I recently 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 of the institution does not matter since the US government is using a six-year standard in many of their graduation measurements. I mention this T-shirt because I am often asked if the average college student understands their student debt total?
Based on the current graduation rate being 40% for 4 years of college and the average student loan debt over $37,787, I believe the answer is no! Many college students don’t understand how poor decisions made in college can increase their total student debt number. They are living in the moment and don’t think of what happens after graduation.
With the end of the year approaching, I believe, now is a great time to talk to your college students about their college decisions and how it will impact their future. In fact, staying on track should be an exercise repeated after each semester. The college financial decision process is one of the few large purchases where it is difficult to properly estimate the total cost and debt. This needs to change!
Importance of Debt Structure
A shortcoming of the current college financial process occurs due to the lack of transparency. Many families do not understand how important the debt structure is to the repayment process. To properly plan, the family must know the current debt incurred and project the debt needed to pay for college through graduation. Reviewing this debt should be done each semester and an understanding of how courses dropped or not passed should be part of the analysis. The best way to save money and avoid debt is to graduate in 4 years.
PayForED does have software solutions to help students and parents can get customized projections on how their debt will be structured and what repayment options are available at any point during the college journey.
After projecting their student debt better, a student can see the various loan repayment options and how it will impact their financial future. As a point of reference, there are nine federal loan repayment methods to consider based on the federal debt structure. If other loans are used, these loans will also have their own payment options.
Understanding the loan repayment in relation to the career choice is an important part of the loan structure discussion. If Public Loan Forgiveness is an option based on career choice, picking the correct loan repayment method is a necessity.
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 and the complexity in the college funding decision process.
Having customized projections will make the conversation more meaningful for your college student. Here are some questions, parents should review each year with their child. We also think parents should 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 federal student loan debt directly per year. People over the age of 50 have the fastest growing loan balance on a percent basis and this debt can affect retirement. Most student loans over the Direct Stafford Loan limit will be directly or indirectly 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?
- Who in the family will pay for this extra 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 student loan debt payment?
- Who is legally responsible to pay back the student 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 your ability to save for retirement?
- Will my retirement funds be used for paying for college?
Conclusion
Student loans and repayment are a complex and confusing area. The goal of PayForED is to improve the transparency of the entire process. With student debt approaching 1.75 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.
By beginning this discussion now, students will avoid student debt repayment surprises at graduation. It will help them stay on track both academically and financially. PayForED software can walk a family is through the financial aid, academic timeline, loan inventory, repayment options, and personalized budget at graduation. The transparency of the post-graduation outcome allows students and parents to make better decisions that are missing from the current process.
We can hope that your child’s sweatshirt will say “Best 4 not 5 Years of My Life with Less Student Debt!”
