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Do you need student loans?

The millennial generation is quickly becoming the poster child for financially devastating student loan balances. I would know, as a member of this generation, I see many of my peers struggle with an uninformed decision they made years ago. Decisions that have led to the current outstanding student loan balance of $1.5 Trillion. Which is why this month’s newsletter will be the first of a multi-part series that will focus on student loans. This month’s newsletter will be from the perspective of a parent or guardian that is helping their student assess the financial options they have available to them to further their education.

So, your student is trying to further their education, how will this be funded? Are you, as the parent/guardian, paying the costs? Or will your student be responsible for their college costs? Or is it a combination of the two? Will student loans or other alternative funding options be involved in this decision?

The process we go through below will help parents/guardians that are planning on paying for their student’s college costs or at least a portion of it. It will also be of benefit to those that choose not to pay their student’s educational costs but are instead advising their student on how to effectively pay for their educational expenses.

Step 1: What are your student’s educational options and what will it cost per option?

  • What schools/programs are your student considering?

  • What are the expenses for each of these choices?

  • Tuition, books, living expenses, transportation, etc.

Step 2: Are there ways to reduce this cost?

  • Are scholarships or grants available to the student?

  • Can the student participate in a work study program or work while in school to potentially reduce some of the costs?

  • Would the student consider changing their career focus to one that may not require as much schooling?

  • Are there less expensive school alternatives?

  • State Schools, Community Colleges, Trade Schools, Professional Designations/Licenses

  • Can the student earn general undergrad credits at one of these schools and transfer to the more expensive school for degree specific classes?

  • Has the student considered joining the military to potentially qualify for military student aid?

Step 3: What is the cost after totaling all the potential expenses and potential reductions (Net Cost)?

  • Add up the expenses from the different scenarios and the potential reductions, what is the cost (net cost) after taking all of this into account?

  • Given this net cost figure, who will be paying this? If you do plan on paying for your student’s entire educational costs or at least the partial costs, move on to Step 4. If you are choosing not to, you may skip Step 4 and move onto Step 5.

Step 4: Assess your own financial position

  • Analyze your current financial situation:

  • Are you in a financially sound position and where you want to be?

  • If you are not where you want to be, then you need to reconsider paying for these costs.

  • Will paying towards this cost jeopardize your financial situation?

  • For example, will this potential cost require any of the following:

  • Deplete your personal savings

  • Require you to use retirement funds

  • Potentially reduce your future retirement contributions

  • Require additional mortgages on your home

  • If paying for this cost will jeopardize any of the previously mentioned, much less your overall financial position, then you need to reconsider how much you plan on contributing to this educational cost.

Step 5: Student loans

  • If you have considered all other options, but still require additional funds, then it would be time to consider student loans.

  • We recommend the following:

  • Communicating with your student what student loans will require of them, because there’s a good possibility the loans will be in their name.

  • Advise your student not to over borrow. Many students have used their student loans to fund non-essential expenses that could have been paid for by other means.

  • Make sure your student is entering a career that will adequately provide for them to pay off their loans in the future.

  • Review Step 6 with your student. This illustration will hopefully provide some perspective on what student loans will require of your student in the future.

Step 6: Loan Balance Scenario

  • When considering student loans, it may be beneficial that your student has some perspective on how long it will take to pay off a loan. Potentially reinforce the message that they should only borrow what they absolutely need. There are many student loan calculators out there, consider using this one.

  • Below is a scenario of four students graduating with the same size loan, but each handle it differently.

  • Each student has $50,000 in student loans upon graduation

  • They are all being charged 5.5% interest on an annual basis.

  • Each student chooses to pay a different monthly amount:

  • Student 1 $1,000 a month

  • Student 2 $750 a month

  • Student 3 $500 a month

  • Student 4 $250 a month

Immediately, you should notice the increasing length of time it takes to pay off a loan and the amount you will actually pay to a lender over the course of your loan term. It would take “Student 4” 45 years to pay off their loan. 45 years!

As this article may portray, there are a lot of options to consider before someone should take out student loans. Ultimately, when deciding whether student loans should be used or not, you should consider the realistic costs associated with completing the desired education and what you can expect to earn with that education. Do the potential earnings outweigh the cost? We are just now starting to see the long-term repercussions of the irrational decisions made by students years ago, which will continue to hinder them for years to come. If you are considering student loans, use the lessons of my generation, make sure to weigh all of your options. Please let us know if you have any further questions concerning student loans.

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