How Your Family Can Avoid a Student Loan Crisis
By Joe Messinger, CFP®
December 16, 2022
Student loan debt in America is the next financial crisis. In fact, it is the fastest-growing type of debt. Students are plunging headlong into huge debt holes without a real sense of how much this debt will affect their future after graduation.
The scariest part is that they have no real idea what they are getting into — they don’t have a full-time job yet, often are unsure of what their salary and expenses will be after graduation, and they may have “skipped” estimating what their monthly payments will be once their loans are due.
Everyone agrees that the problem is completely unsustainable and out of control. The larger problem is that it is also uncontained. If I were in the lending business, I would love to give someone a loan that cannot be bankrupted. Wouldn’t you?
But why should we care? How can we work towards solutions for future graduates? These are the questions that keep us up at night. How can we help high school seniors make proactive student loan decisions?
Can we help them see into the future and understand how their decisions will impact them for the rest of their life before they sign on the dotted line? Having a plan would be a start!
The Current State of Student Loan Debt
In the past 20 years, average four-year tuition at in-state, public colleges has increased 175%.
In the past ten years, the number of student loan borrowers has doubled–ballooning up to 43 million borrowers! Not only are more people going to college and borrowing to pay for it, but the price is also rising at a tremendous rate.
Who Are Student Loan Borrowers?
As you would expect, the majority of people taking out student loans are younger (age 18 to 29). Amazingly, 34% of the entire pool of student loan borrowers in the U.S. are in this age bracket.
However, as the cost of college continues to increase, more borrowers are taking longer to repay their loans — 49% of the total borrower pool is between the ages of 30-44.
Do Students Understand What They Are Taking On?
It appears that they do not. When you buy a car, do you figure out the monthly payment to decide if the car is one you can afford? You probably do. Would you purchase a Porsche without considering what the payment is?
The majority of student loan holders don’t estimate their monthly payment before signing on the dotted line for a loan. In other words, they have no idea how much their loan would cost them each month or the total life of loan cost.
Here is the deal:
You need to know exactly how you will pay for all 4 years of college down to the penny including student loans and the monthly payment upon graduation.
Our rule of thumb is that you should never take out more in student loans than you think your anticipated first year salary will be in that career.
Making a Plan
One way you can help your students make a student loan plan before heading to college is to do an apples-to-apples cost comparison of their top schools using our free College Money Report™ tool. This unique-to-you report pulls data from thousands of top schools and uses your personal information to estimate the total four-year cost of schools on your student’s application list. This way there are no surprises, and you have a clear understanding of what you can cover with savings, scholarships, and cash flow, and where student loans will need to fill the gaps.
Once you calculate your total student loan payment, we recommend filling out a budget to include estimated monthly costs your student will face after graduation–rent, car, food, etc. In addition, the concept of paying taxes every paycheck is lost on a young adult who has never paid them.
With this estimated budget, students can get a real view in dollars and cents of what the financial picture will look like with the loan monthly payment factored in. They will quickly realize that choosing to take on large student loans will impact their quality of life after graduation.
Taking on student loan debt may be a beneficial investment in their future, but they need to be aware of what their future financial situation will look like. We need to make sure people are not being straddled with unaffordable monthly payments, late payments, and loan defaults.
When individuals are struggling in these ways with their debt load, their financial situation is in peril, and society will suffer as a result. In short, they are delaying life.
They can’t save for a down payment for a home, they are unable to save for retirement, they delay getting married and starting a family of their own. Never mind saving for college for their own kids when they are paying off their student loans well into their late 30’s and early 40’s.
And, oh yeah, many of them end up back at home for a few years. Not exactly the ideal outcome we envision for our kids.
What Can You Do?
Talking about money is not easy. Most of us in this country learn how money works at the school of hard knocks because we don’t teach it as part of our school curriculum. As parents, you can change the narrative!
Make sure your students understand how these financial processes work. What does it mean to take on debt? What does that debt look like on a monthly basis? How does debt affect what they want for their lives?
Having a plan helps families make educated decisions and not blindly enter unmanageable student loan debt. Understand how to cut the cost of college, where you can get the most scholarship money, what colleges you can afford, and exactly how your family will actually pay for college.
Updated December 2022.
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