I'm a fan of natural consequences, but sometimes the lessons are too big - with consequences that last a lifetime - for the maturity level of the child. One such example is when a child wants to take on significant debt in the form of college loans. Most 17 year old high school students do not have the life experience to be able to understand the impact that taking on tens of thousands of dollars in debt will have on their lives.
While I encourage young adults to have freedom in making their own decisions, wise and carefully presented parental input is imperative in this issue. Most people would never consider advising a 17-18 year old to purchase a $80K house with payments deferred for 4 years (and a home loan has collateral -- if you go into default, they foreclose and the debt is gone), yet many are willing to let the same teen take on student loans that have even more of a financial impact.
Few young adults who have never supported themselves financially can truly understand what they are getting into with student loans. A friend of mine opted for her top choice of colleges, a small private school, and ended up with over $50K worth of student loans. She got a good job with her degree, but even so, the debt informed every life choice until she was almost forty years old.
The opportunity cost of student debt is high -- the trips that could have been taken, the option to stay home when kids are born, the kind of house that is affordable after the loan payments, and a myriad of other experiences lost when money is still paying for loans 20 years after graduation. Even in such circumstances as becoming disabled to the point that a person is unable to work, student loans may not be discharged without legal maneuvering -- bankruptcy does not discharge student loans. High school seniors don't have the life experience to be able to understand the legal commitment that they are making.
The availability and use of student loans is not inherently negative -- moderate loans for programs that will result in reliable, well-paid jobs can be a wise investment. Training for a trade (as advocated by mikeroweWORKS Foundation at Profoundly Disconnected) can be a lucrative investment even if it takes a moderate amount of debt. The problem is that we aren't seeing moderate loans and employed graduates. Now that the cost of college is up across the board (over 550% since 1985), the loans are growing ever larger (currently over $1.2 trillion, more than U.S. household credit card debt) and turning the current generation into indentured servants, all for the sake of attending 4 years at the school of their choice.
Despite the drastic fiscal consequences of attending a college that they can't afford, students are lured with the ideal of finding a school that is a perfect fit combined with promises of a comprehensive financial aid package. Parents and students should be aware that admissions and financial aid counselors are essentially sales people -- they work for the college and have the college's best interests (i.e. keeping the tuition coming in) at heart, not the student's. Financial aid packages are not just comprised of grants and scholarships; they also include money that the student has to earn or repay in the form of student loans and work/study programs. A financial aid package that fully funds college does not mean that the student is not paying for any of it. Additionally, there is no guarantee that a package that is offered one year will be offered again in subsequent years; in fact, "front-loading" financial aid the first year is a common way to present an attractive financial aid package to prospective freshmen. This "Scared Straight" style documentary playlist from NextGen Personal Finance is a good way to make sure that everyone is aware of the lifelong impact that student debt can have.
Many families come up with a financially sound plan to achieve education goals without vast amounts of debt. Whether that means earning as much advance credit as possible through CLEP, AP® exams, and DSST exams, or living at home and attending a community college for 2 years (saving on both tuition and room/board) before transferring to a 4 year school, these families have found ways to reduce the cost of a 4 year degree.
But what if your child is one of the ones that doesn't think that minimizing student debt is important enough to forgo his top school choice? Below are some strategies to help keep the discussion from becoming an emotionally-charged argument with parents on one side and the teen on the other, along with some questions to ask your teen to consider.
Suggestions for College Debt Discussions
- Go to a neutral location. To help ease the natural defensiveness that a teen might feel when discussing the issue with a parent who disagrees with their choice, it's wise to move the conversation to a place where the parent and teen are on equal footing and the teen does not feel like the balance of power is tipped toward the parent. A coffee shop, a favorite restaurant, or even a park are ideal locations. At home, even financially independent adults sometimes still feel like a child -- how much more so a teen who still lives there.
- Talk one on one. This is a time when it might be best to talk one on one (preferably with the parent who has the least emotionally-charged relationship with the teen) so that it doesn't feel to the teen that the parents are ganging up against him.
