During one of my walks this summer with my wife, I saw an interesting T-shirt that stated “Best 5 Years of My Life”. On the other side of the shirt was the name of a large state university. The name does not matter since the US government is using a six years standard in many of their graduation measurements and the average 2016-2017 colleges cost at a private college is about 26,000. This extra time is more expensive than most students realize.
So how do we get our children to understand the cost of college? I believe understanding the cost of college is a process that needs to begin with the college selection and then continue with a yearly review while your child is in college. The college financial process is one of the few large purchases that we do not properly estimate the total cost. This needs to change.
Due to the emotional aspects of the college decision and expected future value of a college education, many minimize the consequence of an extra year of college. According to the Department of Education, the 2016 College Graduate will leave college with $37,172 of student debt. That is up over 6% from 2015. To put this in prospective that is 393.90 per month for the next 10 years.
New Approach to Student Debt
For families who are trying to engage their children in the cost of college, there is a solution that can help you. We have developed the first “In College” solution to help the 21 million students and families making ongoing college financial decisions. Our In-College Payer software allows the student borrower to see their college financial outcome before, during and after graduation all in one place. It helps them envision the financial consequence of their academic and borrowing decisions.
Each year, the student borrower acquires a new set of loans to help with their educational expenses and tuition funding. Their award letter lists the amount the student needs to pay to the college and will list the student loans that the student qualifies for based on their academic progress. The problem with this financial decision process is that it never projects what your total debt will be at graduation. Most student borrowers often do not understand the long-term consequence of their borrowing decision and access to student loans is easy through the federal government loan programs.
Another shortcoming of the process occurs because many families do not understand how important the debt structure is to the repayment process. They are highly dependent on each other. To properly plan, the family must know the current debt incurred and project the debt needed to graduate. This is an important part of the process and should be reviewed each semester. By using the In College Payer software, students and parents can projected how the debt will be structured and what repayment options are available from the beginning.
After understanding the debt structure, a family can see the various loan repayment options and envision their future loan repayment. Just as a point of reference, there are eight federal loan repayment methods to consider based on the federal debt structure. If other loans are used, these loans will have their own payment options.
This custom analysis is based on estimated financial awards and a family’s cash flow. The EFC PLUS, In-College Payer approach, steps the family through the financial aid, academic timeline, loan inventory, repayment options and personalized budget at graduation. With this added transparency, both student and parents can make better ongoing decisions which is missing from the current process.
Consequence of Decisions
We have written previously about how millennials would have made different college decisions if they had had the proper financial information. Part of this problem is the lack of transparency in this financial decision process. We are hoping by taking this approach and having your custom numbers, better decision and results will occur.
This exercise helps to engage the student and family in some serious money questions concerning their financial future. Having customized projections will make the conversation more meaningful for your child. We have included a couple of tough questions parents should review each year with their child and then do a quick review of their own finances and retirement goals. Many parents do not realize that the student is limited to only a certain amount of debt directly per year. The balance will be directly or in-directly related to the parent.
Here is a list of sample questions:
- Based on the student’s current situation, will college be completed in 4 years?
- What is the cost of college for the fifth year?
- What is the cost of the missed opportunity of not working that year?
- How will the funding gap for college be paid? Loans? Home Equity? Alternative loans?
- Will the future career income support the debt payment?
- Who in the family will pay for this shortfall?
- Who is legally responsible to pay back the loans?
- How much debt will my child have at graduation?
- How much debt will we as parents have at graduation?
- Will paying for college affect may ability to save for retirement?
- Will my retirement funds be used for paying for college?
The benefit of using the In-College Payer software is that it organizes the financial information for the family, engages the student in the process and improves the financial literacy for the whole family. It is a very complex and confusing subject area.
Our goal is to improve the transparency of the process. With student debt approaching 1.4 trillion dollars, many of our young adults will be carrying an unrealistic amount of debt into their adult life. It will affect both their financial and personal futures.
As parents, our goal is to properly direct your child as the best you can. The important issue is that paying for college and student debt is a discussion that can begin before college starts and should continue as your child travels through college. Doing so will keep the debt surprises out of graduation and help the college student stay on track both academically and financially.
Do not be part of the crisis! Understand your options before graduation!