I read this article titled “This Bright-Eyed Young Man Was Utterly Demolished by Student Loans” about (can you guess?) a guy who has experienced significant financial, personal and emotional hardship because of the financial responsibility that he took on with significant student loan debt. I wish this were an isolated incident, but based on some meetings I’ve had with young people recently, I’d be lying if I said this isn’t becoming increasingly more common. Maybe not to the extreme that Nick is experiencing, but there is a growing number of young people who may not be finished with paying off student loans until they are closer to Social Security than college.
What can be done about this problem? What can you do if you’re a student thinking about college or a parent of a child considering college? There are a lot of reasons for the massive explosion of student loan debt in this country, and I won’t make this blog about how I’d fix the broader societal/legislative problem. (Although I do have a few ideas, so Congress, if you’re reading…) But, there are things that can be done at the individual level that can minimize the long term damage that student loans can create in one’s budget.
Read the article and you’ll see the most extreme case I’ve ever seen of student loans playing a central role in the financial difficulties of a person. The reason there’s an article about him and he’s a part of a documentary about student loans is that he’s an outlier. His situation is extreme. While we can learn from extreme cases, I think we can learn more from people who are becoming “the new normal.”
Over the last few months, I’ve seen a lot of people who have graduated from college within the last 10 years and have “student loan debt” as a big item in their budget. It’s becoming increasingly common for me to see people who are paying more each month in student loan payments than they are for rent. It is very common for graduates to share an apartment or a house with multiple friends to have an affordable rent so that they can pay back their loans. Frugality for these people is required because of the enormous monthly financial burden of student loans. Most of them will be paying student loan payments well into their 40’s that are in the neighborhood of what I paid for my 1st mortgage. How will they buy a house? How will they save for retirement? If they have kids, how will they save for those expenses? The answers are troubling.
If there are lessons to be learned, I want to learn them. I have 3 kids who are rapidly approaching college age. I swear it feels like they were born just yesterday, but 2 of them are teenagers now. How can they NOT be in the position of the people that I’m seeing far too often now?
Here is my plan and some topics that I have discussed (or will in the future) with my kids.
- Save, save, save. I am contributing as much as I can (without being detrimental to my retirement) to 529 plans. Having a pool of funds for education expenses is an important part of my plan. Will it be enough? Probably not, so there need to be other parts of the plan. This calculator can help you see if you’re saving enough.
- Make a well informed school selection: There are some parents who want their children to go to the school of their choice, regardless of cost. I am NOT one of those parents. Sure, looking at Pepperdine or Stanford or Yale or Duke is nice, but is it realistic? First, there are the hurdles of getting accepted. Then, the cost is a major issue. Is there a benefit for paying $60,000 per year that you can’t get by paying $5,000 – $10,000? This is the conversation I have had and will have again with my daughter. She wants to be a teacher. Her starting salary will be the same regardless of the college name on her diploma. Why overpay now if there is not going to be a tangible benefit later? This all comes down to the choice of school. Public vs. private? In-state vs. out-of-state? What about community college for the 1st two years? These are all decision points that can reduce the financial burden now and not drag down a young graduate’s financial life for decades after graduation.
- Work! I met someone recently who decided to work for a few years before entering college. She is working at an entry level job now and is taking 1 or 2 classes per semester at a local college. The good news for her? Her company has a tuition reimbursement plan. She was unsure about what she wanted to do with her life; she had no true career path upon graduation. So, instead of starting a career, she got a job and is living at home with her parents and saving most of her income. She figures that after 2 years, she will have earned one year’s worth of college credits and will have saved enough money to pay for a year or more. Her tuition reimbursement program is important and she is learning about potential career paths within her company. She is taking a non-traditional path, but it is working for her. If my sons don’t have a solid grasp on what they’d like to do as a career when they are a little older, we may discuss this option.
When I talk to the young graduates who come in to talk to me about the level of financial stress that their student loans are creating, a part of me can’t help but think of my own kids. I don’t want them to talk to a financial planner about how stressed they are within a few years of graduation. I’m having conversations like that far too frequently right now…