip yourself with information so that you can have knowledge you need to make an informed decision.

One of the most common ways to pay for college is student loans. There are two primary sources of student loan funding: federal loans and private credit loans. The two programs differ in fundamental ways: the money for federal loans comes from the Department of Education whereas private loans come from places like banks, credit unions and other financial institutions.  Federal loans are much more standardized providing the same rates and fees to all borrowers. Most students tend to take advantage of federal loans before moving onto private loans if they still need extra money.

For some families, private loans are a good option because offer competitive rates and a cosigner option to help student-borrowers gain approval. Other families will choose federal loans, which can be easier to get and offer flexible repayment options, like income-based repayment.  Whichever type of loan you choose (and some families take out both private and federal loans), there are a few ways to borrow smart.

Don’t borrow more than you need. Many families get caught up in the availability of what may seem like free money and end up taking out a bigger loan than they need, just because the option is there. But a loan is not free money, even though it is labeled as “financial aid” on a student’s award letter. Every cent you borrow has to be paid back in the future, and often with interest, which can sometimes be up to a few thousand dollars on top of the loan principal. Don’t take out too much money from a student loan; it should be used for education costs only. Take a careful look at actual expenses and remember that interest will accrue on the total balance. You can use a Student Loan Payment Amount Estimator to get an idea of what your payments might look like once you’ve graduated. Be smart about the debt you’re taking on. Only borrow the amount you actually need, otherwise you could be quite literally paying for your mistake down the line.

Review federal loans first. They tend to have the most favorable terms and flexible repayment options, and you generally don’t need a co-signer. To receive federal loans, families must submit the FAFSA form, with the 2016 – 2017 version available beginning October 1. Even if you don’t think your family will qualify for need-based aid, you should submit the FAFSA anyway. Every family that files one, regardless of family income level, is eligible for some type of federal student loan. You never know what you might be eligible for or how your family’s needs will change before the fall. There are different types of Federal Direct Student Loans, including Direct Subsidized Loans, Direct Unsubsidized Loans, and Federal Direct PLUS, among others. We will cover the specific differences between these loans in an upcoming post, but all of them are managed by the federal government. Some can be covered by debt forgiveness programs, like the Public Service Loan Forgiveness Program, but when you’re taking out a loan it’s best practice to assume that you will be paying back the entirety of the balance.

If you need more money, look into private loans. Federal loans are limited year-to-year, and if facing a tuition shortfall, you may need to look into private education loans. One of the best known private loan lenders is the company Sallie Mae, but private loans also come from banks, credit unions, and other lenders. In most cases you’ll need a co-signer. All private loans differ, but their interest rates may be fixed or variable and some require a minimum payment while still enrolled in school. You can learn more about the differences between the two types of loans at Studentaid.ed.gov.

When taking out loans, make sure you understand the terms of the loan. How will interest be charged? What is the grace period on the loan, that is, how much time will pass between graduation and when payments are due? Who will be the co-signer on the loan, if you need one? There are many factors to consider and like most aspects of the college process, the answers will differ among families. But with some research, you’ll feel more equipped to make the right choices for you. Good student loan borrowing is about being smart, making the right decisions, and doing what’s best for you and your family.

John’s Jots #4: Defining College Affordability

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Guess what – there isn’t a standard definition of an affordable college.   Google “Affordable Colleges” or “Is College Affordable for Me?” and you get a hodgepodge. No wonder families are overwhelmed when trying to figure out how they know if they can afford college or if they’re saving enough. How can families assess the financial fit of a college when the “experts” can’t agree on what it means for a college to be affordable?

I’d like to solve this problem for families.  I’ll tell you what I think — let me know if you agree or not — with the hope that we can start to demystify this important question.

First, despite the current good-faith efforts by many, my google search for “Affordable Colleges” amplified the problem.  The returns included:

  • The 100 most affordable colleges — after community colleges and others were eliminated from the sample.  But those that were eliminated are likely very affordable options.
  • Affordable colleges ranked by ROI — a measure that many champion as “the answer” which may be true if you can accurately predict a student’s future income and the total cost of college before your student enters.  Although I like ROI calculations and it’s a financial term that many use because it sounds sophisticated, its fundamental  value is as a backward looking comparative tool.  Like all such measures, the output  can only be as accurate as the inputs, which in the case of predicting college costs and post-graduate wages are highly variable, at best.
  • Affordable colleges ranked by annual tuition and expected income — the winners were the U.S. Naval Academy and West Point, which don’t charge tuition but require a highly selective appointment.
  • Advice to attend a community college for two years, then attend a state school, live at home, buy used textbooks, work at a paying job during the summer and avoid debt.

