Don’t drown yourself in college debt

Dear Liz: I have been accepted to my dream school. However, the school isn’t giving me much aid and I am expected to pay $50,000 a year, or a total of $200,000, if I get through college in four years. Although that is a huge amount of debt to carry, I think a cosmopolitan city would provide useful networks for me as a business major. What is your opinion on this?

Answer: As a business major, you’ll be doing plenty of cost-benefit analyses. Do one now, before you chain yourself to a lifetime of debt.

The general rule of thumb is not to borrow more for an education than you expect to make your first year out of school. A basic business degree is highly unlikely to land you a $200,000-a-year job.

What’s more likely is that you’ll need an MBA to vault into the high-paying leagues — a degree that will require further borrowing.

Understand that massive student-loan debt will have repercussions for the rest of your life. Since this debt can’t be erased in bankruptcy, you’ll be saddled with huge payments that could prevent you from buying a home and saving adequately for retirement.

What makes more sense is tweaking your dream a bit to get an education you can afford. And here’s the good news: Students accepted to Ivy League schools tend to do well in life regardless of the institution they actually wind up attending, according to research by economists Alan Krueger of Princeton University and Stacy Dale of the Mellon Foundation.

So choosing a less-expensive education doesn’t mean diminishing your prospects. Saying goodbye to your dream school will be sad, but far sadder is throwing away the rest of your financial life with too much debt.

How to use student loans the right way

Dear Liz: I’m a 19-year-old student who will be transferring to a four-year college from community college in the fall. My parents don’t really play a part in paying for college or determining where I go or where to apply; I do all that myself.

I’m seriously considering a university that costs about $46,000 a year and has offered me $39,200 in financial aid (the majority of which is grants, not loans).

However, I have no idea how I’ll be able to pay for the $6,800 gap. My parents don’t have much savings, and I’ve never asked them to pay for anything college-related.

I was planning to get a summer job, and I’m applying for scholarships, but what if that’s not enough?

Do you have any advice for me as to the best way of going about this?

Answer: You’re getting a substantial discount on an expensive education. You should investigate whether you can get a better deal at a public school, but the gap between the cost and the aid you’re being offered might wind up being about the same.

If that’s the case, talk to your parents about whether they can help. If they can’t, consider filling at least some of the gap with federal student loans. The loans in your aid package may be need-based, but you probably qualify for additional federal loan money that doesn’t require you to demonstrate need.

Those loans, plus your earnings, should allow you to pay for this education.

Winning scholarships may not get you much further ahead, since colleges typically compensate by reducing the grants you’re given.

You want to use federal student loans before you turn to the private student-loan market, since private loans are more expensive and less flexible.

Also, don’t borrow more for your education than you expect to make in your first year out of school.

If you follow those guidelines, you should be able to comfortably afford your payments once you’re out of school.

You can find out more about student loans and paying for college at FinAid.org.

Maybe you don’t want to pay off those student loans

Dear Liz: My student loan balance is just $7,000 and costs me $80 a month with nine years left to repay. I’d like to pay it off, but the problem is that I have no other debt, since I pay off my credit cards monthly. I’m afraid to pay off the loan for fear that doing so might hurt my FICO score.

Answer: A better reason not to pay off the debt is that it’s pretty cheap money. If you invest that cash instead, you may get a better long-term return. If you really want to pay the loan off, however, you shouldn’t let worries about your scores stop you.

Student loans typically do help your credit scores, and they’ll continue to so long as the lender reports them to the credit bureaus, which is typically for 10 years after you pay them off.

Having and using credit cards also helps your scores. There’s no need to carry a balance.

Should we use home equity to pay off student loans?

Dear Liz: Our question is about student loans.

We have a total of $69,000 in education debt. We also have a home worth $400,000 and our mortgage balance is $266,000, plus a home equity loan with a balance of $14,500.

We make a good salary, have excellent credit, pay all our bills on time, and, if gas weren’t so darn high, we would have a decent amount of discretionary income.

 

Does a home equity loan make sense in this case?

Answer: Generally speaking, trading student loan debt for home debt isn’t a great idea.

Student lenders typically are much more flexible than mortgage lenders, with a wider variety of repayment options. You also can get a deferment or forbearance if you lose your job or otherwise encounter a financial hardship. This respite from payments can last as long as three years on many student loans.

Compare that with what would happen if you couldn’t make your mortgage payments. Within a year, and usually much less, your home lender would start foreclosure proceedings.

In addition, most student loan debt can be consolidated. This would allow you to lock in your current interest rate and perhaps lengthen the repayment term to lower your monthly payments.

A longer loan means you would pay more interest over time, but it could help ease the monthly crunch you’re feeling.

All that said, not being able to deduct the interest on your student loans is a significant disadvantage.

If you’re confident you’ll be able to make the payments, then you might consider paying off at least some of your student loan debt with home equity borrowing.

You should, however, limit your total borrowing — all your home equity loans plus your primary mortgage — to no more than 80% of the value of your house.

You want to keep at least a 20% equity cushion in your home whenever possible, as a last-resort emergency fund and also to protect yourself in case of declining home values. (You don’t want to be faced with having to sell your home and owing more than it’s worth.)

Given the loans you already have, you should be able to pay off $39,500 of your student loans with home equity debt. Then you could consolidate the remaining $29,500.

Help with a 30k College Bill

Q: We are facing a challenge in regard to financing our son’s education. We are being asked to contribute $30,000 a year for a private college education. Is this really a wise move? We have a daughter who will be in college in two years. Help!A: A good education is virtually essential to success in today’s competitive, global economy. That said, there are plenty of ways to get a good education, and bankrupting yourselves on a too expensive college shouldn’t be one of them.

 

If you can’t manage this bill without sacrificing your own retirement plans or your daughter’s education, then you need to think about some options.

If your son has his heart set on this college, then he should be willing to take on at least part of the cost by incurring student loans. (He should be careful, though, to make sure that his total student loan debt doesn’t exceed the salary he expects to make in his first year out of school.)

Another option, obviously, is for him to attend a less expensive school for at least a couple of years, if not the duration of his education.

The fact that you’re asking this question just months before your son starts college indicates that you haven’t done enough thinking and planning, but it’s not too late.

Head to the bookstore or library and grab a copy of a college financing guide and explore your options. You might also use FinAid.org’s expected family contribution calculator, available at http://www.finaid.org , to estimate how much you’ll have to kick in once your daughter starts school.

Good luck.