Say NO to Student Loan Debt (Part I)
January 08, 2014My colleague, Erik Carter, and I just recently finished our 2013 research report on generational financial issues. In this report, we looked at internal and external data to see what Millennials, Generation Xers, and Baby Boomers are dealing with in terms of financial planning. As I began to look further into the lives of Millennials, I was shocked to discover just how much college debt the average graduate carries these days—averaging $35,200 according to a recent Fidelity study.
To make matters worse, today’s graduates are entering a terrible job market. According to the Millennial Jobs Report released earlier this year by Generation Opportunity, 11.6% was the unemployment rate for Americans age 18-29, but this only includes those that are still looking for work. When you add in the unemployed that have stopped looking for work, the figure increases to 16.1%. That basically means there is one person that is not working for every six people that would work if they could.
Statistics like these are common, but we don’t think much about them until they hit home. Earlier this month, I took a call from a parent whose daughter recently graduated from college. To help his daughter, he agreed to take out a PLUS loan.
At the time, his daughter agreed to help repay the loan and so payments were deferred until she graduated. Now, six months later, payments are due, only she doesn’t have that well-paying job she was expecting. Unfortunately, dad doesn’t have the financial resources to make the payments either and there’s a chance the loan could go into default.
Unlike other forms of debt, student loans generally cannot be discharged through bankruptcy. Failure to pay back a student loan can lead to default and there are severe consequences when that happens. Listening to this man’s story, I decided that I would do everything within my power to avoid having my children borrow money to pay for school. Here is what I plan to do:
1. Save money for college
There are a number of ways to do this, including opening a 529 college savings account or a Coverdell education savings account. Accounts like these are funded with after-tax money, but the earnings grow tax-deferred and are not taxed if used for qualified education expenses. Websites like savingforcollege.com offer all kinds of information on various ways to save for college. Just last week, I received an email from them regarding a special 5-day course on section 529 college savings plans. It may not be enough to pay for their entire college experience but every little bit will help so I’m starting early.
2. Get the kids involved
The College Board website has all kinds of information for parents and students, including a Make a Plan section that allows students of all ages to make a personalized plan for attending college. There’s also important information about SAT testing, including ways to prepare for the test and a link to register for the test.
3. Get family and friends to help
Every year, my kids’ grandparents ask the same questions: What do they want for Christmas? What do they want for their birthday?
Well, this year, when grandma and grandpa ask the question, I’m going to say, “A college education.” GradSave is a program that lets parents set up a college savings registry for students so that it’s easy for others to contribute to their college savings. Students create a profile and a savings goal, and then family and friends are invited to help reach that goal. Funds are held in an FDIC insured savings account, which can be linked to a 529 savings account if desired. It sounds cliché but instead of clothes they’ll outgrow or an electronic device that will be antiquated within a year, this is a gift that really can last a lifetime.
4. Commit to not send my kids to school until we can afford it
With so much stigma about adult children living at home and with so much financial assistance available to help pay for school, it can be very tempting to send the kids off to college after their senior year. But if doing so puts them or I in a financial shackle that takes years to overcome, is it really worth it? I have spoken with many parents who have had second thoughts about sending their children off to college at such a young age. These students spend years trying to “figure out” what they want to do for a living, meanwhile spending thousands of dollars in books, tuition, and room and board.
Instead, I’m going to encourage my kids to take a few years after high school to really examine themselves before making a decision to further their education. They may pick up a few classes at the local junior college or decide they want to gain some experience through work, but if and when they go to college, I want them fully invested. We know the value of a good education, but as much as I want that for my kids, they have to want it for themselves. The best gift they could give me is a total commitment to their education. The best gift I can give to them is an education without encumbrances.