Balancing Education Dreams with Smart Debt Decisions

I have transgressed from topics related to financial aid during the past few weeks, but want to return to the issue of affordability, college choice, and financial responsibility. This is now a perennial subject for the press, which is not surprising given the high and unabating cost of college, mounting student debt averages, and the state of the world economy which shows no signs of returning to good health any time soon.

The New York Times published an article by staff writer Ron Lieber on May 28, 2010, “Placing the Blame as Students Are Buried in Debt.” In this article, Mr. Lieber addresses the borrowing-to-pay-for-college dilemma by following the travails of a 26-year old woman who graduated from NYU with nearly $100,000 in college loans. When she chose NYU eight years earlier, she and her mother were determined that she should attend the “best” college, never factoring in the debt repayment burden upon graduation. I put “best” in quotes to emphasize the frequent mistake people make by equating quality and selectivity. This confusion often leads families to pick colleges based primarily on name recognition, without considering numerous other critical factors such as cost, fit and yes, academics.

Having amassed a hefty sum of private and federal loans, the young woman chronicled in Lieber’s article now finds herself in a situation where she does not earn nearly enough to meet her monthly loan payments. She, like many others, went heavily into debt to pay for college, never considering whether the nearly 6 figure investment in her education would yield a return that would make it worthwhile.

Who is to blame? The banks made loans available with little or no credit checks, the student borrowed without projecting her ability to repay the loans, and neither the university nor the banks counseled her on affordability before she amassed so much debt. Sounds vaguely like the sub-prime mortgage crisis, but with one major difference: the way the law reads today, student loans cannot be discharged in a bankruptcy. In other words, the borrower remains on the hook, even if he or she files for bankruptcy.

Curiously, NYU was one of the few universities in the country last year which actually took the initiative to contact families about debt before students enrolled. The university called 1,800 families who qualified for financial aid to ensure that they were aware of the debt they would likely have to incur. To the school’s surprise, this outreach effort had no impact on the enrollment rate. As a result, NYU ceased with such calls this year, though the university still struggles with how to best advise families on borrowing and paying for college, as well as where its counseling responsibility ends with respect to affordability.

In my view, every party here ought to be held accountable. However, the student and family will be the ones left paying back the loans, so the bulk of the responsibility lies with them. Am I implying that borrowing for college is a bad thing? Absolutely not! Financing a college education is a worthwhile investment, provided the ultimate return on that investment is positive. How does one assess that, especially before one has even decided where to enroll? One of my favorite college financial aid resources is the website http://www.mappingyourfuture.org/. This website offers a myriad of useful information, but one of its best features is the calculators which enable you to project forward and estimate future debt payments, based on expected borrowing and interest rates. One of the calculators even suggests what someone would need to earn monthly to comfortably pay back his or her student loans. Other resources such as the Bureau of Labor Statistics site (http://www.bls.gov/) provide average salaries by region based on occupation. Students who have an inkling about what they want to do when they graduate can get a sense for how much they can expect to earn. Both these resources are good starting points for understanding affordability with respect to borrowing for college.

Before you choose a college based on name recognition alone, especially if you will need to borrow, understand the potential financial responsibility after graduation. As I have recommended in prior postings, financial "safeties" or college options that are likely and affordable, are as important to put on the college list as schools deemed to be an academically secure admit.

Influencing a Young Adult's Financial Habits - The Parent's Role

As your sons and daughters reach young adulthood and take those first steps towards independence (isn’t that the goal?!), ask yourself whether they are leaving the nest with a healthy attitude about money and are prepared to responsibly manage their personal finances. Why some kids form good financial habits and others falter in matters of money is a question posed by a program initiated at the University of Arizona and known as the Arizona Pathways to Life Success for University Students or APLUS.

With a representative sample size of 2,098 students who were freshman in the fall of 2007, the study seeks to understand the relationships and factors that influence financial habits and how these attitudes are formed. Questions asked in the survey focus on issues of budgeting, borrowing, saving money and paying bills.

The researchers began collecting their first set of data in the spring of 2008, during the students’ second semester, and used this information to create a statistical model that assessed how parental teaching, work experience and high school financial-literacy courses affected the students’ behavior. I doubt the initial findings will come as a surprise to anyone: the researchers found that parental teaching was by far the most influential factor. Its impact on students’ financial relationships with their parents, satisfaction with their own monetary behaviors, and the wisdom of their actual financial habits is more significant than the other two factors combined.

