The student loan crisis has permeated the news headlines lately, such as “Are Politicians Waking Up to the Student-Loan Crisis?”, or “Don’t Believe the Hype: There’s Still a Student Loan Crisis.”
And yet, unwary students and their parents continue to pile the debt on in pursuit of what can be a valuable college degree. All too often, the result is a Phi Beta Kappa key to the poor house. That risk is real, especially today.
Here’s how your clients can minimize it:
Know the End from the Beginning
Before students begin making promises they may not be able to keep, H. Jude Boudreaux, founder of Upperline Financial Planning, suggests they look at what he calls career risk, the risk the student will step off campus and into her first job, only to discover she hates her work and has a mountain of debt to boot. Instead, Boudreaux says, students should seek internships or conduct informational interviews to find out if the career they’re contemplating will actually be fulfilling. “Sit down with people in your family’s network and ask, ‘What does a day on your job look like?’ ‘What advice would you give to someone interested in pursuing your career?’ Have four or five good questions,” he says. “People are usually willing to share that kind of information.”
Don’t stop there. Financial aid letters finally in hand, the student should take out a calculator or fire up a spreadsheet. What will all those loans add up to in four or five years and what will the monthly payment be? (Keep in mind that tuition and fees have been increasing at a 5 percent clip on average over the last five years and that the baseline is already quite high, especially at private schools.) Then compare that figure to entry-level salaries in the student’s chosen field. Do the numbers add up? It’s important to get real about this early on, Boudreaux argues. “I know somebody who accumulated $250,000 in loans for a five-year degree in textile design. That may not have been a great investment.” If the student plans ahead, she can see that coming—and avoid it.
Free Money First
Even if the student thinks he won’t qualify for grants or scholarships, he should submit the Free Application for Federal Student Aid, or FASFA, regardless. Colleges and universities typically require one before they’ll make awards anyway. The student may be surprised at the result. And he won’t have to pay those dollars back. “No one should skip the FASFA application,” says Heather Jarvis, an attorney specializing in student loan law and founder of AskHeatherJarvis.com.
Cheap, Flexible Money Second
After the free money, students have two basic choices: federal student loans and private or bank-made student loans. The first type is typically less expensive and offers more advantages than the second. Those advantages could come in handy if risk becomes reality. Say that Goldman has no need for someone with a degree in basket weaving, and the student is forced to actually weave baskets. Federal student loans allow for an income-based repayment plan. Private loans typically do not. Or say after 20 years, the student is still looking at virtually the same mountain of debt. Federal student loans may allow for some loan forgiveness, while private loans typically do not. “Remember, you are trying to protect yourself from unlikely, but devastating worst case scenarios,” Jarvis says. “In such cases, federal student loans are super-useful.” Often they’re also subsidized.
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