Paying the Bills When the Party is Over
I promised myself that in writing this column, I would not be afraid to tackle the issues that students and families face about college, regardless of how controversial or negative they might seem. I became interested in working in this field because of the opportunity to engage in something that is positive and life affirming. Unfortunately, from time to time, I find myself having to address the more negative aspects that we struggle with as well. In my last article, I focused on the growing concern about mounting college debt and the lending industry. While this is a controversy that will probably remain in the public’s eye some time into the future, it is also something to consider as we move into May, a time when newly admitted students are preparing to enroll in college and seniors are graduating from school. While the incoming student is just beginning to figure out how one goes about paying for college, the graduate is faced with the new responsibility for paying for their college education long after college has ended.
May 1st is the deadline for many students planning on enrolling in the school of their choice. There is a scramble for both student and family to secure funding to pay college costs. On a regular basis I receive calls from parents unsure of what their options are, often quoted rates that are out of date or unsure what kind of loan financing they are eligible for. Time and time again I hear from parents who struggle with paying for their part of the Expected Family Contribution. Families speed through the process of signing promissory notes and returning enrollment checks to hold one’s place in the incoming freshman class. Most families figure that they have a couple of months over the summer to figure it out, rearrange household budgets and make good on their promises to help their kids go to college.
May is also the time when most college seniors are completing coursework, renting cap and gowns, and preparing for graduation. There is a sense of achievement and accomplishment as well as the promise of a bright future awaiting the graduate. In the midst of celebrating, college seniors are preoccupied with sending out resumes, interviewing for jobs, planning moves or making plans to attend graduate/professional school in the Fall. Credit card solicitations as well as consolidation offers abound and are casually dismissed along side of unpaid campus parking tickets, overdue phone bills and credit card charges from that Spring Fling. Why not enjoy it for a quick second. I’ll be working in the fall. I’ll worry about it then. After all, as one graduate surmised, "It’s not like campus police are going to hound me when I am at home. What are a few campus parking tickets?"
For most of us, who fondly remember the "good old days", we can appreciate the sense of promise and success we experienced as well as being ignorant of what life had in store for us, once the celebrating had ended: The many resumes mailed out, dropped off or forwarded to an endless number of companies looking for “promising college grads”, the countless interviews where you came away feeling under or over qualified, as well as dodging the endless questions about “How’s the job hunting going?” or “What graduate program did you get into?”. And, of course, we all had to experience our parents’ polite questions about our job prospects and hints about amassing bills. Six months post graduation and the meter which has been ticking sounds off a siren….loan payments are coming due! Those seemingly small loans of $3,500 dollars have turned into a debt of more than $15,000 and guess what, there are interest charges to boot?.... “Okay, okay, I can do this…at least I thought I could.”
This is a scenario that is oh too real for too many students and while it may be a wake up call. It is not the end of the world. The problem is that few students have thought about this aspect of their college education. For most college students who may have had to foot little if any of the college tuition costs, it is a revelation….Somebody was paying the bill. Now they expect You to be that somebody. It was relatively simple to apply for that loan, sign the promissory note and “Voila, tuition paid.” Colleges made it easy and simple to do so, but therein lays the problem. It was too simple, most students don’t bother to read the fine print…the terms, rates and conditions of the loan. What kind of loan is it?.... subsidized, unsubsidized, Stafford, Perkins, Plus, Private or Alternative…..And by the way what is an alternative loan? Deferment, grace, default… what do those terms have to do with me? “What do you mean, I have to pay my loan even if I don’t graduate…but I don’t have a job…I can’t afford that much…how come I can’t just default on it ..it’s guaranteed by the government?” Sound familiar? You’re not alone.
Now we know that for most graduates with debt, these loans do get paid, often at great expense and sacrifice to the person. We also know that many of those same students will amass more debt to pay for graduate, law, medical and business school culminating loans in excess of 100,000 dollars.
Other students may struggle with this same debt and eventually stop making loan repayment, thus defaulting on loans and ruining their credit. Unfortunately, this act does not just affect the individual. The “cohort default” rate, a figure based on the percentage of students who default on their loans at a given school, affects future borrowers. The rates students are offered may be higher. A high default rate affects the college’s ability to secure competitive loan rates and participate in the federal loan programs. And we know that for smaller, less financially endowed schools, the inability to offer students loans, seriously impacts on enrollment.
So what’s a little bad credit? Ruined credit affects an individual’s ability to buy a car or purchase a home. Poor credit ratings contribute to higher interest rates when and if that person is able to secure a loan or credit card. A poor credit rating affects not just credit decisions but housing and leasing options. These individuals must have co signers; they must usually pay higher cash deposits and are handicapped in every situation where a TRW or credit history is required. Try getting a telephone without good credit.
So how do we deal with this?
