You’re a parent, and you are responsible for taking care of your minor child financially. But you are equally responsible to take care of yourself. Taking on student loans so that your child can enroll at the college of his or her dreams may sink your dreams of ever retiring. Or worse.
Contrary to the advice you will get from many college and university financial aid officers, you shouldn’t take out loans to pay for your children’s education under any circumstance. Parents should not borrow money to pay for their kids’ college educations.
Locking eyeballs with the financial breakdown for your son or daughter’s first semester will be painful—even if he or she is attending a public college.
If you opt to pay for some or all of the cost of college via student loans, at the very least, you’ll be paying several thousand dollars per year. It’s not cheap.
Ways Parents Borrow
There are a number of ways that parents can sink their own financial ships by taking on debt for their children’s education. The most common is for parents to take out student loans.
Parent PLUS Loans
These are loans that are taken out in the parent’s name(s) to be used for their child’s education. The problem with that? The federal PLUS loan program allows parents to borrow far more than they can comfortably—or ever—repay!
Private Student Loans
Some parents take out private student loans, usually in their own names but more often as a cosigner on a student loan.
Either way, the parent is 100% responsible for the debt—something that many parents don’t understand, even after sitting in a financial aid officer’s office and checking the box that certifies they’ve read and fully understand the terms of what they’ve just agreed to.
Home Equity Loans
Then there are some parents who resort to taking out home equity loans to pay for their children’s education. Rather than having a student loan, these parents use the equity in their home to pay for college.
While that might sound like a great idea in the short term, it’s not. The potential complications are myriad. Over the years, I have received more than a few letters from devastated parents who exchanged their homes’ equities for college debt. And then life happened. Kids dropped out of school; parents faced unemployment, health issues, divorce. You get the picture. They couldn’t keep up with the mortgage plus big HEL obligations. Foreclosure ensues, they’re out on the street and their lives are devastated.
The Real Cost
What parents don’t realize is the true cost they bear when they take on student debt. Parent PLUS loans allow parents (and graduate students) to borrow up to the full cost of an education. Only a basic credit check—no underwriting—is used to determine whether the borrower has the income or ability to repay the loans.
Parents who take on Parent PLUS Loans have precious few, if any, forgiveness options. These loans cannot be forgiven under the Federal Teacher Student Loan Forgiveness Program, and for a variety of technical reasons, parent borrowers won’t get relief under the Public Service Loan Forgiveness Program based on their students’ qualifying for forgiveness. These loans cannot be bankrupted, either. The only sure forgiveness comes upon the death of the signer.
Parent PLUS Loans are not eligible for the student’s income-contingent or pay-as-you-earn repayment plans. The standard repayment requirement offers little if any flexibility.
If you think the U.S. government will ever forget your Parent PLUS debt obligations, think again. Until you die, your only option is to repay them as agreed.
CBS News reports that 3 million Americans over the age of 60 still have student debt. And the Wall Street Journal reports that in 2017, those seniors’ average education debt was $33,800, up 44% from 2010. More than 40,000 people over 65 are having their Social Security payments, tax refunds, or other government payments garnished because they aren’t paying their student loans. That number has more than tripled in the last decade.
If parents strip the equity in their home using a Home Equity Loan (HEL) to pay for their children’s college education, they run the risk of losing their home through foreclosure if anything goes wrong, making them unable to keep up with payments. Yes this happens, and more often than we even want to think about.
Parents and students need to look for ways to graduate college debt-free. It’s called working, and I’m talking about your student here. And there are grants and scholarships—money that is not required to be repaid.
Perhaps it’s time to switch schools. The fact that the fancy expensive school accepted your brilliant progeny does not mean that you can afford it, let alone go there in the same way your son does not get a Ferrari just because he passed his driving test on the first try. Think, people. Match quality with need, and need with the ability to pay.
If after exhausting all options—working multiple jobs, living at home, starting out at community college, scholarships and grants—your student is still are unable to cover the full cost of going to school, and there comes a dire need to borrow that cannot be avoided, the student should be responsible for that debt—not the parents. And that student should stick to Federal student loans—never private loans.
How to Pay as You Go
Paying for college with money saved and invested is definitely the cheapest way to go because a great deal of the money you send to the college will come from interest, dividends, and capital gains. But you have to start early to get those benefits.
Use current income
Spending current income—either the parents’, the student’s, or a combination of both—is a more costly way to pay as you go. This will definitely require a change in lifestyle and considerable sacrifice. But when you’re finished, you’re really finished. The education will be paid for in full. Achieving that goal is definitely worth the sacrifices required.
Work for the school
Many private colleges give an excellent discount to the children of college employees. There are lots of jobs on a big campus other than teaching positions. Check it out. You never know what you might find. Several colleges that I know of offer free tuition to the family members of school employees.
