Why are Student Loans Such a Problem-Part 1-How to Avoid Them?
While it’s true that some of us have gone to college with no student loans or with small student loans, many others took out significant loans. It’s factual to say that federal, state and local governments, over the past four decades, have moved away from publicly financing state colleges and universities. With reduced funding, changes have also been made concurrently to make it easier to get larger student loans. It’s also fair to say that the government, state & federal, haven’t done much to change the system. So, it gets worse and worse as the burden of paying for college is shifted from the state to the students and their parents. But that’s not what this post is about. Because we all have to deal with the system as it is, not what we think it should be.
The student loan system aside, the two main reasons that student loans are such a problem, are inattention and lack of planning. On the inattention side, many parents have no idea that four years in a state university will likely cost in excess of $100,000. They are also unaware that private universities are 2-3 times higher. God help anyone that has more than one kid! With costs that high, college is something that needs to be planned for from a young age. Or, at minimum, starting today since today is the best that we have. And early planning isn’t just important in paying for college, but to head off the barrage (bad) opinions from people who will tell you that you should allow your kid to go to their “dream school”, regardless of cost. If you buy that line or your kid buys it, it becomes even harder to point out the significant downside of college costs & the bondage of student loan debt.
And while this all might seem like a heavy lift, the earlier planning starts, the easier the lift. Let’s do a little math. If someone starts saving at birth, then $200/month savings over 18 years, earning 8% return will turn into just under $104,000 by the time they start college. That doesn’t sound too bad! But almost nobody does that. So, what if you wait until they’re five years old to start saving? That same $200/month will leave you with $61,000. Not bad but waiting just five years reduces savings by $43,000. In order to get back up to $100,000, you’d need to save about $350/month. Still doable for many people! But, in fact, most people don’t give college costs much thought until their kids are in high school. What then? Well, if you wait until age 14, that $350/month gets you about $25K when you start college. Not enough! At this point, to get to $100,000, you’d need to save $1400/month. That’s a much heavier lift. Wherever you are, however, the time to get started is now.
One other problem is called inflation. We’re all familiar with inflation these days, but there’s been significant inflation in college costs for decades. So, unfortunately $100,000 today, with college cost inflation running at about 4%, that $100,000 cost could double in 18 years. So, we need to start early & we need to factor inflation into our planning.
This all seems so overwhelming! Well, there are ways to reduce the cost. Many high schools offer dual enrollment classes or AP classes. These are college level classes that count both for High School and for college. Often, these classes cost nothing, or have small fees. So, this can be a great way to reduce the number of semesters & the cost associated with them. Community college is another way to get semesters paid for at a very nominal rate. This is mainly effective if the student lives at home and doesn’t have to pay for living expenses. You can get up to 4 semesters of units at a community college, which can almost cut the cost of college in half. Finally, scholarships & grants are another way to reduce costs. Pell grants, designed for low-income students, can yield up to $7,395 per year. The amount of the grant, which does not need to be paid back, is determined based on the parents’ income and other factors. Other scholarships can be found from a whole host of organizations. The first place to look is on the website of colleges you’re looking at. Community organizations, some states, private organizations, etc. offer scholarships with varying criteria. Some are needs based, some are based on grades and/or test scores, some are based on leadership criteria, some are offered to the kids of people in certain industries or at specific companies and more. There’s really a whole array of scholarship offerings. But you have to spend the time researching & applying. Or, should I say, your high school student needs to spend the time researching & applying.
The last great way to pay for college is to work & save up. I’m not just speaking to the parents, but the prospective student can have some skin in the game. Not only should they be applying for grants & scholarships, but they can be working & saving up too. This teaches an awesome lesson that working hard & saving up can help you achieve your goals. Where else in life might that come in handy?
Next time I’ll discuss what Student Loans actually cost & why they need to be avoided if at all possible. You’re going to feel a tug to just let your kid pick the school they want & head off to school. I meet these kids all the time after they graduate college. ALL of them lament that no adult set them straight and guided them through the process of paying for their education. So, you’re doing them no favors by putting your head in the sand & letting it all happen. They’ll resent you for it too.
OK, so you read all of that and now you’re worried. How on earth can you save up enough to make college happen? Many people need guidance. As a Financial Coach I help set & achieve goals. If the goal is college, then I help my clients prioritize their spending in their monthly budget, allowing them to save up for college. If you’d like to find out how a Financial Coach can help you plan and save for college, click here. We’ll discuss your financial situation, see where you are and see if coaching is a fit.
As always, you can subscribe below to receive an email every time I post.
