Is Borrowing for College Worthwhile?

You’ve counted the grant and scholarship dollars your student’s been awarded. You’ve added in your college savings account. And you’ve figured how much you can afford to send on your student out of your monthly paycheck. But there’s still a gap. You’re not alone. Like 69% of his or her peers, your student is probably going to have to borrow to attend college.

Americans are wary of college loans, and with good reason. We owe $1.3 trillion in educational debt. Thirty percent of our student borrowers are ruining their credit ratings because they’re behind on their payments. The other 70% sometimes live diminished lifestyles so they can afford pay their student loan bills.

But believe it or not, there is actually something worse than graduating from college with student debt, and that’s not graduating from college!

In 2014, the average student borrower earned a bachelor’s degree after having borrowed $28,950. Under the absolutely worst case scenario, it would cost $47 thousand to repay this amount at today’s interest rates. But census data show that Americans with bachelor’s degrees average $964 thousand more in earnings than those with high school diplomas. Is it worth a $47 thousand investment to earn $964 thousand? You bet! And since 64% of today’s new jobs require a college education, college borrowing should be viewed as just that — an investment.

Still, it’s just plain dumb to run up an unmanageable amount of educational debt. Fortunately, there are many ways to avoid this. See 10 Strategies for Limiting College Debt to learn more.

College Affordability Solutions has 40 years of experience in helping families pay for college. To find out if we can help you, call (512) 366-5354 or email collegeafford@gmail.com.

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10 Strategies for Keeping College Debt Manageable

It may be necessary to borrow in order to go to a college that’s a good fit. But making smart and disciplined decisions can help keep your student’s college debt from becoming an unaffordable monster. Here are some strategies for doing that . . .

(1)  Make Those Dollars Stretch: Your student needs a plan to guide his or her spending at school. Tuition, fees, and on-campus room and board will be deducted from financial aid at the beginning of each semester. Then remainder has to pay for books, transportation, and personal expenses for the rest of the semester. Making and sticking to a spending plan can help your student avoid running out of money before the semester ends — at which point the only type of aid that’s left is likely to be loans.

(2)  Get a Job: You may worry about your student working, especially while adjusting to the rigor of college during the freshman year. But research shows that undergraduates who work 10-14 hours per week average higher GPAs and lower drop-out rates than those who don’t work at all. Working helps your student earn money to limit borrowing, gain resume-enhancing employment experience, and generate future references for graduate school and job applications.

(3)  Borrow Only What’s Absolutely Necessary. There’s an old saying, “The student who borrows to live like a professional before graduation will have to live like a student after graduation!” If his or her spending plan indicates your student can cut back on borrowing, urge him or her to do so.

(4)  Don’t Borrow It Just Because It’s Offered. That’s right. No rule requires your student to accept any loan funds that are offered. In fact, most financial aid award letters provide ways to wholly or partially reject loan awards. If your student accepts loan funds on the award letter but then figures out they’re not needed, he or she should contact the aid office to reject them. If your student ends up needing some of those rejected funds later, he or she can go to the aid office and have his or her Federal Direct Loans reinstated.

(5)  Borrow from Uncle Sam First. The U.S government provides $9 out of every $10 student loan dollars. Why? Because federal loans are just better than other student loans. Unlike private loans, interest rates on federal loan are fixed, so interest on them will never rise. They offer six different repayment plans — including plans limiting monthly payments to a percentage of after-college income — and borrowers may switch plans whenever they need. Borrowers can lower their monthly payments by stretching out their repayment periods and, if they suffer short-term economic problems, they can postpone their monthly payment obligations. Federal loans also have generous forgiveness programs.

(6)  Minimize “Unsubsidized” Student Loan Borrowing. Even within the federal programs, some loans are better than others. Federal Direct Subsidized Loans and Federal Direct Unsubsidized Loans have the same interest rate, but subsidized loans will cost your student much less than unsubsidized loans. How? Interest doesn’t accumulate on a subsidized loan until your student has been out of school for 6 continuous months — i.e. the “grace period.” Conversely, unsubsidized loan interest begins accumulating the day loan funds are disbursed (applied to tuition and fees or transferred to your student). No payments will be required until the grace period ends, but then outstanding interest gets added to loan principal, and interest begins accumulating on an inflated principal amount.

(7)  Prepay It. If your student can ever afford to make a payment while in school, even a small one, it’ll reduce what he or she will pay later. Better still, repaying Federal Direct Loan funds within 120 days of disbursement causes the government to cancel any interest and loan fees that accumulated on the amount repaid. The financial aid office can tell your student how to make such a payment.

(8)  Don’t Save Unsubsidized Dollars for Next Year. At the end of each academic year, some students bank the loan dollars they received but didn’t use. Bad idea! This is especially true for unsubsidized loans which, at today’s rates, accumulate interest at 4.29% per year. Paying over 4% for funds on which a savings account will yield 1% to 1.25% is a lousy investment strategy and, remember, your student can get new loans next academic year. One exception: using leftover loan funds to cover tuition and books for summer school courses at the local community college. The community college must considerer your student as a “transient student” while completing such courses, but your student will likely be able to transfer them back to his or her university — thereby accelerating time-to-degree.

