What’s the best way of reducing the cost of higher education? Talk with your kids, from an early age, about the importance of getting through college at a moderate cost. Expectations, as much as price, determines what you’re likely to pay. Reducing cost means reducing debt, and improving your post-college quality of life.
Children from families with modest incomes know, from the cradle, that costs are going to matter. Middle-class families, however, sometimes let that little fact slip by. You might encourage your kids to think that they (or you) can pay for their dream school, if they get in. When reality bites, and the cost is high, it might be too painful to steer your child away from her heart’s desire. She might decide to take the maximum in government and private loans. To avoid disappointing her, you might take government PLUS loans for parents, or co-sign a private student loan from a financial institution.
If you have a high enough income, and your child gets a good enough job after school, this can work out. If not, your child might struggle with repayments and your own retirement might be at risk.
We all want the best for our kids, but what does “the best” mean, exactly? To me, it means entering adult life with a good education and unburdened by debt. It also means that a new graduate can choose a career in teaching, the arts or nonprofits that don’t necessarily pay a lot. And they won’t wreck their prospects if they lose a job and can’t repay a large student debt.
So what is your strategy, as you raise your child?
Here are seven points:
1. Explain that most of America’s colleges and universities provide good educations, so they should keep an open mind about where they want to go. Around 80 percent of students go to state schools, which means that they provide the majority of the country’s civic and business leaders.
Little-know private schools also produce their share (Eureka College—Ronald Reagan; Quinnipiac College—Johnson & Johnson CEO William Weldon; Mount Saint Agnes College—Maryland Senator Barbara Mikulski). Many famous people started out at a community college (author Gwendolyn Brooks; Dr. Craig Venter who helped sequence the human genome; architect Frank Gehry). Students generally get attached to whatever school they attend, even if it wasn’t first on their list.
2. Bright children should certainly apply to famous schools that interest them. They might get large enough grants to make the school competitive with their state university. Some small private colleges offer extra-large grants to attract talented students. But colleges, struggling with financial problems of their own, aren’t as generous as they used to be. Only 35 percent of families received scholarships in the 2011-2012 academic year, compared with 45 percent the year before, the student-lender Sallie Mae reports. Sallie Mae also says that more families are making lower-cost choices, so you won’t be alone.
3. Be open with your children about debt. If you have ever gone overboard on credit card spending, tell them about it. If you’re 40 and still paying student loans, tell them that, too. Borrowers over 40 account for around $900 billion of the nation’s $1 trillion in student debt, and are struggling more than other age group with repayments, according to the Federal Reserve. The delinquency rate for borrowers 40 to 49 is running close to 12 percent, compared with an average rate of 8.9 percent. The sooner children understand debt as an obligation that impacts their other choices (and their parent’s choices), the more allergic to borrowing they’ll be.
4. Student loans cannot be discharged in bankruptcy, unless a judge declares the borrower’s case totally hopeless. That’s rare. In one case on record, a judge refused to clear the loan of a part-time orchestra cellist who gave music lessons, on the ground that he could find higher paying work. Interest and penalties can turn a $25,000 loan into a $100,000 obligation in the blink of an eye. If the graduate can’t pay, he can be hounded by debt collectors for life — wages garnished, tax refunds impounded, disability and Social Security payments garnished, too. His credit score will be a permanent wreck.
I should add that the same thing happens to parents, if they co-sign a loan that their child can’t pay, and that they can’t pay, either.
5. Every parent and student has to pay a minimum amount in cash before any grants kick in. Find out now what your obligation is likely to be by using the College Board’s calculator for “Expected Family Contribution.” College might be years away and tuition costs will rise, but with luck your income will rise, too. The EFC gives you a reasonable savings target. If you save less than this sum, you will have to borrow to make it up.
6. When your child starts narrowing down his choices, don’t go by the college’s “sticker price” — the published total for tuition, fees, room and board. What matters is the net price — the price after any tuition discounts the school is likely to offer. For your planning, use The College Board’s Net Price Calculator. You’ll get only a very general idea of the probable expense, but it will help manage your expectations. Some private colleges count part of your home equity as being available for college while others don’t — you’ll get a better deal from the ones that don’t.
7. When making your final choice, always look at the bottom line: How much does the school expect you and your child to borrow to cover the total cost? The perfect answer is “zero,” the next best is a modest loan. At the worst, your child should borrow no more than they can get from the government’s Direct Student Loans, without tapping private loans from financial institutions.
When you’ve brought up your children to understand the risks and burdens of student debt, you’ll have given them values that will serve them all their lives.