Seek out discounts for pastors and missionaries
Many church-affiliated colleges and universities offer significant discounts to the children of pastors and missionaries. If you fall into one of those categories (or feel a change of profession coming on), make inquiries.
Apply for grants
A grant is a flat-out gift. It is free money, and there is no requirement to repay. The most common is the Pell Grant, money from the federal government to assist low-income undergraduates. But don’t get too excited. The grant will be small, at best, and will be determined by the family income. It could be as little as $200 or as much as $2,500.
If the student is a displaced homemaker (a woman who has left the workplace to rear children and is single as a result of either divorce or death and requires training to return to the workplace) or a dislocated worker (anyone fired or laid off due to downsizing or a self-employed person whose business failed because of a turn in the economy), that grant applicant will receive preferential treatment.
The Federal Supplemental Educational Opportunity Grant (FSEOG) is available for very low-income undergraduate students and ranges from $200 to $4,000 per year. Many states have grant programs for students who go to state colleges or universities. In addition, many colleges have their own grants based on need.
Take part in a work-study program
A federal program, work-study provides on-campus jobs for students. The college administers the jobs and supervises the workers. Once the student is granted an award, he must work until that award is earned. There is no requirement to pay the money back, even if the student does not graduate.
Look for corporate benefits
Many large corporations have an education reimbursement program for employees who qualify. This can be an excellent way for a student to get plenty of their college costs paid for. Those seeking graduate degrees might consider a job change to a corporation with such a program before enrolling in graduate school.
Serve in the military
For those young people wishing to serve in the military, an excellent education could be a decided benefit. The military will put you through medical school, for instance, if you enter as an o+cer and agree to stay for a period of time upon completing your residency.
Apply for no-need scholarships
There are jillions of scholarships available that are not based on need but rather on ability or one’s ethnic heritage—many of which go unawarded every year. You can find exhaustive lists online at sites such as Fastweb.com.
Apply for financial aid
Financial aid is a term the educational system uses to refer to grants, loans, work-study, and scholarships. Even if you desire to pay cash rather than accept loans, you might want to go through the financial aid process to learn if you might be eligible for grants or other aid. You need to apply for financial aid at least one year in advance. I suggest that you take a couple of aspirin before getting started, and you will do yourself a big favor if you eliminate all expectations. Learn more at Fafsa.ed.gov.
A friend, Carol Anne, had a rude awakening while going through this financial aid process when her daughter enrolled at a large, private university. She went through the long and arduous process and discovered to her surprise, that her daughter was eligible for aid for all but $5,000 of her first year’s costs.
Her daughter, a brilliant and highly motivated journalism student, decided to go after every possible scholarship to make up the $5,000 gap. Sure enough, she was selected as the national champion for a journalism scholarship to the college of her choice in the amount of—you guessed it—$5,000.
How shocked they were to be informed by the college that her financial aid would be reduced dollar for dollar by any scholarship she won outside. The college said it wasn’t their fault. They are required to adhere to federal regulations that require all sources of income to be taken into consideration. They saw the scholarship as a new source of income.
If You Must Take Out a Student Loan
In the same way that most people would never be able to buy a home without a mortgage, most people cannot afford a college degree without some amount of financial aid in the form of student loans. I wish that were not the case, but it has become a fact of life.
That being said, here are guidelines to follow to make sure student debt doesn’t become a much larger problem for your future than if you had not gone to school in the first place.
Only the amount you absolutely must have to get by
It will be tempting to borrow the full amount for which you are eligible. But that could be more than necessary. Be strong. Say thanks but no thanks. Do not accept more than you need so you can do any number of very foolish things with borrowed funds (all taken from the annals of my mailbox):
- invest the excess (this one always amazes me)
- buy an engagement ring (oh, puh-leeze)
- buy a computer (the one you have is fine)
- buy a car (can you say public transportation?)
- live off-campus (dormitory living is an education in itself)
- spring break at Daytona Beach (I’ll pretend I didn’t hear that)
Rule of Thumb
Borrow no more for your education than you will earn in the first year working in the field for which you are preparing. For example, if you are getting your degree to become an elementary school teacher in a city where first-year teachers are paid $27,000, your total student debt for your education (all of the years, not only one semester) should not exceed $27,000. That’s a rule of thumb you can rely on.
Begin immediately to make payments
Even though you have the option to defer payments until you graduate, don’t take it.
Understand that federally guaranteed student loans come in two flavors: subsidized and unsubsidized.
Subsidized loans are need-based and issued to families and students who can demonstrate a financial need. These loans do not begin to accrue interest until after the student finishes or leaves college.
Unsubsidized loans (most student loans are unsubsidized) are available to anyone and begin accruing interest the moment you cash the check. However, the government allows the interest to be rolled back into the loan and does not require payment of it until after graduation. This means you could borrow, say, $8,000 but end up owing $9,000 or more, because of the un-paid interest that rolled into the principal balance. You’re paying interest on interest!