As the parent of teenage daughters, I must admit that the initial results of this study hit home…literally! We hear that the behaviors we model will influence our kids’ attitudes and leave an impression that lasts long after they leave home. But is it enough to exercise good financial habits without teaching them the basics? The message to take away from this study is that we as parents need to consciously teach and communicate good financial behaviors to our children and not take for granted that they will know what to do when they venture out on their own. This is not something they pick up through osmosis. They need to be taught the difference between risky and sound money management practices as well as purely practical things such has how to balance a checkbook. These are the lessons that will enable them to establish healthy financial relationships in the future with their families and partners.

The researchers at APLUS had initially planned to collect the next round of data during the students’ senior year, yet have decided to use the current recession as an opportunity to measure the economy’s effect on the sample group’s behavior. The results of the follow-up survey which the students completed this past spring are expected to be released in the fall. For anyone interested in seeing the report on the initial phase of the study you can find it at http://aplus.arizona.edu/finalReport.pdf.

Credit Card Reform...It's About Time

Financial institutions that prey on college students by offering gifts and other promises in order to entice them to sign up for credit cards has been a huge problem…one that fortunately is about to come to an end. Both the House and the Senate recently passed the Credit Card Accountability Responsibility and Disclosure Act of 2009, which President Obama is expected to sign into law. What is significant about this act? Aside from addressing what are considered unfair practices with respect to interest rates charged to cardholders, this act will do much to curb potential abuses targeted at college students. You may recall from one of my prior posts that students graduate from college with, on average, more than $4,000 outstanding in credit card debt, according to a recent Sallie Mae survey. This truly illustrates how serious a problem student leverage has become.

The most significant provisions of the act relating to college students can be summarized as follows:
- The issuance of credit cards to consumers under the age of 21 is prohibited unless
- a co-signer, 21 or older, agrees to be jointly responsible for the account, or
- the borrower can demonstrate independence and the means to repay debt incurred under the card.
- Credit card companies may no longer offer give-aways on or near college campuses to induce students to sign up for credit cards; The act will also encourage colleges to set policies that will limit credit card marketing locations and institute credit and debt counseling as part of their student orientation.
- Any contracts between colleges and credit card companies will require public disclosure.

This is a much needed first step to address a practice that is contributing to the potential financial irresponsibility of the Millennium generation. The changes that the act will institute are overdue, and we as parents should take this opportunity to also counsel our children on good and bad debt to help them establish sound money management habits as they move on to financial independence.

Teaching Financial Responsibility - Talk to Your Kids About Money

This week I gave a presentation on Good Debt/Bad Debt to students at Chess-in-the-Schools, a not-for-profit after school program for New York City youth. I am hopeful that they left the session that much smarter about how to manage their personal finances. I am encouraged that I made some headway and was able to impress upon a group of high school kids that good financial habits will make or break their ability to lead financially secure lives.

Personal financial responsibility is a subject that needs to be taught to all young people, not just kids from lower socio-economic backgrounds who have no safety net. No one wants a child to graduate from college with excessive and unpaid credit card balances or to rack up large and unmanageable debts during any point in his or her life. Many of us had children in our thirties, and need to be thinking about our retirements too. Do we really want to be supporting our children’s bad spending habits after we’ve shelled out an obscene amount of money for a four year college education that we hoped would lead to their financial independence?

So what can we as parents do? Don’t wait until they go off to college to talk to them about good personal financial habits. Teach them the difference between good debt and bad debt. Using a credit card for impulsive purchases and paying the monthly minimum balance means that they are probably financing that purchase, at an 18% interest rate, over a period exceeding 20 years! At a double digit rate, the amount of interest they’ll end up paying will exceed the cost of the original purchase. If your son or daughter has a newly acquired credit card and is finding it difficult to pay off the balance each month, suggest using a debit card which takes the money directly from the checking account (but make sure that the checking account has sufficient cash so as not to overdraw the account). Help your child to see the need to cut back on impulsive spending.

Here are some staggering statistics. A recent survey conducted by student lender Sallie Mae, as reported on Bloomberg, revealed that 84% of students have at least one credit card, compared to 76% in 2004. Students with credit cards have an average of 4.6 cards and half of them have 4 or more. The average credit card debt among graduating college seniors was more than $4,100 last year, up from $2,900 in 2004. And only 17% of those who responded to the survey said they paid off their credit card balances each month!

You may be shocked to learn just how easy it is for an 18 year old college student to get a credit card. The banks prey on them on college campuses, send mailings about low initial rate offers, post inviting pitches in college bookstores and even entice students with free lunches. Make your child aware of these seductive offers and help him or her to understand how to be responsible about money and credit. There is no shame being one of the 17% who pays off credit card balances each month!