If borrowing for college, consider future debt
After going through the grueling process of applying for college, writing essays, keeping high school grades up, and trying to boost ACT and SAT scores, high school seniors and their parents have a few more tortured days ahead.
May 1 typically is when colleges want students to tell admissions offices whether they will take the college up on its offer. And since most parents can't save enough to cover the full cost of college, the last few days of the college decision tend to mean agonizing over: Can we afford the dream college, and is it worth it?
The decision usually revolves around criteria ranging from the college's reputation to gut feelings about the culture. But the money realities are increasingly drawing attention as parents struggle to catch up from the recession and as students anticipate iffy job prospects in many fields.
A study of couples with four-year college degrees highlights the importance of the money discussion. According to the study by Robert Hiltonsmith for the Demos think tank, couples who complete four years of college and have the average level of college loans can expect to lose about $208,000 in wealth over a lifetime because of their debt obligations. Graduates without debt didn't suffer such losses, even though their pay was lower, on average.
You might be able to make a dent in these repercussions, if you are able to get a college to boost financial aid during the next few days. If a student has been offered grants and scholarships at one school, but not the student's favorite college, call the director of financial aid. Explain that another college is more affordable, and tell the director you'd prefer his or her college instead if the cost could be shaved.
Colleges expect such calls. But if the plea doesn't work enough, consider the effect of too much borrowing.
Anthony Carnevale of Georgetown University's Center on Education and the Workforce found that the average college graduate earns $2.3 million over a lifetime compared with $1.3 million for high school graduates. But starting college, and not finishing, changes the outcome. About 37 percent of people with only a high school degree make more than the median for people who had some college but no degree.
Further, degrees matter. Starting petroleum engineers recently were averaging pay of about $120,000 a year, while those with psychology degrees were at about $29,000. Handling the $27,000 student loan debt that's average for graduates with loans is clearly more manageable for the engineer. A rule of thumb in education is to avoid loans that will cost you more than 8 percent of your gross income each month as you make payments. A GradSense calculator can help: http://gradsense.org/gradsense.
But beyond payments, there are long-term implications of student debt. Researchers have found that some graduates delay marriage and children because of high student debt levels. Hiltonsmith has calculated that a couple with the average student loans of $53,000 will lose $208,000 over a lifetime. About $134,000 of the loss came because of earnings channeled toward student loan payments instead of toward retirement savings. And the indebted grads also lost $70,000 on home equity that people without the debt didn't give up.
A high level of debt interferes with a person's ability to get loans at the lowest interest rates.
Lenders tend to charge people higher interest on their purchases if they have significant levels of debt. Higher interest payments end up making homes less affordable and can impinge on building up equity.
Also, higher monthly payments on homes and cars leave less money available to save for retirement.
Research by University of Kansas professor William Elliott highlights even worse consequences for students who are delinquent on paying their loans. That cuts credit scores considerably and adds higher interest costs to other borrowing.
And when parents co-sign student loans for their children, parents are liable and suffer consequences for their own credit scores if students fail to pay loans. According to the Federal Reserve Bank of New York, about 2.2 million Americans older than 60 are liable for repaying $43 billion in federal and private student loans — a burden that can hold back saving for retirement and result in retirement on a shoestring.
Gail MarksJarvis is a personal finance columnist for the Chicago Tribune and author of "Saving for Retirement Without Living Like a Pauper or Winning the Lottery."