NEWSLETTER

Written by Jimmy Becker

The ball and chain of student loan debt

Borrowing too much money to pay for college can get you into lifelong financial trouble.

Don’t do it.

I offer some background context and then guidance for both parents and students.

Background
1. The bankruptcy laws make it nearly impossible to discharge any student loan debt. This is why it is so easy to borrow whatever amount you may need. The colleges, lenders, and loan servicers all benefit, and you’re stuck paying for a long time. No other consumer debt is treated this way and you have no escape hatch.

2. The college financial aid office is not an impartial financial advisor. They are looking out for their college’s interests and not yours. They will find a way for students to keep borrowing to remain enrolled at their college, rather than worrying about whether the debt is affordable. Don’t trust them to give you unbiased guidance or to protect your financial interests.

3. The normative college experience is different from the cultural images of small, leafy New England college campuses full of dogs and frisbees. Eighty percent of students attend a state college, nearly half do not graduate within 6 years, and more than half attend part-time and are presumably working while taking classes.

4. There are three types of undergraduate student loans:

  • Federal student loans (i.e., “Stafford” loans) — these loans are made to students and are eligible for income-dependent repayment plans and thus the safest loans to use. However, for most students, there is a limit of ~$7,000 per year so in many cases, it is simply not enough to fund an entire college education.
  • Federal PLUS loans (“Parent Loans to Undergraduate Students”) — these loans are made to parents at a higher cost than Stafford loans. While they are federal loans, they are not eligible for income-dependent repayment.
  • Private student loans — these loans are made to either parents or students by any financial institution (or state agency); they are not federal loans and are not eligible for income-dependent repayment.

Parents:
1. Don’t borrow more than you can comfortably repay within the framework of your current income and living expenses. If you are not certain you can afford to pay off these loans over a 10-year term, don’t borrow the money. Be realistic about what you can afford to repay and don’t risk your retirement or your home. Don’t borrow the money if your plan is to figure it out later.

Separate the question of how you should finance this expense from the question of how much you should borrow, if anything. Just because you can take out a home equity, PLUS, or 401K loan, doesn’t mean you should.

2. Don’t co-sign loans for your children. That’s a clear signal that you’re both over-borrowing. It not only risks the financial security of both of you but it also could create future family conflict around these outstanding debts.

3. Your teenage children will not understand the future obligations to which they commit when taking out student loans. Taking on future debts is too abstract and unfamiliar for teenagers to fully grasp and they will make poor financial decisions if on their own. Yes, teenagers have minds of their own and may not respond well to parental guidance, but we need to protect them from making poor judgments with lifelong consequences. Be the guardrails they need when making these decisions.

Students:
1. You won’t fully grasp the loan commitments you’re making so be extra careful with how you proceed. Convert the loan amount into what the future monthly loan payment (assuming a 10-year term) is going to be. This is how most people buy homes and cars — they focus on the monthly loan payment as much as the total price.

2. You will owe more than you borrowed. Your loans will be accruing interest while you are in school and when you begin repayment that unpaid interest is added on to the loan balance. Factor this into your calculations. (So-called “subsidized” Stafford loans are the exception to this.)

3. Don’t borrow more than the Federal student loan (i.e., “Stafford”) maximum amounts. For most students, this will result in ~$30,000 of debt at graduation. This should be affordable to repay in most circumstances and if not, you will be eligible for an income-dependent repayment plan which will serve as a safety valve for all of this debt. Any more debt than this is risky, unwise, and a signal that you’re getting in too deep.

4. Don’t co-sign loans with your parents (or anyone else). That’s a trap for both of you and another signal that you’re borrowing too much.

5. Don’t assume you’ll graduate in four years — there is a good chance it will take closer to six years to complete your degree, particularly if you’re working. (See my next point.) Factor this into your calculations.

6. Work during your college years. Not only do you need the money but a job will (a) leave you with less idle time to spend money you don’t have, (b) motivate you to graduate as quickly as you can, and (c) prepare you for your post-college working life.

What if you cannot afford the college you had in mind?
Don’t hope that things will work out. That strategy will likely leave you with a lifetime of regret.

Consider these options:

  • Instead of a private college, attend your state university.
  • Instead of your flagship state university campus, attend a state college.
  • Instead of your state college, begin at a community college and take courses whose credits can transfer to a four-year college.
  • Instead of a dorm, live at home.
  • Attend part-time and work full-time.
  • Attend full-time and work part-time.
  • Take a gap year and work to save as much money as you can.

Any of these choices will put you in the mainstream of most American students and families.

The worst outcome is to over-borrow and exit college with an unpayable debt that will remain a ball and chain secured to your ankle. Don’t do it.

Do you need help navigating the college financial aid process? Get in touch.

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PS:  I’ve previously written about the college financial aid process and financing graduate school.