Responsible budgeting...what an old fashioned notion. Does the student understand the value of a dollar…the actual cost of things? Do you believe that your child needs to have a charge card that you pay…with no limits on spending? And what about those cell phones? Who pays the bills and is there a limit? Does calling one’s 3 best friends across the country count as an emergency? How much money is your child expected to contribute towards college costs? Have you had that talk with your child where you spell out these conditions? What is an acceptable college cost and what is over the top?
Expectations about your child are important. Maybe you don’t want them to work part time or during the summer, but I’m sure somewhere in there is an expectation that the student will attend class, work hard and graduate on time. Often we as parents take this for granted, but have we communicated this to our kids? I remember counseling a junior college student who had a cumulative GPA of 1.3 after attending college for 4 semesters. He had just completed another year, priding himself on having successfully withdrawn from class in time to not have his failing grades count. I pointed out to him, that in spite of this “smart strategy”, it was still costing his parents, because they could not get a refund on the tuition paid. He laughed and stated “It obviously doesn’t bother them…why are you so concerned?” Somehow, I don’t think his parents ever got around to having “the talk”.
A reasonable career plan helps a student remain focused. What are you planning on doing with that bachelor’s degree in Philosophy? Knowing how your child is going to pay the bills should have some impact when deciding how much loan to take. College, after all is an investment. An investment that costs time and money and pays off in one’s attaining a degree to pursue the career of their choice. But if that career can’t pay off the debt incurred in pursuing that degree….what is the back up plan? As a parent you have to be clear what your job is...because in an effort to make your child’s life simple, avoiding the pitfalls that we learned growing up, we may be enabling this next generation to be dependent, irresponsible and not prepared to deal with the challenges of adulthood. So how long do we pay our kids’ tuition bills and to what extent do we subsidize a major that has few or limited prospects for a decent salary. Yes, it’s wonderful to be the social worker making 35,000 dollars a year, but where will you live, what kind of car will you be able to afford. Difficult choices may require more sacrifice than one is willing to make.
College debt management has to be budgeted, not an afterthought. Just like the rent, the phone bill, food and cable, that loan has to be paid regularly and on time. Just because they can’t repossess your education doesn’t mean you get a free pass. While many students can rattle off their plans for finding an apartment, buying a car, taking that long awaited trip…has that student figured out the monthly cost of repaying loans. Take some time to familiarize yourself with the repayment terms of the loan. Are there ways to get help in repaying college debt by working in a specific field? Many jobs offer signing perks that include paying off college loans or paying for continuing education. These are highly valuable benefits that often get overlooked. Remember all of those consolidation ads you received in June and July? Consider consolidating your loans into one single loan which can usually be repaid over a longer period of time. The up side is that you can often reduce the amount you are paying on a monthly basis. The downside is that a longer repayment period will mean increased interest charges which add to the total debt to be paid. In either case you should aim to repay these loans as quickly as possible, which ultimately shortens your repayment time and lowers your interest. What works better for you? Putting off or delaying that expensive purchase as well as keeping credit card debt low is an important strategy. Current credit cards rates can be as high as 30.9% interest. The person who regularly pays the minimum payment will never pay off the debt. Although most graduates are excited about using the new pay check to get some of those luxury purchases, the mid town condo, the BMW, the trip to Cancun….is it possible or even advisable to make these purchases so soon? Get into the habit of saving and putting off purchases, especially impulse buys until you have a real sense of finances. Also, delaying that purchase and waiting to see if you want is as much as you did 6 months ago, will tell you a lot. Many young people opt to forego health insurance, life insurance and 401 K benefits for a higher salary. But this is not always a good trade off. A company offering more traditional benefits and a relative amount of security may be a better option, after all, a fall on a ski trip, an unplanned pregnancy or any unexpected bill can cause significant debt in a short period of time. Have you noticed the price of a visit to an emergency room?
Now don’t get me wrong. I understand that the norms and values of today have changed since I graduated from school. Tuition is higher, as are rents, and general living costs. Young people are used to having more things and our culture is consumer driven. But some things haven’t changed. As adults, we are expected to be self sufficient, not only for ourselves, but for many of us, that will also include a spouse and kids. While salaries have risen, so too has the cost of living. Many families rely on the earnings of both parents to meet the bills. With a divorce rate of over 50%, many single parents find themselves handling this burden on one salary. For families with young children, the cost of babysitters, daycare, after care, private school, and summer camp strangles the family budget. And these are just the costs that enable both parents to work. For young people starting out, this is not a promising picture. The planning that needs to take place early on, the spending and saving habits established early on can make the difference.
Yes, it is a shame to think that some alumni returning to their college reunions 20 years from now, may be still paying for college. But hopefully, they will feel that their college education was a good investment. I believe that like any other challenge we face in life, this too is not insurmountable. Parents who engage in advance planning, as well as setting limits and communicating expectations along with teaching their children budgeting and life management skills will be ensuring that their children will be prepared to compete and deal with whatever the future holds for them.