- Acknowledge that he is entering adulthood. With the exception of loans that require the signature of a parent, the decision is ultimately up to the student once they reach the age of majority. As a parent, what you can do is give him information so he can make an informed decision. It's important to make the discussion an adult-to-adult conversation. Ask him to listen to what you say with an open mind. Tell him that you only have his best interests at heart, and that regardless of what decision he makes that you'll respect his decision if he seriously considers and thinks about what you have to say.
Questions about College Options
Ask your teen to ask himself the following questions, and to answer them honestly (as least to himself). It may be beneficial for you to plan another outing to neutral territory in a few days or weeks to discuss them, or even to look up information/find the answers together. Remember not to lecture -- the point is for the student to ponder the questions, not be lectured with the answers.
- Does he have other, less-expensive options that will provide him with the same opportunities after he graduates?
- What does he see as the pros/cons to the different schools he's been accepted at?
- What do you see as the pros/cons of each of them?
- What makes the specific school he has chosen "better" in his mind?
- Does it offer things that he won't be able to get at other schools?
- Do the other schools have something similar, just not quite as good?
- Will he earn more after graduating from the chosen school than he would at the less-expensive option? And if so, will it make up for the difference in cost? How long will it take?
- How much in loans would he need to take?
- How much will it end up costing him (including interest) to pay off the loan? How long will it take him to pay it off (keeping in mind that the longer it takes the more it will cost in interest)?
- Does he have a plan to pay off the loans if he has to leave school before getting a degree (loans are only deferred as long as the student is in school)?
Ask him to create a post-graduation budget.
Sometimes the cold hard facts on paper can bring perspective to the consequences of student debt. Work together on a budget showing the potential earnings with the degree (I'd have him do both low-end income if he ends up waiting tables due to a poor job market and starting to mid-range salary for the job he is hoping to get). The budget should include all bills, including:
- Required health insurance under the ACA
- Medical bills that insurance doesn't cover, including prescriptions
- Student loan payments
- Entertainment, including eating out, travel, movies, concerts, etc.
- Emergency savings
This is where opportunity cost comes in -- most students think student loans aren't too bad until they see on paper what they will have to give up for decades in order to afford their top choice for those 4 years.
More Opportunity Cost
Then, continuing from the previous questions, encourage him to consider the real cost of repaying the loans by considering what he would do with that much money if he had it in a lump sum right now. Take the loan amount that would be necessary to fund the expensive option and subtract from it the total of the loans that would be necessary (if any) if a less expensive option was chosen, and brainstorm with him to come up with a list of things that amount could pay for.
A benefit, profit, or value of something that must be given up to acquire or achieve something else
Ask him to consider:
- If he had that much money right now to do whatever he wanted, what would he do with it?
- What does he think his future-self might choose to do with that money?
- What else could that amount of money buy him in the future? Is he interested in starting a business that needs funding? Buying a house? Taking a gap year to travel?
Not being able to do/have those things is really what the loan is going to cost him.
Your student probably understands in theory that the loans have to be repaid, but it is important to tactfully make sure that he really understands that there is really no easy way to get rid of them. The deferrals only last as long as the student is in school, they stick around after a bankruptcy, and if they are still unpaid when when the student begins collecting Social Security, they can be garnished from Social Security payments. They are truly a lifelong financial obligation.
Workbook Download for Newsletter Subscribers
TheHomeSchoolMom has put together a workbook download to help students evaluate their college options. The workbook, which is a newsletter subscriber exclusive download, includes many of the suggestions made here along with forms for determining loan costs and creating budgets. You can download the workbook in our subscriber area. Your subscribed email address is the username and morningcoffee is the password.
Opportunity Cost. (n.). BusinessDictionary.com. Retrieved February 14, 2015, from http://www.businessdictionary.com/definition/opportunity-cost.html
Thanks to Karen B. for her assistance with this topic.
[ED: Updated 17 Feb 2017 to add NGPF "Scared Straight" playlist.]