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Each year at this time, many parents face a gut wrenching choice. Allow your son or daughter to pursue the college of their dreams, even if the acceptance came with a less-than-stellar financial aid offer, or persuade them to attend a financial “safety” school that carries less of the emotional attachment, but a much more affordable out-of-pocket cost.
To be sure, it would be foolhardy to suggest that such a life altering decision should be made with absolutely no emotion. After all, a higher education broadens horizons, opens up job opportunities, propels your child up the economic ladder, and may even establish a lifelong network of friends and career contacts. It can literally change the way they see – and interact with – the world around them. And college “fit” — academically, socially, environmentally, and emotionally — is critical to persistence, completion and gaining the full benefits of higher education.
But when emotion is the sole driving factor, with no attention paid to rationality, it can lead to poor consumer decision-making. The numbers for today’s college-goer are hard to discount. Higher education costs have outpaced inflation for decades; Americans collectively owe more than $1.2 trillion in federal student loans today; seven out of every 10 college graduates take on debt to finance their higher education; and perhaps most troubling of all, 43 percent of federal student loan borrowers are either behind or received permission to postpone payments due to economic hardship. There’s even evidence now that student loan struggles impede college grads’ ability to afford the traditional milestones of independence, such as buying a home and starting a family. In fact, American Student Assistance’s Life Delayed study found that 54% of student loan borrowers would have made different college choices if they could have a do-over.
This doesn’t mean college isn’t worth it; those with college degrees still make substantially more over their lifetimes, face far lower unemployment rates, and have generally shown to live healthier, more civically engaged lives. What it does mean, though, is that choosing a college based on only your heart or only your wallet can be a dangerous proposition either way. So for students and families grappling with the big decision before that May 1 deadline, here are some questions to consider:
What will be owed not just for this year, but after graduation?
Families often approach paying for college on a semester-by-semester basis, but that makes it difficult to assess the total amount that will be owed after four (or more) years. Map out how you (parents and student) will finance the entire education. Factor in not only the financial aid package but money from savings, current income, and monthly payment plans as well as loans. This will give you an estimate of what the education debt will be after graduation for both the parents and the student. Keep in mind that financial aid packages can change over the years and you will adjust your plan accordingly. As a consumer, the key is to know before you go.
Will my son or daughter be able to make the monthly student loan payment?
Now that you have an estimate of the total amount owed, take it one step further. Use an online calculator to break down expected total debt amounts in the aggregate into monthly installments for a specific payback term. To an 18-year-old, owing $30,000 is an elusive concept, whereas making payments of $345 a month for 10 years is much easier to grasp.
Next, review salary estimates for the student’s intended major or career to get a better idea of how much to borrow. We student loan experts love to tell students to limit total amounts to less than the anticipated salary in the first year out of school, or limit student loan payments to no more than 10 to 15 percent of expected monthly income. But incoming college freshmen may have a hard time wrapping their heads around what they want to be when they grow up – never mind how much they’ll earn per year and the impact of student debt on their debt-to-income ratio. So an easier rule of thumb to follow is to try and stick to federal student loans vs. private as much as possible, because they come with handy income driven repayment options that will make payments more manageable.
Is my son/daughter’s dream school worth jeopardizing my retirement?
Your child’s financial aid package may suggest you take out a federal parent PLUS loan. Parent PLUS debt levels have increased significantly in recent years and since there is no debt-to-income or ability to pay analysis conducted before a PLUS loan is granted, many families are incurring debt well in excess of what they can ever hope to repay.
While you may naturally want to contribute to your children’s education or shield them from debt, remember that the 18-year-old student will have far more time to repay the debt before retirement than you will. Federal student loans come with a lower interest rate and in the early years you can always help the graduate with their repayment. Talk about it together and, again, plan, plan, plan.
Why does my child really want (or why do I really want my child) to go to this college?
Be honest with yourself about why XYZ College is your child’s dream school. Beyond being a good academic fit, is it because all his friends are going there? That may not be such a bad reason — often the campus where students feel the most socially comfortable and supported gives the greatest chance of completing to graduation, and those who graduate stand a far greater chance of landing employment and successfully retiring education debt.
But if it’s because you want to keep up with the Joneses, or display the bumper sticker of that highly selective college on your car or name drop at the next cocktail party, then you may want to seriously re-evaluate. That may not make for a real “fit.” Have an honest discussion with your child – you may find out they really don’t want to put the family in financial jeopardy for their education. Or maybe you’ll learn that just because it was your dream to always attend said college, maybe it’s really not your child’s.
Ultimately, there are many intangibles of college fit that cannot and should not be wholly ignored in the selection process. Your child will not thrive at an institution if she’s not happy there. But also remember to approach the decision as a rational consumer. At the end of the day, it very well may be that the dream school is in fact the perfect choice, but know the costs and what your family is getting into beforehand. Go in with your eyes wide open, because education debt is a terrible thing to regret.