7 Strategies to Avoid the Student-Debt Trap

One of my favorite themes in this column over the years has been that choosing a college is an economic decision as well as an academic one. I’m a great believer in a liberal-arts education, but as I wrote recently, “Parents aren’t obliged to pay for four years of football weekends, frat parties and beer (see Do the College Math)." Lately, lots of others are jumping on the bandwagon. It started rolling when the recession forced many cash-strapped families to cut back on college plans, then picked up steam recently when Mark Kantrowitz, publisher of FinAid.org and FastWeb.com, calculated that total student-loan debt exceeds revolving credit (mostly credit-card debt).

Is it worth it to pay $200,000 for a liberal-arts education, especially if it means taking out loans? One of my twentysomething Kiplinger colleagues answers bluntly: “If I had realized how much debt I was getting into, I would have gone to my state school instead of an expensive private college.”

Trouble is, many 18-year-olds are dazzled by the prospect of football weekends, frat parties and beer and don’t realize what they’re getting into. And often parents, wanting the best for their kids, are reluctant to say no. As important as education is in today’s world, families need to find more-affordable ways to pay for it. Here’s my seven-point guide to avoiding the student-debt trap.

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Save as much as you can. It’s never too late to start, especially if you live in a state that gives you an income-tax break for contributions to state-sponsored 529 plans (see Get a Break on College Costs). Plus, money withdrawn from 529 accounts and used to pay for qualified college expenses is tax-free.

Don’t let the total cost of college discourage you. If it seems intimidating, aim for a more manageable goal -- such as saving enough to pay first-year expenses or one-third of the total cost (the rest could be covered by a combination of current income, both yours and your child's, and financial aid). Remember, every dollar you save is a dollar you won’t have to borrow.

Be straight with your kids what you can afford. Have the “college talk” with your teenagers before they start their search so that they know what fits into your budget and how much they’ll have to contribute. At a minimum, kids should be expected to earn their own spending money.

Choose schools strategically. You’re looking for colleges that deliver good value -- a high-quality education at an affordable price (see our Best College Values special report). That might mean a state institution, or it could mean a pricey private school that offers a generous financial-aid package. To better their chances for a scholarship, students should focus on schools at which their GPA or other achievements would make them a standout. (This really works, by the way. Each of my three children qualified for a substantial scholarship at a noteworthy college.)

Think outside the box. Students can follow the example of one of our top Kiplinger editors, who started at a lower-cost community college and then transferred to a four-year school. And more colleges are offering online classes to keep costs under control. Taking Advanced Placement classes in high school can slice a year off your child’s education and cut your expenses by 25%. Uncle Sam will help pay the bill if your child joins the military. You could also take advantage of the growing number of colleges offering accelerated, three-year degree programs.

Or here’s a radical thought: Your child may be better off passing up college, at least for a year. Not everyone is ready for college at 18. It might literally pay if your child takes a year off to mature, earns some money and figures out what he really wants to study. Education and training are critical in today’s economy. But rather than spend time and money on a degree from a four-year institution, it might be more appropriate for some kids to consider a one- or two-year certificate program from community college in a field such as health care or engineering.

Borrow smart. If your family must borrow to pay the bills, stick with government-sponsored Stafford loans for students and PLUS loans for parents (or a home-equity line of credit, if you qualify). Current interest rates on government loans are 6.8% for students (lower if you’re eligible for financial subsidies) and 7.9% for new PLUS loans (for more information on student loans, go to StudentLoans.gov). With that combination, you shouldn’t have to resort to more-expensive private loans. Remember, though, that a subsidized student loan can be a two-edged sword, encouraging kids to borrow more than they should.

Run the numbers. Perhaps the most important mathematical exercise your child will ever have to do -- and the most widely neglected -- is figure out how much it will cost to pay back his student loans. At FinAid.org, you can use the Student Loan Advisor calculator to determine the monthly payment amount based on a future salary.

Let’s say your daughter plans to major in accounting, with a projected starting salary of $47,200. If she wanted to hold the loan payments to 10% of her monthly income and repay the loans over ten years, her monthly payment would be $393, assuming a student-loan interest rate of 6.8%, and her maximum manageable debt would be $34,200. ( To read about other options for paying off student loans, see Digging Out of Student Debt. Another rule of thumb: Students should try to limit their total borrowing to no more than their expected starting salary when they graduate.

Pick a marketable major. Majors that are most likely to yield an immediate job offer after college are accounting, business administration, computer science, engineering and math, according to the National Association of Colleges and Employers. But students can still major in liberal arts and make themselves attractive to potential employers by choosing subjects that are marketable.

As an editor, I always counsel budding journalists who are majoring in something as general as “mass communications” to add a minor or a concentration in another subject -- business, health or computer skills, for instance. As the editor of a personal-finance magazine, I can attest that our most-attractive job candidates are those who combine writing ability with knowledge of the subjects we cover.

And that applies to other fields as well. If your daughter is majoring in economics, she should take accounting. If she’s studying history or government, she could learn a foreign language. An English major could take classes in technical writing. Then she’d have a better shot at landing a well-paying job to help pay back those college loans.

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