Don't overborrow for college
You'll regret it later in life.
It's the time of the year when high school seniors receive college acceptance and financial aid award letters. This is my opportunity to remind you that borrowing too much money to pay for college can get you into lifelong financial trouble.
Easy for me to say but, don’t do it. This simple command is true for both parents and students. At the risk of sounding like a puritanical, out-of-touch, curmudgeonly, old man, keep in mind the following:
1. Don’t borrow more than you can confidently repay.
Be realistic about what you can afford to repay over a 10-year term within the framework of your current income, living expenses, and target retirement date. Don’t risk your retirement or your home. Don’t borrow any money if your repayment strategy is to figure it out later.
Separate the question of how you should pay for your kid’s college from how much you can afford to borrow, if anything. Just because you can take out a home equity, PLUS, or 401K loan, doesn’t mean you should. If you’re taking out any of those loans and plan to continue to do so for the next 4+ years, you’re already in too deep.
2. Students should not borrow more than the federal student loan (i.e., “Stafford”) maximum amounts.
For most students, this is ~$30,000 of debt. This should be affordable to repay in most circumstances and if not, they’ll be eligible for an income-dependent repayment plan which will serve as a safety valve for this debt.
Any additional private student loan borrowing by students is risky, ineligible for income-dependent repayment, and another signal that you’re in too deep.
3. Do not co-sign loans with your children.
That’s a clear signal that you’re both over-borrowing. It could risk the financial security of both of you, hurt your credit scores, and create future family conflict around these outstanding debts and who’s responsible for their repayment.
4. Your teenage children do not understand their future financial obligations when taking out student loans.
Taking on future debts is too abstract for teenagers to grasp, and they’ll make poor financial decisions if left to their own judgment. Yes, teenagers have minds of their own and may not respond well to parental guidance, but protect them from making decisions with lifelong negative consequences. Be the guardrails they need when driving down this unfamiliar road. Don’t let them over-borrow as no one else will stop them.
Convert the total loan amount into the future monthly loan payment (assuming a 10-year term). That’s more concrete for them and together, you can then compare that to a realistic guess about their potential future income. You and your kid(s) may be shocked at how burdensome this monthly payment could be — that’s the point.
5. You and/or your kids will owe more than you borrowed.
Student loans accrue interest while in college and that unpaid interest is added on to the loan balance. Factor this into your calculations. (“Subsidized” Stafford loans are the lone exception.)
6. Don’t assume they’ll graduate in four years.
The norm is closer to six years, particularly if the student works. (See my next point.)
7. Working during college years is helpful.
They should get a job. They’ll need the money and it will:
reduce their debt
motivate them to graduate as quickly as possible
prepare them for their post-college working life
offer them an opportunity to save a bit in a Roth IRA and create a good habit
leave them with less idle time to spend money they don’t have (See my next point.)
8. Students should curb their spending.
At the risk of still sounding like a grumpy old man…
There can be a lot of social spending pressure while in college. If they don’t learn to resist it, they’ll be further in debt when they graduate. Conversely, if they learn to control their spending, they’ve created another good habit going forward.
During the college years, a debit card is almost always a better idea for a student than credit card as it makes it harder to overspend.
9. A bankruptcy filing won’t help.
Student loan debt rarely can be discharged in a bankruptcy proceeding. The NY Times has a good summary of the challenges that borrowers face and how we got to this point.
10. The college financial aid office is not your friend.
They’re not your “advisor” and they’re not looking out for you. Their interest is to get the student to attend their school. Remember, they’re not on the hook for your loans — you are.
What if you can’t afford the college you had in mind?
Over-borrowing and hoping that things will work out could leave you with a lifetime of regret. Hope is not a winning strategy.
Consider these options:
Instead of a private college or an out-of-state state university, attend an in-state university.
Instead of your flagship state university, attend a state college.
Begin at a community college and then transfer to a four-year college.
Live at home instead of a dorm.
Study part-time and work full-time.
Study full-time and work part-time.
Take a gap year and work and save as much as possible.
Any of these choices would put you in the mainstream of most American students and families.
Is now the right time?
College is not for all of us. Don’t fall for the trap that everyone must go to college and do so right after high school. If you’re not sure, start with a low-cost community college class or a free online class. Or, go to work and then start college when you’re ready, you’ve saved enough money, and focused on what you want to study.
The worst outcome is to over-borrow and exit college with a burdensome debt that will remain a ball and chain to drag around for many years. Don’t do it.
Note: paying for graduate school is a whole different can of worms and borrowing strategy. Read more about financing graduate school here.