Money Smart Kids
7 Strategies to Avoid the Student-Debt Trap
There are ways to pay for college without relying too heavily on loans.
By Janet Bodnar, Editor, Kiplinger's Personal Finance
August 30, 2010
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.”
Related Links
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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.
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 Plus, money withdrawn from 529 accounts and used to pay for qualified college expenses is tax-free.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.
Reader Comments (11)
Posted by: Mike M at 08/31/2010 12:28:00 AM
One BIG way to save money is for the students to live at home during college. College dorms can be outrageously expensive!
Posted by: Tom Sandman at 08/31/2010 12:35:19 AM
My parents provided me with a debt-free college education at a state school. My wife's parents did the same for her. It was the best gift they ever gave us. They worked hard and made it a financial priority. They paid the lion's share; I provided some scholarship money and a summer job each year. My wife and I, in turn, intend to provide the same for our kids using a prepaid tuition plan and a 529 savings plan, paying the rest from current income through the school years. Debt does NOT have to be part of the equation. Thank you for clearly stating what is not so obvious to many.
Posted by: Bob at 08/31/2010 09:42:23 AM
Good article except for letting the student take a year off to mature. There is nothing harder than getting back to the school routine after taking a year off. If the child does happen to find a good temporary job during this time it will also be hard to give it up along with the spending money. You should be talking to your kids long before they reach 18 about what they would like to do for a living. Since there are so many general education classes to take in college, the choice of a major can be delayed to the second year without incurring too much additional expense. It is also better to be in college talking to other kids about their goals and why they are choosing their majors. I am also not a fan of the one or two year certificates. Great for health care jobs but not so great for engineering. I know that in the engineering field such certificates often require the taking of diluted technical classes. I have seen many who went into the field and wished they could go back and take the harder required classes to get a degree. Lastly, many decisions require a deadline rather than rambling on while trying to decide. Pick a marketable major and go for it. Four years will pass quickly whether we are prepared or not. Years from now most of us won't be doing the job we thought we would. My 33 year old commented the other day that almost everything in his college computer science classes is obsolete and he is now doing work that didn't even exist ten years ago.
Posted by: Nomen at 08/31/2010 10:06:21 AM
Every child has different talents and abilities. Many schools add to the the child's confusion by telling them that they can be whatever they want to be rather than realistically looking at their strengths. Many talented kids waste time and money to pursue a major that they lack the talent for. Some are better suited to work as a nurse or mechanic rather than as a doctor or engineer. We need them all.
Posted by: Aleck at 09/01/2010 10:40:37 AM
I am glad the subject of picking a marketable major is finally getting some attention, although it was the last item on this list. Apparently, spending several years and over $100,000 to major in something like "Women's Studies" did not turn out to be very practical. Too bad it took long time to realize something that seems so obvious. And we may be facing a student loan debt crisis similar to the housing one.
Posted by: Tom at 09/01/2010 01:40:11 PM
As if "football weekends, frat parties and beer" don't exist at state schools.. This is a good article but I think you can make the same argument about financing an $80,000 in-state education as you do with the $200,000 liberal-arts education. There should be some education going on at multiple levels (freshman orientation, a required math course, when applying for financial aid at the office, etc.) about what the pay back amount looks like when you're taking thousands of dollars out on a 10 year loan at a fixed interst rate, kind of like what you get when you take out a mortgage. I took loans for my education, and I'm glad I did get the opportunity to do so, but I was shocked when the $350 bill came a few months after graduation. Thankfully the loans were Direct Loans and I can afford to pay it off in the 10 year time frame. I've even been lucky that the loans aren't fixed at 6.8% and have been going down with interest rates (currently 2.26%!). But I still remember the shock. It would've been worse if wasn't an RA and had to pay for housing for 3 years.
Posted by: Bill At FamZoo at 09/01/2010 04:51:56 PM
I like all the tips except for the headline on the last one. I think you'll have a much happier life if your work is aligned with your passions. You'll also be much more effective and pleasant to work with. Including practical courses in your curriculum makes sense, but by all means pick a major that you're passionate about - not just one that you think is "marketable". (Just be sure to learn to live within your means - however modest they may be based on your career choice.)
Posted by: Janet Bodnar at 09/02/2010 03:57:57 PM
To everyone: Thanks for all of your thoughtful comments. I see the makings of a follow-up column with responses to some of the points you made. Janet Bodnar
Posted by: Tom Leestma at 09/03/2010 02:45:12 PM
My son is completing his BS debt free. Here's how he's doing it: 1) Take a year to work before going on. Look around and job shadow to see where your interest and talents lie. 2) Take CLEP (College-Level Examination Program) tests during that year of the basic courses. Aprox. $100 buys a college class. Info: www.collegeboard.com/student/testing/clep/about.html 3) Go to the local Comunity College that will transfer the credit to the university of your choice. 4) Apply oneself in order to get excellent grades at the comunity college level to gain access to higher transfer scholarships. 5) Transfer in year three to an in-state college. Tuition is generally lower. 6) Schedule your classes three days a week and commute. Eat and sleep on Mom and Dad's nickel. He's WAY smarter that his father... get's it from his mother... whom met in college...and married... so, I guess I'm not so stupid.
Posted by: arbabjehangirkhan at 09/04/2010 02:14:36 AM
i want a computer engineering course
Posted by: Chris at 09/04/2010 11:09:19 AM
The only time a private school matters is if the degree is from a school so famous everyone has heard of it. Yale, Harvard, or MIT. Otherwise that small and expensive private school does not matter a bit after you get 100 miles away from it. Private colleges only matter to people in private colleges and the people who pay for them. Once you actually start working no one cares that you spent 4 times the money for your degree as someone else. They only want to know what you can do now that you have that scrap of paper. The first step in your education should be that if you can't pay cash for it, you don't need it.