Student debt - Nancy McKenna ––

Category Archives for Student debt

Why you should avoid Parent Plus loans

You want your child to go to a good college. That is the number 1 item on your list. There’s just one problem.

College is really expensive.

Just how expensive is it?

The average cost for an in-state public school is $9,970 for the 2017–18 school year. If your child decides to go to an out-of-state school, the cost balloons to $25,620.

What about a private college? That comes to $34,740.

That’s scary on its own, but let’s dig a little bit deeper.

On average, parents have saved a mere $18,000 for college.

That’s about half what they need if their kids go to an in-state school.

Around 35 percent of parents haven’t saved anything at all.

Are you getting stressed yet? Well, it gets even worse when you look at the borrowing patterns many families follow.

The Debt Cycle — Step 1: Student Loans

When kids don’t have the money to pay for college, they typically look into student loans. “No big deal,” they think. “I’ll just borrow what I need and pay it back when I get that super-high-paying job as an artist.”

As you can imagine, those payments are hard to make, and it’s just expected to get worse. The default rate is expected to get close to 40 percent by 2023, making it clear that students are taking out way more than they can afford.

But that’s just part of the issue.

Students also can’t borrow all they need.

Most parents don’t realize that the government sets borrowing limits on college students. These limits change depending on the year the student is in.

For the first year, dependent students can’t borrow more than $5,500, and it goes up by a thousand dollars the next two years. It stays at $7,500 for the fourth year and beyond, as well.

There’s a catch, though. That’s the combined borrowing limit for subsidized and unsubsidized loans. During the first year of college, students can only take out $3,500 in subsidized loans, and that goes up by $1,000 the next two years. 

("Subsidized loans" means the government pays the interest while your child is in college.  "Unsubsidized loans" means the interest is added to the principal balance while you are in if you borrow $30k, by the time you graduate you already owe  quite a bit more!).   Guess which path most choose?   Yep, they add the interest to the balance.

That means the rest must be taken out in unsubsidized loans.

Students might end up turning to private loans to fund the rest of their college, but those loans are much more expensive. Plus, they are more difficult to get -and later, refinance.

This is where the second part of the debt cycle comes into play.

The Debt Cycle — Step 2: Enter Mom and Dad

As a parent, you want to save the day. You want to make sure your child goes to college, and you feel guilty or inadequate because you don’t have the money he or she needs.

That’s why you’ve thought about doing what should be unthinkable.

You’re considering taking out a Parent PLUS loan.

These loans are a huge mistake for so many reasons. First, there is the obvious reason that you will be taking on student debt as you get close to retirement. There are horror stories about parents trying to retire while owing six figures in Parent PLUS loans. Even five figures in Parent PLUS loans can prevent you from retiring.

Think of it this way. If you can’t afford the debt today, you cannot afford it when you retire. That means you’ll likely have to keep working to make those minimum payments for the lifetime of the loan. Lots of parents end up taking the loan out for 25 years, so that will put you a long way from retirement. That’s practically a mortgage, and you won’t even get your own degree out of it.

The only other option is to default on the loans, and that is an even bigger problem.

Getting into debt isn’t the only issue with these loans. They are much more expensive than other types of loans, so you will end up owing a lot more than you borrow.

At 7.6 percent interest, the interest rate is quite a bit higher than the 5.05 percent rate for direct subsidized loans. Plus, Parent PLUS loans are unsubsidized, so the interest kicks in right away. That means you will have to pay interest for the entire life of the loan.

The origination fee is also an issue. It’s 4.248 percent for PLUS loans and only 1.062 for direct subsidized loans. That’s a huge difference.

You would think that numbers like this would keep parents away from Parent PLUS loans, but that’s hardly the case. In fact, right now, 3.4 million people have Parent PLUS loans, owing $81.5 billion dollars. Yes, that is billion with a “B.”

The Home Equity Loan — An Even Worse Option

You have to pass a credit check to get a Parent PLUS loan. Those who don’t pass the check often do something that’s even worse.

They take out home equity loans to pay for college.

They basically borrow against their homes to pay for college.

There are a couple of problems with this. First, when you take the equity out of your home, you never know what could happen. If property values decline, you can be in serious trouble.

Plus, if have to relocate, you won’t have the money in your home anymore. You’ll basically just have to pay it off when you sell it, and then you’ll start from scratch somewhere else. That’s not what you want to do this close to retirement.

You also have to consider that the government has eliminated the tax deductions people used to get on home equity loans. That means you’ll end up paying back more now that you would have years ago.

The Solution

Parent PLUS and home equity loans are not the solution to your problem. Instead, you need to think smart when sending your child to college.

Look at other options for college. Send your child to a community college or have your child work at a company that offers tuition reimbursement. Your child can also take a gap year while saving for school.

Those are all excellent options if your child is about to leave for college. If you still have time, sign up for a financial planning workshop to get help saving for college.

Why Are So Many Middle-Class Families Taking Out Student Loans?

Seventy percent of parents in the United States intend to pay their children’s tuition in full, but they are not on track to do it. On average, they can only cover 29 percent of the cost of tuition by the time their kids enter their freshman year of college. How does this happen?

This is a terrible problem for middle-class families. Students from middle-class families typically aren’t eligible for financial aid, so they have to pay out of pocket or take out loans when their parents can’t cover the bill.

While the problem might be serious, it’s fixable. Families can make some changes to boost their college savings and eliminate the need for student loans.

Ask yourself some questions, and then get ready to save for college.

What Are Your Priorities?

