A recent New York Times op-ed shared a controversial view on educational loans: it is fine to borrow and never pay them back. A few days later, a rebuttal piece criticized author Lee Siegel and the New York Times for their “deeply irresponsible op-ed.” At College Coach, we are passionate about providing the best advice available with respect to college aid, and we felt we had to provide our own perspective for those families who might have read Siegel’s original piece.
We see no reason why families should take on huge amounts of debt for an undergraduate degree. Contrary to what Siegel assumes, lower and middle class families do not have to borrow huge amounts of money to get a good education. College Coach finance experts work with families every single day to determine how much they can afford and, if borrowing is going to be part of their college financing plan, how to be successful in repayment.
Prior to 2008, students could borrow private loans up to the cost of attendance without a co-borrower. Today, for the traditional, dependent undergraduate student, once he has exhausted his federal loan eligibility (usually about $27K), additional education loans are either borrowed on behalf of a student (by a parent) or with a co-signer. We believe parents should exercise their parental right to use the word ‘NO’ when asked to co-sign a loan that is financially risky. You aren’t dashing dreams. Your child doesn’t yet understand the true implications of borrowing loans that will likely far exceed her starting salary, and you need to understand that for her. If the end goal is to obtain a college degree, students (and their families) need to recognize that there are many different ways to get there.
For families considering education loans to cover college costs, here are things we recommend you keep in mind:
- If you have a year (or two) before your child starts college, determine what your monthly loan payments would be and start paying yourself that amount. You will quickly see whether or not your budget can sustain payments and the eventual loan you borrow will be lessened by your savings!
- Now is the time to comb through your budget and identify all the resources you currently have allocated to your child. Costs for private school tuition, uniforms, participation and activity fees, music lessons, and travel costs to sporting events add up. Make sure to consider all one-time expenses as well, like driver’s education classes or SAT prep courses. Double check all the temporary or seasonal costs that you have and then run through your list again! You are covering these things from your budget – you didn’t save for them as you would college. Congratulations, you have just determined how much college you can afford without loans!
- If you decide to co-sign or borrow on behalf of your child, you need to consider what would happen if the borrower or co-signer were to die. The lender of a private/alternative loan may call the entire loan due at that time and the burden of repayment will be placed firmly on the borrower. If the borrower dies, the burden of repayment falls to the co-signer. If you plan to co-sign a loan for your child, determine if the lender offers insurance for the loan and if not, consider purchasing a life insurance policy for the borrower that will cover the cost of the loan in the event of his death.
- Siegel’s op-ed is irresponsible in many ways, but one of the biggest problems is that he never addresses the reality of what happens when a student defaults on her loans. The outcome may include garnishment of wages and federal tax refunds, as well as a damaged credit history. Things are not free and easy after default, as he suggests.
- Consider the average starting salary for people in the profession you are considering. A good rule of thumb is not to borrow more than the amount you expect to make in your first year out of college.
- Will you have to eventually relocate to find a job in your field? If so, consider the cost of living in the area where you plan to reside – will your salary support loan payments in addition to the rent, food, utilities, and other costs of living?
- If your future plans include graduate school, consider the amount of additional debt you will need to take on, add it to the loans borrowed for your bachelor’s degree and then determine what your repayment will look like. What happens if you can’t afford the payments? Is your co-signer able and willing to assume payments?
The bottom line is that a college education exists at many different price points, and families should compare their bottom line with their resources, bearing in mind what future costs of loan repayment will look like. When you understand what you can afford, both now and in the future, you’ll be ready to make a decision on the college that is best for your child in every way.