All good — but not particularly specific to guide a family. So I tried to narrow the search by asking “Is College Affordable for Me?”  I hoped that would give me more personal financial advice.  Here’s what I found:

  • A U.S. Department of Education Blog, which is mostly cheerleading about the  Administration’s efforts. The efforts, like most high-level policies are well intended, but don’t specifically help me unless I like to eat tax credits.
  • Many articles arguing to make some colleges free — likely driven by the election sound bites to make community colleges free.  A interesting political idea but somebody’s still going to have to pay for the college experience.  In this case, taxpayers.
  • A link to The Lumina Foundation’s excellent study arguing that a college is affordable if the total cost of a bachelor’s degree does not exceed the total of 10% of a family’s discretionary income over 5 years plus the amount a student can earn working 10 hours per week during the school year.  It’s mostly applicable to lower income families but is a useful guide.

Kudos to Lumina for more good work and an attempt to address the issue.   But what’s the answer for most families?  How does a family know if a college is affordable?

There are 5 factors that determine if a college is affordable without taking on debt:

  1. The college selected. Families have  COMPLETE control over this important part of the equation.   There are over 7,000 colleges and  universities — one will certainly be a good academic, social and financial fit.  Picking a college based on cost is one sure fire way of ensuring that it is affordable.  The problem: many, if not all, students and parents have a pre-conceived notion (their dream, which I completely get) of the type or specific college they seek, so many choose higher cost alternatives than they may need.  Knowing the student’s longer-term goal is helpful. Do they want/need a job after college or is grad school an immediate option?
  2. Family Income.   Financial aid is mostly driven by family income – not assets.  Need-based aid is readily available at most colleges — and some of the most selective colleges provide 100% aid for low income, high achieving students.
  3. Savings. How much will likely be saved by the start of freshman year?  Very few families will save 100% but establishing a savings plan early  — and contributing routinely — will make a big difference.
  4. Getting “Free Money.”   Grants and scholarships will help defray college costs.  In addition to federal, state and third-party grants and scholarships, many colleges offer generous Merit Aid to students who help the college fill-out the entering class.  The college may be seeking an actor or thespian or woman/man from a particular geographic area and will offer lots of money to them. Other times gifts from relatives and others help students cover college costs.
  5. Current Income.  Will parents and/or students be able to contribute cash while the student is in-school?

If these sources cover the full-cost of college (tuition, fees, room/board, other projected expenses such as travel), the college is affordable.   If there is a gap, the discussion gets more interesting because loans are now necessary — and this is where parents and students get into trouble.

Part of the problem: the federal government allows schools to include loans as “aid” in Financial Aid Award Letter  — including a Parent PLUS loan that is offered for the full amount of attendance with little  regard for whether the parents can actually afford the loan.  So the college indicates that it is affordable — based on packaging a boat load of loans without regard to a family’s capacity to repay them.  Sometimes, schools will also front-end load grants or scholarships that might not be renewed or available after freshman year.   Again, the college may appear to be affordable, but maybe only for freshman year.   It’s mind-boggling but true.  It’s like walking into a car dealership and getting a “no questions asked” loan to buy a Mercedes.   The dealer will no doubt think:  Enjoy the great drive — until we repossess the car because you can’t afford the loan payments (which, by the way, we knew before you drove away).  Don’t let this happen to your family!

In my world, a college is affordable if — after exhausting 1-5 above — the student or parents need a loan to fill the gap and BEFORE taking a loan consider:

  • Student’s post-college life.   Students needs to avoid the trap of simply taking big loans to attend the school of their dream without first UNEMOTIONALLY and REALISTICALLY thinking about what their goals are after college — how much are they likely to earn per month?  Before signing for the first loan, determine how much debt is likely to be necessary over 4 years and see what the monthly payment will be — for 10 or more years after graduation.  There are a few rules of thumb on this: Don’t borrow more than your first year’s starting salary. Don’t borrow more than 15-20% of your projected monthly disposable income.  If the monthly payments do not line up with projected income, that college doesn’t sound affordable to me.
  • Parent’s life style and retirement plans if they co-sign their students or take parent loans.   If parents take on debt to pay for their child’s education, they’re best advised to understand what it will mean to carry that debt for 10 or more years after graduation, which just may happen to coincide with their planned retirement.   Will the college debt extend the number of years they  have to work or substantially reduce the amount of their available retirement savings?   Do they plan to borrow against retirement savings?   If so, that college doesn’t sound affordable to me.

This may all sound simple. Theoretically it is:  choose a college that is affordable and offers a social scene and academic rigor in line with your student’s abilities and interests. We should also consider how the student can make progress from the challenges they face in college.  Ideally they are given the opportunity to learn from failure after giving their best efforts towards something they are passionate about.  Not everything has to be perfect to make for a great learning experience.  The result will be a happy, empowered college graduate who, like fearless Felix Baumgartner, lands on his feet: with a diploma in hand, a well-paying job, and student loans, if necessary, that are manageable.   And parents who have helped their child successfully navigate this process without putting their retirement or life style in jeopardy.

Let me know if you disagree with this train of thought — and why. Together we can help families grapple with this vexing issue.