At the very least, begin immediately to pay the interest each month on all unsubsidized loans. It won’t be a great deal … quite possibly $10 or $15 a month.
Repay the debt in three years
You will have opportunities to consolidate your loans into one loan so you can make a single payment each month. That’s fine, but know that you can accelerate your repayment, and you should. You do not want to be making these payments for the next ten, twenty, or even thirty years. Determine to pay that student debt in full within 36 months, come what may.
Continue to live like a starving student so you can get your repayment taken care of in short order.
Know the ropes
The government has over the years introduced payment plans and outright forgiveness based on income, service, and other life situations. While it’s tough to qualify, this is information you need to know if your name is associated with any kind of student debt.
Income-based repayment, for example, is tied to your gross household income after graduation. If it’s low or you work in public service or for a nonprofit organization, you could qualify to have some of your debt forgiven. But there are requirements having to do with on-time payments over a long period of time and so forth. It is so complicated you’ll want to tear your face off, but stay diligent. Learn, ask, find out, don’t stop until you fully understand.
SavingforCollege.com, Studentaid.ed.gov, and StudentLoans.gov are information-rich sites that will help you stay on top of the laws and regulations for all things student loans. There have been recent changes (some temporary, others permanent). If you as the parents or your student end up going into debt to fund a college education, do it as intelligently as possible.
Know at all times exactly how much you have borrowed, the interest rate, the exact terms, and when the payments will commence. Start repaying at the first moment possible and pay more than is required. Do not push the limit by accepting the six months of grace you’ll get before starting to repay your debt. Do not consolidate or rewrite the loans if doing so extends the payback time. Accelerate the schedule so you pay off the loan as quickly as possible. Above all, never default.
Your kids can get help paying for school, but nobody will help you pay for your own future. Going into debt to pay for a child’s education could be the biggest financial mistake you will ever make. It is not some kind of gift.
The best gift you will ever give your kids is assurance that you will not become a financial burden to them in your old age. If you are not aggressively saving to fund your retirement, that is exactly what will happen. Not a pretty picture, is it?
Your college years will definitely be among the best of your life. Make the most of your very expensive education. Don’t select a major because it sounds fun, or so you can be in classes with your best friend. If you don’t know what you want to do with your life, get some counseling. You may need to sit out for a few semesters until you do know.
Beware of credit cards for students. You will be amazed to find the major credit card companies hounding you to accept their credit cards. They are going to come after you with a vengeance. They will make you feel mature and responsible; they will offer you huge incentives like, well, a T-shirt. They’ll make it sound like you will be better off with their credit card.
Learn these two important words: hard work. You are younger, stronger, and freer from obligation right now than you will ever be again in your life. You need to have skin in this game, which means paying your own way. Step up! I am talking jobs, jobs, and more jobs.
Work every holiday break, every summer, and during every school year, too—as if your life depends on it. Take any and all jobs you can get. Stop spending your brains out on everything that looks cool.
Take responsibility for this amazing opportunity you have to get an education. Getting your degree will be the biggest thing you will have accomplished in your lifetime to date. This is serious.
Stop whining and stop feeling entitled to have someone else pay your way.
You may never again be presented with the privilege you are facing now of being accepted into a college or university. This is a big deal. Don’t blow it.
Determine to take the scorched earth approach where no measure to cut costs is too frugal. Live at home if they’ll let you. Be grateful. Demonstrate your appreciation. Cook your own meals. Ride a bike, rent your textbooks.
If you must take on a minimum amount of student debt, there are many future options if the student loan is in your name, including student loan forgiveness and various repayment plans that can lower payments. Do not ask anyone to co-sign a loan with you. That’s the easy way out. Don’t opt for easy. Opt for smart.
In closing …
Let me close with the story of Debra Crow. As a single parent, she felt overwhelmed and guilty when her daughter headed off to college. There was no education account to draw from—no savings. Nothing.
In desperation fueled by guilt and shame, Debra took on $41,000 in Parent PLUS debt to help pay for her daughter’s education. Now that the debt has come due, she struggles to make any payments—even the minimum payments are putting her behind every month. She’s looking at many years of struggle, pain, and debt repayment misery.
Debra’s daughter is working for a non-profit organization that would qualify for student loan forgiveness if only the debt were in her daughter’s name. Loan forgiveness does not apply to PLUS loans or private parent loans unless the parents who took these loans—not the student—have worked for a non-profit organization or government agency for at least 10 years. And even then, actually qualifying for forgiveness is next to impossible.
Debra is stuck. She has no way out but to repay that horrific amount of debt plus. To let the loans go into default only sets her up for garnished benefits once she reaches her full retirement age.
If Debra’s daughter had simply taken on the debt herself, she would have had more payment options and quite possibly forgiveness of most of that debt in exchange for her work with a qualified non-profit.