(9)  Graduate. Remember, the holder of a bachelor’s degree averages earnings of $964 thousand more in a lifetime than the average person who gets a high school diploma. The extra earning power a degree brings can go a long way toward making your student’s college loan payments more manageable. If your student drops out without a degree, he or she’ll miss out on this earnings boost, not to mention all the other benefits that go with college completion.

(10)  And Don’t Dawdle Along the Way to Commencement. Accelerating time-to-degree can be a real money saver. One major university recently found that its undergraduates who earned their degrees within four years averaged 35% less debt than those who earned degrees in five years, and 51% less debt than those who did so in six years. So urge your student to get that degree as soon as possible.

College Affordability Solutions has educated thousands of Americans on the ins and outs of student loans. Call (512) 366-5354 or email collegeafford@gmail.com if you need help.

Fit: It’s Critical to College Affordability

May 1 will soon be here. That’s the deadline for paying a non-refundable enrollment deposit to hold a place in the 2016 freshman class of most four-year colleges and universities. At many institutions, this deposit will also secure your student’s enrollment in a particular major.

Hopefully, by May 1 you’ll have been able to compare the costs of attendance and financial offers for all the schools your student is considering. If so, the choice is simple, isn’t it? Pick the most affordable school: the one whose financial aid offer produces the lowest amount left to be paid, right?

Not necessarily. Dollars and cents aren’t the only thing to take into consideration. Equally important is the question of the “fit” between your student and a particular institution and major.

Think about it. A student who attends an institution that doesn’t fit his or her needs is, not surprisingly, more likely to suffer emotional distress and poorly academic performance. He or she might not flunk out of the institution, he or she’ll face three choices. The first of these is to transfer to another institution. If your lucky the new institution will accept all courses successfully completed at the prior school. But all too often, transfer students end up retaking at least some of their previous courses; so transferring often inflates the cost of attendance because students pay twice for the same classes*.

Second, your student could “tough it out” at his or her original school. But then, to make it through that institution, there could well be extra costs for support services (counselors, tutors, etc.). Or there may be one or two semesters in which it all becomes too much and the student “stops out” of school. This can result in paying more to earn a degree in five or six years instead of four. Either way, if toughing it out affects your student’s grades and/or graduate or professional school test scores, it could also affect his or her ability to get admitted to such schools and/or to receive assistantships and fellowships to help pay for them.

Finally, students mismatched with a college or university may throw up their hands and simply drop out of higher education. From an affordability perspective, this is akin to writing off a substantial financial investment. Educational loans still must be repaid, but without the increased earning power that generally accompanies a degree. And even if your student goes back to college a few years later, the scholarships he or she initially received will be lost, increasing reliance on borrowing to pay ever-increasing costs of attendance.

A poor fit between your student and his or her major can lead to similar outcomes — even if the student remains at the original institution. Courses taken to fulfill requirements for the original major may not apply to a new major, so your student ends up paying tuition for more credit hours than necessary. Toughing it out in a major that poorly fits the student’s aspirations and interests can contribute to lower grades, extra expenses for support services, and failure to meet academic requirements for scholarship renewal. It can also lead to stopping out or even dropping out.

In today’s world, you cannot afford to ignore issues of college affordability. But neither can you afford to ignore issues of fit between your student, an institution, and a major. Will your student feel comfortable on this campus and be turned on by that major? When thinking this through, it’s vital to recognize your student’s ambitions, passions, and personality traits. Would she be bored at a small church-related liberal arts school in a rural town but stimulated at a large, diverse university in the midst of a big city? Did he hate every math and science course he ever took, but was he fired up about classes in English composition, music, speech, and theater? Is it important for her to remain relatively close to home and family? If he’s highly social, should he really attend that commuter school where most of his friends will go home every night and weekend?

College comes during one of the most critical stages of human development, and chances are your student will be a very different person four years from now. But you’ve lived with that young man or young woman longer than anyone. You’ve watched him or her grow up, observed his or her behaviors, shared his or her victories and disappointments.

In short, you know your child best and, whether that child says so or not, chances are you’re his or her closest advisor and confidant. So as you counsel your student about what may be his or her most important and expensive life decision, remember this — while you probably can’t afford to ignore how much it’ll cost for your student to attend different colleges or universities, in the long run higher education affordability and success are all about the fit, too!

College Affordability Solutions can help you evaluate your student’s financial aid offers and determine the net costs and funding gaps you and your student will incur at institutions making those offers. Email collegeafford@gmail.com to learn more.

* In Texas, all successfully completed lower-division courses that are part of the state’s core curriculum are fully transferable among public institutions; but the applicability of transferred courses to specific degree programs is determined by the receiving institution.