28 Jul How Much and How Should Your Family Borrow for College?

As we move into August, rising college freshmen are putting the finishing touches on their college payment plans. They already know what their out-of-pocket costs will be, and understand how much money they need to borrow to cover their expenses. But rising high school seniors are at the other end of the financial decision-making process right now.

They are just looking at how much colleges on their list might cost, and have not even begun the financial aid or scholarship search processes. Thinking about borrowing money is not at the top of their to-do list, but maybe it should have higher priority. If you wait until next year to think about how you are going to pay for college, you might be setting yourself up for a lifetime of financial challenges:

• • • Heavy Debt Loads: You have probably heard about the student loan crisis, where there is almost $2 trillion in outstanding student loan debt. Students are graduating with an average debt load of almost $40,000. Although there is some talk about student loan forgiveness through the federal government, nothing is set in stone yet. So think about how that kind of debt could affect your lifestyle after graduation. You will probably start at the bottom of the pay scale, and may also need more loans to pay for a home, wedding, or car. Now add a few hundred dollars in student loan payments into that equation every month, and you will understand why so many college graduates still live at home.
    • Parent or Co-Signer Debt: To help their student get through college parents may borrow money under the PLUS federal student loan program, or act as a co-signer for a private student loan. Without an advance understanding of repayment responsibilities, some parents find themselves approaching retirement while still saddled with thousands of dollars in student loan payments.
    • Bankruptcy Potential: The college graduate or parents facing substantial debt burdens may become so overwhelmed that they stop making payments or declare bankruptcy. Either choice has serious financial ramifications for many years. While a recent court case found that private student loans may be discharged in bankruptcy, lenders may still appeal that decision. Be aware that federal student loans are currently not dischargeable in bankruptcy, and you would still be liable for payment.

The best way to avoid these circumstances in the future is to completely control your college financial decision-making process now. Your objective should be to borrow as little money as possible, so you will not be faced with these challenges. Reaching that goal may impact your college choice if the selected school does not offer a sufficient financial aid package. Remember these money guidelines:

• • • Run the numbers: Use the Department of Education’s Net Price Calculator to get a good estimate of costs at the various colleges on your list.
    • Project your earnings: Colleges can provide you with data on how many students graduate, how many graduate in four years, how many get jobs within their chosen profession, and how much money they are earning. Use these to look at what you might be able to earn if you do well and get a good job after graduation.
    • Check loan costs: If you think you will need to borrow money, run some scenarios on the Federal Student Loan Repayment Simulator.
    • Borrow wisely: Always apply for financial aid and look for scholarships to keep your out-of-pocket costs as low as possible. If you do need to borrow money, only borrow what you need to cover education expenses and look for income sources to cover your living expenses.

Students going to college this fall who are still working out the financial details can set a loan appointment with CFAA, where we will discuss borrowing options. I will resume loan appointments in August, and slots are limited. Please plan accordingly.

Set up a CFAA new client free strategy session to learn more about finding ways to pay for college. To get the latest financial aid information and college application to-do lists, look for my weekly JustAskJodi emails and check out my monthly CFAA e-newsletter.