Financial matters: How to avoid too much student debt
May 10, 2014
It's that exciting time of year when high school seniors have decided on where they'll head for college in the fall. At the same time, many juniors begin to apply to the colleges of their dreams. A school's academic rigor and programs, student-to-teacher ratios, athletic opportunities, size and location are all important considerations when identifying a good fit. So is cost — especially if your child plans to take out student loans.
The best way to help your child avoid accruing overwhelming student loan debt is to take time now to show them the bigger financial picture. This includes helping them understand how their loan payments may affect their financial situation post-graduation. To start:
Determine which colleges are affordable — Tuition and fees are only the starting point in determining what a school costs. Other factors include room and board, books and supplies and personal and transportation expenses. To determine the total cost of attendance at the colleges of interest to your child, visit their websites. You also can consider the impact of any merit, athletic or need-based scholarships or grants (money that you don't have to pay back) that your child may receive to calculate his or her actual cost of attendance.
Identify the average starting salary for a position in their future field — Experts recommend that a student loan payment be less than 8 percent of the student's gross income. Of course, salaries will vary by field and region. For information about student placement rates and average starting salaries for different degrees, conduct an Internet search or consult the career placement office at the school(s) your child is considering.
Calculate the monthly payment on a student loan — The monthly payback amount on any loan will depend on its interest rate, repayment plan and payback period. For example, if the interest rate on a $26,000 student loan is 4 percent and equal payments are made over 10 years, the monthly payment is $263. The best way to test different loan scenarios is to use an online student loan repayment calculator.
Illustrate their future cost-of-living expenses — Many young adults don't realize all the costs that come with living on their own. Although a $45,000 starting salary may seem like a lot of money to someone who may have previously worked for or near minimum wage, the number can look much different after you deduct:
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Taxes — federal, state and Social Security taxes
Insurance — health, dental, auto, renters or homeowners, and life or disability income insurance
Fixed expenses — housing, car payments, cell phone, cable TV, internet, college loan and utilities
Variable expenses — groceries, gas, clothing, toiletries and entertainment
Savings — an employer sponsored 401(k) plan or other investments
The bottom line? Helping your child make smart choices now so that they are financially sound when they become self-reliant is one of the best gifts you can give them. For help assessing which colleges make the most sense based on your family's goals and financial situation, consult your financial advisor – you could even have your son or daughter attend an upcoming meeting. Your advisor can help you evaluate the short and long-term implications of student loans and help your family identify which colleges offer you the best value.
Rick Gross is a Financial Advisor and Private Wealth Advisor with Ameriprise Financial Services, Inc. in South Lake Tahoe, CA. He specializes in fee-based financial planning and asset management strategies and has been in practice for 20+ years. To contact him, visit http://www.rickgrossadvisor.com, 530-542-1571 or Tahoe Keys Blvd Ste D2, South Lake Tahoe CA 96150.