Q&A: College finance experts weigh in on borrowing
Borrowing money for college is increasing. And it is increasingly a subject of concern. But for families paying for college, borrowing to pay some of those costs is still a reasonable decision — one that 7 in 10 students at all of Minnesota’s four-year colleges are making. So how do students and their parents ensure they are being responsible and thinking this through with care?
For some initial answers we turned to three college finance experts:
- Kris Roach, director of admissions and financial aid, University of St. Thomas;
- Stuart Perry, executive director of financial aid, College of Saint Benedict and Saint John's University; and
- Carol Stack, principal at Hardwick-Day and co-author with Ruth Vedvik of The Financial Aid Handbook: Getting the Education You Want for the Price You Can Afford.
One of the first hurdles to overcome is a sense that college financing is overly complicated. Carol Stack, for one, doesn’t accept that theory. “Financing a college education is not rocket science and it is not unknowable. You can understand this,” she said. “It means you may have to have some conversations that may be a little uncomfortable. But there is no reason that financial aid and financing college has to feel like managing derivatives.”
Focusing in on student borrowing, here are some observations from our experts to help start demystifying the decisions families have to make. These are just excerpts; you can read the full transcript of their comments here or download a PDF.
Q. What has changed in conversations with families when it comes to debt?
A. Roach: We acknowledge with students and parents that borrowing is a fact of life. …Most of us have not been able to save much and most of us are unable to simply write a check out of our monthly cash flow to pay for an education…and that means we have to borrow. …Increasingly we are sharing strategies with student and parents that may help to minimize the debt they may incur…choose a living situation that minimizes expenses, work hard over the summer and during breaks and save money.
A. Stack: Ten years ago you would most likely hear some objection to the idea of student loan debt for their children. That conversation has now changed to one where we’re talking about the student loan debt being a reasonable amount. There’s a recognition that students are beneficiaries; it is reasonable to ask the students to help pay for part of their education and for most students the only way to do that is through loans.
A. Perry: We have a few more families, compared to the 1990s and early 2000s, expressing concerns about their son or daughter’s current or potential indebtedness. Our response to these concerns includes some common themes. We explain that student loans can be viewed as “good debt,” or an investment in oneself — an appreciating asset. …We expect most students who demonstrate financial need to participate in student employment and to borrow to help finance their education. …There’s a greater likelihood that the student will take the college experience seriously if they have some “skin in the game.”
Q. How can families determine what is a reasonable amount to borrow?
A. Roach: Each family has its own comfort level with borrowing; what is reasonable for one family may be very different for another. Parents and students are encouraged to talk about borrowing in a candid manner prior to making a college selection. An often-talked-about rule of thumb is that students should not borrow more than they would earn in their first year of employment. If, for example, someone starting as a teacher makes $32,000 a year, then the student shouldn’t borrow more than $32,000 as an undergraduate. …Students should be very careful when selecting a private or alternative loan, as not all loans are created equal.
A. Stack: I wish I could say there’s a simple worksheet to figure out what is reasonable for any given family, but there isn’t. …To figure out a real amount to borrow, you need to sit down with a sheet of paper, a list of monthly expenditures and a calculator. And then you need look at your income every month and how you are spending funds — look at that closely to figure out if there’s anything discretionary and look where the trade-offs would be in terms of diverting any income to your child’s education costs. Recognize that if you borrow it, you’ll pay for it, so lowering what you need to borrow is to your advantage.
A. Perry: If a student borrows the maximum federal Direct Loan each year, and assuming he or she graduates after four years, the amount borrowed is $27,000 and the monthly repayment is around $300. I think most experts would agree that this is a manageable amount for a liberal arts college graduate. The challenge, however, for many liberal arts college students is keeping their cumulative borrowing at or around this level.
Q. How can families choose wisely when it comes to borrowing for college?
A. Roach: Students and parents have to weigh the value of an education against the reality of the student’s life without that education and all of that has to be considered in light of their financial circumstances and risk tolerance. Families should also take the time to investigate and thoroughly understand the terms of the loans they are considering.
A. Stack: In conversations with financial aid and admission people, look for a college that is the best value and fit for the student. …Just as we pay for other goods and services, we pay for college. Maybe that means for some families that they need to alter how they spend some of their discretionary income, putting off a car purchase or vacation. When you graduate, the very first item to tend to in your budget will be your student loan debt. So if you don’t need it, don’t do it: that means don’t use student loans funds to pay for the vacation in Cancun or a new car. It is terribly tempting and it is too easy.
A. Perry: To the extent possible, relying only on federal loans is a good idea. If a student must access private loans, they would be well-advised to borrow the minimum needed to get by…and live a “college student” lifestyle, which I see less evidence of these days. These loans are not going away, even under a bankruptcy scenario, so keeping good records is also important. To be able to choose wisely, it’s easier when the parents of a college-bound kid have chosen wisely when their child was young by opening and contributing regularly to some type of college savings vehicle.