Borrower Beware – Two Cautionary Tales
Two recent money conversations I was a part of had interesting parallels.
The common theme? Borrower Beware. Just in time for Halloween and college admissions season.
The first conversation took place at the college our son is now attending (Go Cougs!) and the second was with a 70-year old divorced, single woman who wants to retire in one to two years.
Earlier this year, we visited the college my son was planning to attend, participating in a student information day called Experience WSU. They also dangle a carrot by offering $1000 toward tuition if you attend. That was a pretty attractive offer and even though we’d been on campus several times, our family headed to Pullman for the day.
At this point, these students are admitted but uncommitted nor writing checks. When we first got there, we met in a large room with hundreds of other families to listen to a representative of the college get us pumped up and excited to be a new Coug and really start that process of emotional bonding so that all of us would come back in the fall, tuition checks in hand.
Once there, they did their very best to inform and woo at the same time. They had student-led tours to see dorms, we ate lunch in a dining hall, had a special tour of the department of interest (engineering for my son) and there were information sessions to get questions answered. I attended one offered by Student Financial Services. They described it as “How are you going to pay for it? Learn more about financial aid, scholarships, loans and important dates and deadlines you must meet in order to ensure you get the most amount of aid possible delivered on time.”
The first thing to run through my head was this. Here we are, on a college campus, with our admitted student who will start school in a matter of weeks, and it seemed that there were people, potential student loan borrowers, who hadn’t fully determined how they were going to pay for all 4 years of college.
The woman speaker gave her talk about aid, scholarships, grants and loans. Rather late in the session, one brave soul finally asked the question that seemed to be on many people’s minds.
How do I pay the difference?
The first-year total cost for a Washington state resident to attend (living in a dorm is required at this state school) is right about $24,000. You could see that the math going on inside some parent’s heads was not adding up.
Federal student loan for freshman year = $5500 freshman year, subsequent years $6,500 and $7,500.
Scholarships (my kid either didn’t apply for any or didn’t get any) = $0
Grants (our income was too high to get grants but not high enough to cover $24k, plus 3 more years of school) = $0
So again, “how do I pay”? How do I make up the difference?
The speaker’s reply?
Parent Plus loans, private loans, borrowing from equity in your home. These sorts of things. And of course, to talk to your financial advisor before becoming a borrower.
You could hear the room get a little quieter as her response started to sink in.
She went on to say in so many words that it is not the role of the Student Financial Services to tell families what they should do but to give them all available options, including being a borrower.
And you know what, I think she’s right. College is big business and it’s her job to attract qualified customers, just like any other salesperson. It’s her duty to share with you any options that help you become a customer. That is her job.
It’s not her job to inform you that you may not have the resources to help your student pay for all 4 years, or that there is a nationwide student loan crisis to the tune of $1.5 trillion dollars and your family may get caught up in that. That’s our job as parents to be our family’s own best advocate and plan out how we are going to pay for college.
The second conversation I had was with a single, divorced woman, 70 years old, wanting to stop working in one to two years. She had purchased a brand-new car within the last 4 years, planning to have it paid off by the time she stopped working.
As I learned details, there were several areas that caused me concern.
She hadn’t paid off the prior car, so part of that loan got wrapped into the new car loan. She wanted reliability, so she purchased a 9-year warranty on the new car. All totaled, the new loan was about $41,000, with a $550 a month payment. Her annual salary is around $54,000 and her retirement nest egg is in the $30,000s. She was already receiving Social Security but was going to be receiving more and wanted to apply that extra money to her car payments.
When I hear things like this, several things come to mind.
How do lenders lend money to borrowers in situations like these?
Students who have no real concept of the impact of borrowing nor the ability to repay, parents who haven’t figured out what four years of college will cost them and what they can or cannot afford or individuals who borrow nearly as much as their annual salary to buy a depreciating asset?
It comes back to the comment the Student Financial Services rep made.
It’s not their role to tell you what you should do but to give you all available options.
With student loan borrowing pushing $1.6 trillion, average new car loans reaching $32,000 with longer and longer terms, (and apparently personal loans are also at an all-time high) consumers, now more than ever, must be smarter about borrowing for everything from cars to education. The people selling you these goods and services are not looking out for your best interest. It is not their job to tell you not to do something. They are salespeople making a sale, and this is how they make their living. So, no one is going to look out for you more than YOU.
As we enter the crazy college admissions season, I share these cautionary tales of borrower beware to help people realize several things. Here are some — although certainly not all — of the most important takeaways:
1. Start Saving Early – If there is a chance your child may go to college, start saving money as early as possible. That may even mean starting today even if you have a high school senior. There are many ways you can do this beginning with 529 college savings plan, brokerage accounts, or even a Roth IRA. Some people think that if they save money it will diminish their chances for aid. And yes, it may affect your EFC (Expected Family Contribution) to a small degree. But a dollar saved is ultimately a dollar not borrowed.
Same goes if you are planning to buy a car. Save some money so you’ll have a smaller loan and term.
2. Start Planning Early – Starting to plan for college early helps remove some of the stress and creates a better outcome. Check out colleges Net Price Calculators by searching on that term on any college’s website. If they don’t have one, then it is likely they are a for-profit school and again, buyer beware.
3. Understand How Financial Aid Works – Sure, completing the FAFSA is easy. But like taxes, the people who understand how it works, benefit more.
4. Think of Buying a College Education Like Buying a House – How? Start by figuring out all your available resources. Include everything from savings (529s and other), monthly cash flow, summer jobs, tax credits (like the American Opportunity Tax Credit), and grandparent help. Now do this for all 4 years.
5. Establish Your Maximum Student Loan Amount – And do this for all 4 years. Want to avoid getting in over your head? Plan to borrow no more than the graduate’s first year expected salary. Ideally, keep it below the 4-year federal loan maximum, $27,000. Rule of thumb: every $10,000 borrowed equates to a $100 monthly payment for 10 years. Just because borrowing parent or student loans is an available option, that does not make it YOUR best option.
6. Shop For Schools In Your Budget – So, up to $27,000 plus all your resources. What did you come up with? This is your budget and what can be considered affordable. Now, go shopping for schools within this budget. Don’t rule out any school as too expensive just yet. The “sticker price” may not be the net price you pay. Spend time understanding the net price and the role that financial aid will play. Realize that “aid” from schools can come disguised in the form of loans which is why you have already figured out your maximum allowable amount. Some school’s net price will ultimately be unaffordable.
7. Have The Money Talk With Your College-Bound Child – this is where is can get tough. We all want the best for our kids, but it does not benefit them to start down a path that is unaffordable and unsustainable. Parents have retirement to think about as well. Now that you have your budget, talk to your students, set expectations of what is affordable and what you are willing to do as parents. How much is the student expected to contribute toward their own education? Are they expected to work while in school? Will they need to start at a community college and transfer? Talk about these things again and again, as early as possible.
Keep these tips in mind as you start to tackle your student’s college plan and you will be able to walk into your student’s financial aid information session confident that you already know all available options and have a 4-year plan that works for you.
# borrower beware
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Angie founded Avea Financial Planning and is a fee-only advisor helping retiring PNNL employees with tax-smart retirement planning, investments & fiduciary financial advice so they can be more confident and live life on their own terms.