We have all heard the horror stories about students who graduate with as much as $100,000 or more in student loan debt only to find that they aren’t making enough money to pay the monthly installments. We’ve also heard of students who bent past the point of breaking to provide their children with their dream degree. The excitement of getting acceptance letters combined with ideas of the ideal education cause many families to make bad decisions when it comes to pay for college. The effects of these poor decisions can be long lasting, and the Consumer Financial Protection Bureau states that around 10% of all new college graduates owe loan payments that take over a quarter of their income. This has led to unprecedented default rates for many. To prevent falling into the same trap, avoid making these 5 disastrous but common mistakes:
- Decide which schools fit your budget ahead of time. Before you have time to get an acceptance or financial aid letter, take the time to determine which schools your family can afford and only consider those options. Too many families wait until they receive financial aid information before deciding. By then, many students have already fallen in love with the idea of attending a certain school and the parents hate to let them down. According to Carol stack, who coauthored The Financial Aid Handbook, these parents then buckle under pressure and take a second mortgage, another job, or raid retirement plans.
- Remember that prestigious schools don’t always pay off. While some prestigious schools do provide a greater payoff on investment over time, there are many lesser-known colleges and universities that will provide an excellent earning potential at a fraction of the cost. Do not feel that you have to jump through hoops to get that Ivy League degree if it is beyond your financial comfort zone.
- Don’t count on a scholarship at the top schools. While your student may have an excellent GPA and may be receiving merit scholarship offers from numerous schools, that doesn’t mean he or she will receive a scholarship at a top-tier university. Remember that most students want to attend these schools and that the competition and credentials will be much higher. While your student may be in the top 10% at one college, he or she may be in the bottom 10% at a top-tier school. When you are determining which schools you can afford, don’t count on scholarship money that has not already been confirmed.
- Don’t choose private loans over federal loans. While the rates on private loans may be advertised as low as 2.25%, which is much lower than the 3.4% subsidized and 6.8% unsubsidized rates on Stafford loans, only those with the best credit scores and/or a cosigner will qualify for the lowest rates. In addition, private loans often have variable interest rates and offer much fewer options if you later fall upon financial hard times.
- Don’t forget to calculate what your student will be able to repay. Would you let your child borrow hundreds of thousands of dollars to buy a new home and car without thinking over all options and discussing repercussions? Definitely not. Borrowing for college deserves the same consideration. Take the time to research the amount of money your student will likely be earning while working in his or her desired profession and make sure the monthly payments will be within his or her range of ability to pay.
Financing college can be quite a burden that will last for years after graduation. By avoiding these 5 most common mistakes, you can be sure that you can provide an education for your child without ruining your future.