I recently came across an article about a couple who borrowed $500,000 in student loans to help three of their children attend college. Yes, you read that correctly – half a million dollars. Thankfully, each of their children agreed to pay back 75 percent of the money they borrowed, but the couple still has $150,000 in outstanding student loan debt and another child is about to enter college. Their monthly student loan payment is currently a whopping $1,700. They have no retirement savings and will be paying off the loans for the next 25 years. On what planet does this even make sense? I love my children and plan to help them with college, but there’s no way I could manage a loan balance that large without risking my own financial security. And to be quite honest, even if I could manage it, I don’t know that I would be willing to borrow that much for my child’s education.
Unfortunately, there are some parents who don’t think about the bigger picture or the consequences of not being able to make those large student loan payments. They only want to make their children’s dreams come true, no matter the price tag. And now, the U.S. government is actually trying to make it easier for them to get into financial trouble. Currently, parents can borrow up to 100 percent of the cost of attendance (minus any financial aid received) through the federal Direct PLUS Loan for Parents. They must pass a credit check, which includes a look at any adverse action over the last five years and any current delinquent accounts. The new proposal, however, would reduce the adverse credit to only the last two years and may even include credit approvals to those with delinquent accounts or even those in collections. Many consumer advocates worry that these changes will lead to families taking out more money than they can realistically pay back and cause default rates to rise.
But, parents aren’t the only ones taking on too much student loan debt. Students are willing to finance their dreams without considering their return on investment. More than 70 percent of this year’s graduating class (undergraduate) is leaving with student loan debt. The average amount is now $33,000 per student, a jump from last year’s average of $29,400. For those who take on more than the national average, amassing student loan debt to the tune of $50,000, $75,000 or even more than $100,000, there are serious consequences. Many new graduates move back home to live with their parents or other relatives because their salaries aren’t large enough to cover living expenses and their student loan payments. New college graduates are also delaying large purchases, such as cars or new homes, and putting their future plans (like starting a family) on hold. Of course, those are the lucky ones who are able to make their student loan payments. Over the last decade, the number of students defaulting on their loans has also continued to increase. Last year, 11.5 percent of graduates were at least 90 days late on paying their student loans. And according to a survey from the American Institute of CPAs, 60 percent of student loan borrowers now regret taking on so much debt for their education.
How do parents and students determine how much is too much to borrow?
It’s actually not that complicated. Here are a few things parents and students should consider before taking out any student loans.
- Research post-college salaries for potential careers
- Consider cheaper alternatives for obtaining a degree (community college, public school, etc.)
- Don’t borrow more than what will be earned during the first year after graduation
- Make sure estimated payments do not exceed 10 percent of monthly gross income
- Borrow only what is truly needed to pay for educational expenses
It’s also important that parents and students exhaust all federal financial aid options before turning to private student loans. There is more flexibility with federal financial aid, as well as more repayment options, but that doesn’t mean borrowers should take out the maximum allowed. It’s better for parents and students to make the difficult decision to alter their educational plan now, rather than struggling with student loan debt for the next 10 to 25 years. Those who make smart choices are more likely to graduate with a degree and a student loan payment that is within their budget. If they don’t, they could find that their dream college has turned into a nightmare from which there is no escape.