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HSFPP Weekly Update #88—Paying Back College Loans

Message from Flashman: This week’s update should help teens and parents decide what type of post-secondary education will best lead to a personally rewarding career with an adequate level of prosperity. College is not for everyone and, even if one decides to go to college, he or she must consider the various costs associated with it. How else might the money be spent, if not for college? With college costs clearly rising faster than the overall rate of inflation, this is something for today’s high-school students to consider carefully.

Teens and parents need to look more realistically at the cost of going to a state or private college or university, or attending college versus receiving technical training and investing the difference in a tax-shelter retirement plan (IRA or Keogh), which can also be used to buy a house, pay for additional education when needed, or to accumulate for retirement. Too much debt incurred during college leaves many graduates without enough money to buy a home and save adequately for retirement, especially if jobs in their field of expertise are low-paying or no longer available because they are being outsourced to other countries. For those new to the Weekly Updates, our website has links related to each unit in the HSFPP materials. This week’s Website Pick of the Week relates to Unit # 5 in the student section. The main link to this section is: http://www.ca.uky.edu/fcs/hsfp/lessonlinks.html.

Follow-up to Earlier Updates:

Roughly 16,000 Kentucky college students could lose state scholarship money next year under legislation that passed out of committee yesterday. Senate Bill 238 is aimed at stabilizing the state's Kentucky Educational Excellence Scholarships, known as KEES, by raising the academic standards for getting the money and for keeping it. By making the scholarship more selective, lawmakers hope to ward off a $5 million budget shortfall predicted for 2006.

Source: Linda B. Blackford, Herald-Leader Staff Writer. Published in Lexington Herald-Leader, March 5, 2004, Page A1.

Updates 69, 73, 75, and 82 deal with aspects of college funding such as how to pay for college, the changing needs for financial aid to serve those who need it most, and the possibility of increasing funding for KEES through higher cigarette taxes.

Website Pick of the Week:

http://www.ed.gov/offices/OSFAP/DirectLoan/ConsolCalc/form3.htm

The calculator on this website allows you to enter the interest rate and amount you owe for all types of loans a student might use to pay for college. It can help students figure out how much debt they will have and to plan accordingly.

Suggested Activity for Educators:

You might want to look at Update 18, which deals with typical debt levels of college graduates; and Update 19, which discusses reasons for attending college besides preparing for a job or career.

After students read this week’s article In the New$..., have them answer the question below. The correct answer is that it would be better to have lower payments and be able to invest money in an IRA because the sooner you do this, the more money you can potentially have later on.

In the New$...How Much College Debt Is Too Much?

“Student loans are usually classified as ‘good’ debt. Like a home mortgage or a business loan, borrowing for education can be a smart investment in your future.

”Too many of today’s students and their parents, though, are taking a good thing way too far. I get e-mails from readers who are $30,000, $40,000 or more in debt from student loans and who can’t find work in their fields. Even if you graduate with the average level of education debt—about $18,000—you may be jeopardizing your financial worth. Many newly minted college graduates find their loan payments are so big that they can’t save for other goals, such as a house or retirement.

Four years of loans can last a lifetime
“ Putting off these goals to pay debt is an expensive choice. A 22-year-old’s $3,000 Roth IRA contribution, for example, could grow to more than $95,000 by the time [he or] she’s eligible for full Social Security benefits. Put off that contribution by 10 years, and [his or] her contribution will grow less than half as big, to about $44,000. Both examples assume 8% average annual returns.

“It’s up to you to put limits on how much educational debt you’re willing to incur. As with mortgages, credit cards and most other kinds of debt, lenders are willing to give you far more money than you can comfortably afford to repay.

“Students do face maximums on how much they can borrow under federal student loan programs. Private lenders have no such limits and will typically lend students, or their parents, the difference between their college costs and any financial aid they get.

“These lenders know they have a pretty good chance of getting paid back, no matter how rocky your post-college finances turn out to be. There’s a much better system than in the past for tracking down defaulters, so it’s harder to simply walk away without paying. And even though student loans are unsecured debt—not tied to any asset, like a house or a car—you typically can’t have them erased in bankruptcy court.

How much can you safely borrow?
“ Knowing all that, how do you decide how much debt you should incur? Obviously, the less borrowing you have to do, the better:

• If you’re a student, your payments shouldn’t exceed 10% of your expected monthly gross income once you graduate.

• If you’re a parent, all your debts—including mortgage payments, credit cards, car loans and education loans—shouldn’t eat up more than 35% of your gross pay.

• Once you start borrowing, keep track of your debt. It’s easy to get confused about how much you owe, particularly if you borrow from a number of different lenders.

“How can you figure out how much your loans will cost when the interest rate is often variable? You’ll be pretty safe if you figure on a rate of around 8%. That’s almost twice the current rate for federal student loans right now, but rates may go up, and most loans are capped at 8.25% to 9%.”

Source: Liz Pulliam Weston, MSN Money.
http://moneycentral.msn.com/content/collegeandfamily/cutcollegecosts/p36836.asp?Printer

Student Activity:

Take into consideration what you have learned in Units 1, 2, 3, 4, & 5.

1. Explain the type of post-secondary education you plan to attain and how you plan to attain it, based on what you have learned so far. (Use the steps in Unit 1.)

2. Explain why you selected the educational institution and program you plan to attend.

3. Calculate the cost and how you plan to pay for it.

4. How long will it take for you to pay off those student loans?

Kentucky High School Financial Planning Program

http://www.ca.uky.edu/fcs/hsfp

The purpose of this Web site is to assist county extension agents, credit union educators, and high school teachers in improving the economic well-being of our constituency, beginning with today’s students; and also, to assist teachers in Kentucky in meeting KERA’s goal that all students become technologically literate. Weekly Updates are provided by the University of Kentucky Cooperative Extension Service, and are free to all educators.