Splashed across the headlines we often hear about student loan debt and its lasting consequences on the borrower. I feel fixing the consequences of student loan debt can be helped beginning with the college selection. The majority of families do not understand the outcome of the student debt during the college decision process. As of 2016, the average student debt by graduation for a borrower was $37, 173. It is currently the second highest form of debt in the United States and has double since 2009. It is projected to double again by 2024.
Our goal is to help families better understand the proper use of student loans when trying to pay for college. The entire EFC PLUS website and software was built to encourage families to become informed about their borrowing decisions. There is increasing evidence that student debt is hindering our children’s financial future. Their ability to buy a house or car, start a family or save for retirement is all starting to be affected.
Currently, 63 % of graduates with student loans delay making a major purchase due to this burden. In order to fix the student debt problem, we need to change how parents and students approach the college decision. During the college selection and admissions process, I think it is important to include the financial outcome of your college decision. So much emphasis is placed on the admissions part of the college process that families do not properly plan or review how they are going to pay for college. Both the student and parents under estimate the total net cost and debt to get to graduation.
Financial Wellness Focus
Recently, I reviewed the information found in the Prudential’s survey, Student Loan Debt: Implications on Financial Emotional Wellness. This 2016 student loan survey included 2,369 people, of which 1,011 were current college students and 1,358 were graduates. The article emphasized how disconnected many people are in their borrowing decisions.
After reading the survey, you can understand why student debt is such a problem. The survey revealed that the current student loan borrowers did not understand their type of loans, the terms, their future monthly payments or who has cosigned for their loan. Besides this confusion, the added stress of student loan debt has also had long term effects on both the financial and emotional outlook of the borrower. The following statistics were gathered by Prudential’s survey.
- 74 % Of the Borrowers do not understand when repayment begins or length of loan
- 53 % Of the Borrowers have not calculated or know their future monthly payment
- 59% Of the Borrowers have not calculated how much income will go towards loan repayment
- 52% Of the Borrowers never found out if any of their loans were cosigned
Better Loan Decisions
The first step to correcting the problem is the consumer needs to become more informed. For families in the college planning stage, you need to understand your financial aid position, estimate your financial awards and determine a budget that you can afford. With this information, you will be able to estimate the debt needed to attend certain colleges. This is what our College Cost Analyzer generates for families so that they can avoid the risk of excessive debt.
We feel it is also important that you do a four year projection of your cost and debt. It will allow a family to maximize their resources and allow them to better plan on their paying for college strategies.
Depending on the study, approximately 50 – 70 percent of students will change majors while in college. Having the ability to project their students financial outcome when these decision occur is critical. It is important to have the transparency to project this new outcome.
Our approach to this situation is simple. You need to understand the credits needed to get to the desired graduation date. What is timeframe available and course structure needed. With that information, you are able to project additional cost and debt. Our In College Payer software helps students and families address this problem so you can see the consequence of the student debt.
What most student and parents do not understand is your debt structure determines the student loan repayment options after graduation. By not seeing that information, many wrong decisions are made.
Student loans should be separated by whether they are federal or private loans. This applies to the families with children heading to college next year and the current college borrower. Once the loans are separated, list the amounts, terms and repayment options. Federal loans have better loan repayment options than private loans.
Tracking the actual loan debt by type of loan will help the student understand what loan options are available to them at graduation. The Prudential Survey indicated that borrowers don’t understand their monthly payment. I recommend that a family do a personal profit and loss analysis so that you and your child can visualize the loan options in relations to the child’s future salary.
Include a discussion on other living expenses and future life choices. I know this seems so far away for the college student but just introducing the idea can lead to better borrowing decisions and may help a student stay on track with their courses. Understanding their major and career choice will also allow discussions on future salary or the need for further education after the undergraduate degree.
There are currently nine different federal loan repayment options and various loan forgiveness programs. The loan type and the career chosen will drive picking the correct repayment options and forgiveness eligibility by the borrower. Although an entering college student may not know the exact career they will chose, it is a good idea to understand the borrowing options and if any of their possible career choices might be eligible for loan forgiveness.
Compiling this information may seem confusing and complex to some families. As stated above, students and parents are struggling to get this information. Creating your own spreadsheet will be difficult. We have simplified and created the transparency needed to make better on-going decisions with our EFC PLUS solutions.
The EFC PLUS mission is to help students and parent avoid excessive student debt and make better college financial decisions. The current process does not illustrate the financial realities of college cost and debt into the future.
Become an informed consumer and avoid costly student loan borrowing decisions. The consequences of the student loan debt are often not understood until after school is completed. At that point, the debt is yours! Please join us on November 8, 2017 for our free Student Loan and Student Loan Repayment webinar we will discuss understanding student loans, debt at graduation, student loan repayment and what it means to finance college tuition. To register for the the Student Loan and Repayment webinar click here.