Paying for college, is it worth it? Making the tough decisions and the Student loan debt crisis.

This is an important topic facing many families these days. I will try to address some of the issues for those just about to start their college journey, those already in college and for those who are out but struggling with student debt.

I think a college degree is still worth it and most articles and financial planning professionals agree, but the number of articles and professionals that disagree are growing each year. Like every part of your financial plan in your life, it is important to look at both sides of the argument and make the decision that is right for you and your situation. Here is an article on Why a college degree is still worth it as well as an article questioning, is college worth it.  

One of the things almost every expert agrees on is the cost of higher education has risen much quicker than general inflation and wage growth. This means it is much more difficult to get through college, paying as you go with part time jobs than it was 30 years ago. Students that start college without having any college savings will most likely have to borrow money to make it through college in a reasonable amount of time. So for those parents with young children who want their children to go to college and graduate with as little debt as possible it is wise to start saving and investing early.

College graduates typically earn more money, are less likely to be laid off in difficult times, and almost always enjoy a lower unemployment rate. Obviously some degrees are much more valuable than others, both based on where you get the degree and the type of degree you get. All this should be factored in when making your decision.

For most people making the decision about if and where to go to college will be one of the most expensive decisions they ever make. For some that make poor decisions it will be even more expensive than buying a home and may prevent them from ever being able to buy a home. Making poor decisions can end up costing you much more than the cost of a home. Unfortunately very few people look at it as a purchase or investment.

When deciding if and where you want to go to college you should really treat it like any other large financial decision you make in your life. When you buy a car you have choice of buying something really fancy like a Rolls Royce or buying a transportation special that simply gets the job done. In making that decision you have to look at what you can pay for, what you can afford, and ultimately what you actually need to get the job done. Finally you have to decide if the extra value you are paying between what it cost to get the job done and what you want to buy is worth it to you in the long run. Unfortunately many people do not look at all the factors but only look at what they can pay for. With it being pretty easy to get student loans you can often pay for much more than you can afford, hence the student loan crisis and the increasing number of people in dire straits now thinking a college education is not worth it. This is very analogous to the number of people that buy too much home or run up to much credit card debt. If you only focus on current minimum payments in making you decision’s you are likely setting yourself up for long term financial problems.

As with any financial decision taking out a loan you can afford is not a bad thing, however; whenever you take out a loan to purchase something it means that item will ultimately cost you more than the original sticker price when you factor in the cost of interest over the duration of the loan. How much more depends on the rates and term of the loan. So when borrowing money to make a purchase, you probably want to minimize the extras you are buying, borrow no more than you have to, and make sure you get the best rates available for your loan. When making this critical decision about your education choices and student loans you have to be realistic about how much debt you will incur on the path you take. You also need to estimate what the likely starting salary will be for the field you will be entering when you graduate. Ideally your total debt when you graduate should be no more than your projected starting salary in your chosen profession. Even then it will take you approximately ten years to pay off your student loans.

Too often students pick a college without factoring in the cost or the return on their investment. I am often told by parents or students they want that experience of “going away to school”. That is a great experience but it cost money. You have to first ask can I afford it, and second if I can afford it is it worth the extra $60,000 that it will add to the cost of my education?  Often students pick some small liberal arts school because they are offering them the most scholarship money. While you always want to maximize the scholarship money at any institution you end up going to, when comparing cost to other institutions don’t look at the money they are saving you (like a 50% off coupon the store only offers you after they double the price) but instead look at what the net cost of you going to that institution will be.  Only when you look at your net out of pocket cost can you compare apples to apples. If the community college cost you $5,000 for two years of school and after accounting for all scholarships and financial aid a private school you go away to will cost you $80,000 for those same two years the price differential is $75,000. Without naming any schools, in most instances if cost were equal going to the private school would be the better choice, but seldom are the cost equal. When you look at the net cost what you have to ask yourself is one can I afford the cost difference, and two, even if I can afford it is the private school actually $75,000 better and is this how I want to spend my money.

So now you have decided on a school and you have to take out loans to pay for it, what should you do? If you have not already completed your FAFSA do so. This will let you know if you qualify for federal student loans and if those loans can be subsidized. For most people and most circumstances federal student loans are the best option, especially if you qualify for subsidized student loans. With subsidized student loans the government pays the interest while you are in school and during qualified deferments.

Hint, even if you think you can make current tuition payments without them, if you are planning on going to graduate school and qualify for subsidized student loans while in undergrad, you may want to take advantage of them now as the rates are lower, and you can start saving extra money for grad school. This strategy only works if, like with a credit card, you don’t blow the money or buy anything you wouldn’t have bought if not for the easy credit. By the same token, just because student loans are easy money don’t take out any more than you need especially if you are going to spend the money on unnecessary items. If you are making it through school with the help of student loans you should refrain from the morning lattes and eating out regularly or you will be paying for those indulgences many more years than you realize.

If you do not qualify for enough federal student loans to meet your needs, you should first reconsider your school choices and make sure you are purchasing an education you can afford and that will pay off in the long run. If you decide you have, then you can look at private student loans. Research them and get the ones with the best terms. There are several good sites on line to help you with that, this is one that I like Private Student Loan Guru. Often private loans have higher rates and fees, and are subject to credit checks, which means for most students a co-signer may be necessary. For parents or family members that are considering co-signing understand your responsibility. You are on the hook for the entire loan amount plus any unpaid interest and penalties if the primary borrower fails to pay. If you trust your student enough to co-sign, and you have the means to do so, you may want to just consider directly lending the money to them instead. Either way you could essentially be out the entire amount of the loan, only if you are the lender you can have the interest paid to yourself and avoid penalties and interest if the student defaults to a third party. It is almost impossible to have federal or private student loans discharged in bankruptcy, so once you take one out you are essentially stuck with it until it is paid off or for your life, and that goes for the co-signer as will.

If you are already in college and struggling to finish you need to go through the same evaluation steps listed above. The only thing that changes is instead of evaluating the cost of the entire degree you are evaluating the cost to finish your degree. You already have cost you incurred, but you can’t do anything about those, if you took out loans you have to pay them off whether you finish or not. As stated previously it is really hard to ever get those dismissed. So look at whether the additional cost to finish will be justified by the return you get on your degree. If you are at a school that is more expensive than you should have chosen, is it more cost effective to complete your degree there or, when factoring in the potential for lost credits and time, is it more cost effective to transfer and complete it elsewhere? Are there expenses you can cut out to keep your borrowing cost to a minimum? If you have to take out private student loans are you finding the least costly with the best terms?

So you just graduated and you followed all the advice above or didn’t, but either way you have this huge debt in front of you, what should you do! Unfortunately there is almost no way to get the debt dismissed other than by paying it. Be leery of any debt consolidation of deferment offers that will likely be flooding your mail box: there is no easy out and most of these offers end up costing you more in the long run. Before jumping on any of them make sure you consult with a trusted financial adviser or lawyer.  At a minimum you need to make all your minimum required payments otherwise fees and penalties will quickly spiral the debt even further out of control. After you make sure you make your minimum payments put together an overall financial plan, and, if that allows you to do so, contribute as much above the minimum payments as possible to pay down the balance on your loans. Any of those lattes and dinners out you enjoyed during college you are paying for now, so consider cutting a few of the current ones out until the debt is gone.

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