If your child isn’t ready for college quite yet, it’s easy to push thoughts of saving money into the background. There are so many things you want, so you decide you’ll start saving next month or next year.

If you’re serious about getting your child through college without debt, you have to make saving a priority starting today. That means you need to skip the yearly vacation and wait to get that new house. There will be plenty of time to spend money on yourself. Right now, you need to focus on saving for college. Your mantra needs to be, “College first. Everything else comes second.”

Cars or College?

A whopping 107 million Americans have car loans right now. To put that in perspective, that’s more than 40 percent of the entire adult population in the country.

These loans aren’t cheap, either. The average cost of a new car loan is $31,099, while people pay an average of $19,589 for used vehicles.

Add in the fact that many middle-income families have multiple auto loans, and it’s easy to see why people have such a hard time saving for college. People are putting hundreds or thousands of dollars into their vehicles every month and then sweating bullets when it comes time for Junior to go to college.

Add in the fact that many middle-income families have two auto loans, and it’s easy to see why people have such a hard time saving for college. People are putting hundreds or thousands of dollars into their vehicles every month and then sweating bullets when it comes time for Junior to go to college.

Fortunately, there is an easy solution. Families should not have more than one auto loan, and if possible, they should own all their vehicles outright. Simply putting off getting a new vehicle can help you send your child to a four-year university without acquiring any debt. That will make things much less stressful for your entire family. Plus, you’ll have a new car to look forward to when your child gets out of college. It’ll be like a graduation present for yourself.

Do You Know How Much You’ll Owe?

Knowing your priorities and limiting your debt will help you prepare for college, but you still have to know how much you’ll owe. Many parents simply do not understand what to expect when their kids go to college, so they are woefully underprepared. They think they have enough money saved, when in reality, they aren’t even close.

A survey conducted by Fidelity Investments found that 45 percent of parents don’t know how much they should put away for college each month. They are confused about the future cost of college, the impact of saving on financial aid, and the basic fundamentals of college savings plans.

If you aren’t 100 percent sure how much you should save for college, you need to enroll in a workshop. Virtual workshops are an easy way to evaluate where you are and where you need to be. Once you know how much money you’ll need, you can develop a blueprint to reach your goals. Then, you will be ready when your child enters the dorm freshman year.

Is Your Child’s College of Choice the Right Choice?

Kids don’t really understand money. Because of that, they are prone to falling in love with schools, regardless of the cost. Unfortunately, many parents allow their kids to attend whatever school they want, even if it doesn’t make financial sense.

While your child should certainly have a say in the matter, don’t let your kid go to a university just because he or she falls in love with it. You need to be practical, so you can avoid falling into debt.

That means you need to consider the school’s location. Your child might want to go out an out-of-state school, but that can cost you thousands of dollars more in tuition each year. That’s an easy way to get into debt.

There are a couple of exceptions to this rule. First, some schools have a neighboring states’ reciprocity agreement. Such an agreement means your child can attend the out-of-state school for in-state costs. These agreements are rare, though, so research them in your area before allowing your child to even tour out-of-state schools. There is no reason for your child to get his or her hopes up if attending that school isn’t going to be possible.

Second, sometimes, going to an out-of-state school located in the South or the Midwest is cheaper than going to an in-state school in your area. For instance, schools on the coasts are extremely expensive, so you might save money by going out of state.

Does the School Match the Degree?

Don’t allow your child to attend a school that doesn’t match the degree. For instance, your child doesn’t need to go to NYU to become a teacher. He or she would assume unnecessary debt for the teaching degree. It would be hard to pay off that debt since teachers don’t make a ton of money.

To put it simply, don’t overpay for a degree. If your child is going to be a social worker or a teacher, a degree from Harvard isn’t necessary. He or she can go to a state school and get the necessary degree.

If you have to borrow for freshman year…

If you have to borrow for freshman year of college - won't you have to borrow for all four years?

This just isn't a good idea.  There are lower cost alternatives, and freshman year is the best time to try one of these alternatives.

Community College

Of course - community college is the best known solution.   Heck, many kids aren't ready emotionally to go away to college at age 18 anyway.  It sounds exciting - but today's kids are used to living "a certain lifestyle" - and sharing a bedroom is not part of that lifestyle!

And, how many of us know kids who have gone off to college only to come back home for one reason or another.   If they had borrowed money for the semester, it really stinks.

Why not skip the dance, and just have your child stay at home and go to community college freshman year?  

Community colleges are a great way for kids to segue into college.  They can also, perhaps, get their grades up and be better qualified for aid when they go to a 4 year college.  Your child should also be working and saving for the four year school.  (So should you).  

Tuition Rembursement

Did you know that there are many nationally-known companies that have terrific tuition reimbursement programs?  Your child can work at Starbucks, UPS, Fed Ex - and many other companies, and get tuition reimbursement right away.  Check their websites for information.   Your child can live at home and work at one of these well-known companies and begin profiting right away!

Uncle Sam

Does your child have a patriotic bent?  I wouldn't suggest this unless your child wants to go this route, but wow - the tuition benefits are really outstanding.  My son is interested in joining up.  The question is how this will happen.  I want him to go to college, try the ROTC program freshman year to make sure it's for him, then try for a scholarship sophomore year.   He is not as forthcoming as I would like, but I fear he will enlist right out of high school.  

Love Europe?

Did you know that there are hundreds of English-language programs  at universities in Europe that are downright cheap?  Cheaper than many community colleges!  Of course, the student would have to live somewhere, but what a crazy wonderful thing!