Trying to pay for college and avoid excessive debt is high on the list for most families today. As we sit down for Thanksgiving dinner this year, a common family conversation may evolve around the college decision, college major and the high cost of college. What most families don’t take into consideration is the added cost that they may incur when their child transfers or changes their major. The increased cost for many will result in more debt. All of these decisions have financial consequences that are not very transparent.
Due to the lack of transparency, high emotions and the easy ability to defer payment, families are unable to project the financial consequences of these important decisions. Here are some steps that may help both students and parents engage in a better college and avoid the burden of excessive student loan debt.
Understand your College Credits
A college student is considered a full time student at 12 credits. The problem is in most cases, a student will not be able to graduate within four years if they only take 12 credits per semester. If you consider that 35% of students will transfer and over 50% will change majors, understating the number of credits needed to graduate is critical. This seems like a simple concept but in many cases most students do not properly do it. The best way to save money is to graduate on time.
Timing of Courses
Many colleges design their curriculum to fit the majority of the students as they progress to graduation. As a result, some courses are only offered during certain semesters. In addition to tracking the total credits, students need to map the required courses for their major and when each course is offered. This course mapping should be done at the end of each semester and during registration.
College Credit Tuition
Students and parents need to understand their tuition bill. For many colleges, you pay as a full time student. The number of credits that a student can enroll could vary from 12 – 18 credit per semester. As more students transfer and change major, using the availability to take more courses without paying more could be a great way to save money and graduate on time.
Annual Federal Loan Limits
Proper debt structure is often overlooked in planning for college. This is due to the complexity and lack of proper information. We always recommended that a student take the Federal Direct Stafford Loan each year while an undergraduate. This will improve the student’s loan repayment and forgiveness options after graduation. The annual limit will be adjusted based on the student’s academic progress and if they are a full time or part time student.
Incurred and Projected Debt
I discussed above the importance of tracking a student credits to make sure they are on the path to graduate on their targeted date. More colleges and even some states are requiring colleges to send letters each year to the students stating the amount of current federal debt that they have incurred. This is an improvement but is only one part of the solution.
Students and parents need to have both incurred and projected debt to graduation. To make the best college financial decisions, families need to know the “WHAT” they will pay and the “HOW” they will pay it. The “HOW” is custom to each family and determines the debt structure.
The EFC PLUS In College software helps both students and parents project their debt to graduation. It builds a personal budget using the projected income and loan repayment options. This enable the family to envision both the “WHAT” and “HOW” in their specific situation. As a result, they will make better college financial decision and avoid excessive student debt.
Understanding of Loan Repayment Options
A student’s debt structure drives their loan repayment options. The Federal Student Loans have better loan repayment and loan forgiveness options. There are currently 10 federal loan options depending on the type and date of the loan. Only certain loan repayment options qualify for loan forgiveness.
There are more advertisements regarding private student loan consolidation. If the borrower converts their federal loans to a private consolidation, they no longer have access to the federal repayment options for those loans.
Following your dream is an important part of the college experience and college major decision. As part of that decision, the student needs to investigate the demand of that career and income potential. There needs to be a sense of reality in casing that dream. Many students have the impression that by having a college degree that guarantees them a secure financial future. That is not true.
While making these college student loan decisions, many students are not envisioning if their career income can support the debt that was incurred. This is one of the major weaknesses of the paying for college process. The EFC PLUS, In-College Payer has a built in personal budget calculator which allows the student to input projected income, personal living expenses and select a customized loan repayment option.
Often overlooked in the paying for college are a variety of tax strategies or advantages. As an example, the American Opportunity Credit is worth up to $2,500 per year per student. This is limited to undergraduate students and can only be used for 4 years. There are also tax harvesting and business owner advantages that are more advanced.
Using summer courses
A great way to save money is to take summer courses. Students can get ahead or use summer courses to get back on track if they are behind in credits due to a transfer or major change. Summer courses can also help to minimize debt. The student should always check with the college and get any summer courses approved by the college if they will be taken at another college or a community college. Each college is different and may have specific guidelines for course approval.
If you use the summer courses and optimize the semester credits limit, families could minimize their cost. By reducing a families cost, less debt will be needed to achieve the desired outcome.
Planning for Post Graduate
Over the past few years, more careers are requiring additional education to achieve the desired career. Planning for this additional cost and debt needs to be done as soon as possible in the college decision process. In my current presentations, I discuss how you need to envision your child’s life at age 25. This would include education requirements, income and student debt.
I often hear students and parents wishing they had made different decisions. Using all of the assets for an undergraduate degree may not be the best decision. Graduate loans have much higher interest rates and fees. Undergraduate decisions and student loan planning could improve your child’s financial future if done properly.
Examining the cost, debt and income are important parts of college financial decisions process. Managing expectations and life style need to be added to the plan. For example, certain jobs may require a car or the graduate may need to live in a specific area of the country which could increase a graduate’s cost of living.
As a parent, I know how hard and emotional these decisions can be. I hope that these insights can help you navigate this complex process. At the end of the day, having your child graduate on time with manageable debt is a great accomplishment. To see them being happy productive adults with a positive financial future is success!