How your family can avoid a student loan crisis

We have all read the headlines. Student loan debt in America is the next financial crisis. It is the fastest growing type of debt. Students are plunging headlong into huge debt holes without a real sense of how much this debt will affect their future after graduation. The scariest part is that they have no real idea what they are getting into. 

Everyone agrees that the problem is completely unsustainable and out of control. The larger problem is that it is completely uncontained. If I were in the lending business, I would love to give someone a loan that cannot be bankrupted. Wouldn't you?

But why should we care? How can we work towards solutions for future graduates? These are the questions that keep me up at night. How can we help high school seniors make pro-active student loan decisions?

Can we help them see into the future and understand how their decisions will impact them for the rest of their life before they sign on the dotted line? Having a plan would be a start!

Recently, the Global Financial Literacy Excellence Center (GFLEC) examined the current state of student loan debt in America. Their findings examined not only the current levels of student loan debt but also took a closer look at how decisions were being made about taking on debt and how well debt was being paid off after stopping school. Once again, this research identifies a significant problem for our young adults and quite frankly the future of our economy in the United States.  

So, what is the current state of student loan debt?

Here are some of the GFLEC’s findings. In the past five years, average four-year tuition at public colleges has increased 13%--growing significantly faster than wages and inflation.

In the past ten years, the number of student loan borrowers has doubled--ballooning up to 43 million borrowers! Yes, that means we have 100% more people with outstanding student loans than we did in 2005. Not only are more people going to college and borrowing to pay for it, but the price is also rising at a tremendous rate.

If you look at the total amount of debt, the amount has gone from $240 billion in 2003 to $1.3 trillion in March 2016--over 510% increase in total in the last decade. We are now on pace to add over $100 billion this year alone. Words like “billion” and “trillion” don’t paint the whole picture. Look how these zero’s pile up!

2016 - $100,000,000,000

Total - $1,300,000,000,000

That is a huge, staggering sum!

Who is taking out these loans?

As you would expect, the majority of people taking out student loans are younger in the 18 to 34 age bracket. Amazingly, almost half (45%) of all the people in this age group have student loans!

Loan holders are having more trouble making their payments. About half of them have been late on their payments during the last year. Check out this graphic from the Wall Street Journal earlier this year:

Do students understand what they are taking on?

It appears that they do not. When you buy a car, do you figure out the monthly payment to decide if the car is one you can afford? You probably do. Would you purchase a Porsche without considering what the payment is? 

54% of student loan holders did NOT estimate their monthly payment before signing on the dotted line for a loan. In other words, they had no idea how much their loan would cost them each month or the total life of loan cost.

Here is the deal. You need to know exactly how you will pay for all 4 years of college down to the penny including student loans and the monthly payment upon graduation. Our rule of thumb, you should never take out more in student loans than you think your anticipated first year salary will be in that career. 

Take a look at how we compare college costs side-by-side for families. These charts show the exact same family comparing the net cost of two different colleges and how the family would pay for each of them down to the penny. These examples include projecting for increases in tuition each year, which as you will see has a significant impact. Costs go up each year, but your scholarships typically remain level meaning more out-of-pocket expense each year.

Once you calculate your total student loan payment, we recommend filling out a budget to include estimated monthly costs your student will face after graduation--rent, car, food, etc. In addition, the concept of paying taxes every paycheck is lost on a young adult who has never paid them.

With this estimated budget, students can get a real view in dollars and cents of what the financial picture will look like with the loan monthly payment factored in. They will quickly realize that choosing to take on large student loans will impact their quality of life after graduation.

More than half of the student loan holders in the GFLEC study would do it differently if they could. They are realizing too late that they have made an uneducated decision, and they are finding it difficult to understand repayment options available to them.

The policy brief correctly summarizes that the sheer size of the student loan debt and the number of people in debt is not really the primary concern. It is of course a concern, but the bigger problem is that students are not making educated decisions about their future. They are not receiving the financial literacy education they should.

Taking on student loan debt may be a beneficial investment in their future, but they need to be aware of what their future financial situation will look like. We need to make sure people are not being straddled with unaffordable monthly payments, late payments, and loan defaults.

When individuals are struggling in these ways with their debt load, their financial situation is in peril, and society will suffer as a result. In short, they are delaying life. They can't save for a down payment for a home, they are unable to save for retirement, they delay getting married and starting a family of their own. Never mind saving for college for their own kids when they are paying off their student loans well into their late 30's and early 40's. And, oh yeah, many of them end up back at home for a few years. Not exactly the ideal outcome we envision for our kiddos.

What can you do?

Talking about money is not easy. Most of us in this country learn how money works at the school of hard knocks because we don't teach it as part of our school curriculum. As parents, you can do it though! Make sure your students understand how these financial processes work. What does it mean to take on debt? What does that debt look like on a monthly basis? How does debt affect what they want for their lives?

Having a plan helps families make educated decisions and not blindly enter unmanageable student loan debt. Understand how to cut the cost of college, where you can get the most scholarship money, what colleges you can afford, and exactly how your family will actually pay for college.