Students in hock, is an expensive college worth it?

September 25, 2008
AZ College Planning always advises students and parents to take a closer look at whether borrowing makes financial sense. This of course is based on the individual family situation and the student's potential future income. Your student may graduate with student loans that will be due (typically 4 ½ years after disbursement). The difficult question […]

AZ College Planning always advises students and parents to take a closer look at whether borrowing makes financial sense. This of course is based on the individual family situation and the student's potential future income. Your student may graduate with student loans that will be due (typically 4 ½ years after disbursement). The difficult question you have to ask is, is the occupation income that your student receives going to cover these costs plus the expense of living?

Many families don't bother to make that calculation or they may not have even considered it. In a recent survey by Sallie Mae, an astonishing 70% of students and parents said that a student's postgraduate income either wasn't considered or didn't make a difference in their decision to borrow.

That comment frightens me. Perhaps this is why the US economy is in dire straits and the whole reason for the economic $700 billion dollar bailout. If your student graduates with $100,000.00 in student loans and lands a job making $30,000.00, it is going to be a very long time before those debts are paid off. Researching a career is just as important as researching the major and college.

If you're looking for guidance on how much to borrow, consider these benchmarks from a survey by student lender Nellie Mae. Borrowers who devoted less than 7% of their gross monthly income to repaying education loans generally didn't experience any difficulty making their payments. Those with an education debt-to-income ratio of 7% to 11% felt more of a burden, which increased once the ratio reached 12% to 16% or higher. The median ratio for all borrowers was 8%.

The two things you can never default on are anything to do with the IRS or taxes AND student loans. These debts will haunt you until they are paid off.

The key is to know what your EFC (expected family contribution) is and are there any strategies that can be implemented to lower your EFC so that your student will qualify for more aid. (Yes there are strategies.) The second step is to research the giving pattern of the college your student is planning to attend. Not every school is created equal. Some colleges tend to give out more grants and scholarships where other colleges lean more toward student loans or parent (PLUS) loans.

Straddling too much debt will cause an individual person’s economic bubble to burst.

J.D. Wyczalek (why-zall-ick) the College Guy and expert blogger says “Know before you go.”

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