It’s that time of year when many high school seniors are filling out their college applications. And while choosing a perfect school and trying to get in can be hard enough, navigating the world of student loans can also cause major stress. KMUW’s Sean Sandefur reports on how families can best prepare for the cost of college.
Forget car payments or even credit cards: Student loans are the highest form of consumer debt outside of mortgages.
According to the financial website MarketWatch, total student loan debt in the U.S. is more than $1.3 trillion, and it’s growing by the second. This means that from the age of about 17 to 22, many young adults are making life-altering financial decisions. The question is whether or not they know what they’re doing.
Lori Rayle teaches personal finance to juniors and seniors at Hutchinson High School. The class isn’t mandatory, but is strongly encouraged. The curriculum covers mortgages, retirement, and even health insurance. It also sends a clear message about student loans--and the myth that students can't go to college without them.
Rayle uses a textbook written by Dave Ramsey, a personal finance guru. The advice is simple: Take your high school grades seriously, shop around for a reasonably priced college, and take advantage of each and every scholarship and grant opportunity. Rayle also says high school students shouldn’t take summers off.
“Work every chance you get—two, three jobs in the summer—as much as you can," she says. "There is a way. Don’t just say ‘I have to have a loan.’”
The students in her class have been receptive to the advice. Benjamin Hiebert, a senior at Hutchinson High School, is getting his prerequisites at Hutchinson Community College and says he already has them paid in full.
"And that’s before scholarships, just through working and saving up," he says.
HCC is right around the corner from the high school. Hiebert says he wants to get all of his prerequisites out of the way before transferring to a four-year school. He expects to save about $18,000.
“There’s no such thing as good debt, I’m sorry," he says. "It is not worth the hassle.”
A real-time student loan debt clock (via MarketWatch):
The majority of Rayle’s students have a clear plan to pay for college, and most plan to start out at a community college. While this can work for some students, many others want that on-campus experience, and even though they receive scholarships and work part-time jobs, it’s just not enough to cover everything. Those graduating with a bachelor’s degree in Kansas in 2014 averaged a total of $25,000 in borrowed money. But that doesn’t mean students can’t be smart about the loans they take out—it all starts with the FAFSA, or Free Application for Federal Student Aid.
"It never costs families to complete it, so they should make sure they go do that," says Julie Scott, who works in the financial aid office at Wichita State University. As part of her job, she travels to local high schools to help families plan for college expenses.
“The FAFSA is the primary application for students to be considered for any federal financial aid, and especially in the state of Kansas, for some of the state resources that are available to them," she says.
By completing the FAFSA, students get a clear understanding of how much money they can receive in government grants—which usually go to low-income families and don’t need to be paid back, as well as work study programs. It will also show, based on income levels, a reasonable amount to pay out of pocket. Those totals are combined with the amount the federal government is willing to loan you.
Together with scholarships, a student then has a picture of which schools they can afford.
Scott says there’s a common rule for what an acceptable amount of college debt looks like.
“That rule of thumb is not to borrow more than what you would expect to make your first year out of college. And so cumulatively, never borrowing more than that first year salary," she says.
She says this helps to keep income levels and student loan payments balanced. Wichita State helps students keep an eye on how much they’re borrowing each year and what their options are. If federal loans aren’t covering everything, another option are private loans from a bank.
“We actually require them to do individual counseling in our office with one of our financial aid advisors so that they really understand the benefits of borrowing federal loans first and maximizing those opportunities," Scott says.
Private student loans can be much more difficult to pay back: They usually lack income-based repayment options, and it’s often difficult to put payments on hold in times of financial stress. Many private loans aren’t forgivable if a student were to die or become severely disabled—meaning spouses or family members could be on the hook.
Private loans can also carry interest rates that fluctuate, sometimes going very high.
“The federal government offers fixed interest rate loans. They’re not at a variable interest rate as opposed to many private loans that are out there," she says.
Scott says that Wichita State does its best to hammer these points home, but that it’s ultimately a student’s responsibility to keep track of the money they’re borrowing.
But some say parents and educators need to do a better job readying students for the price of college.
Melinda Lewis works in the School of Social Welfare at the University of Kansas. She co-authored a book about student loan debt. She says the problem is societal, and that we shouldn’t be asking teenagers to roll the dice with tens of thousands of dollars.
“Our education system doesn’t do a very good job equipping young people to be good financial actors," she says. "We’re essentially asking a 19-year-old to predict what the return on his or her degree is going to be in an uncertain labor market.”
Lewis says the U.S. needs to get away from the model of student loans as a way to pay for college. That doesn’t mean asking students to be frugal or work 40 hours a week; it means fixing the system itself.
Lewis says the first step is to reinvest in public higher education.
Data shows that both federal and state governments drastically cut funding for public universities during the great recession, and those paying tuition have taken the brunt of those cuts. Lewis says it’s time to put that money back in the form of cheaper tuition and more widely available grants.
She also says parents and educators should start talking about college when children are still in diapers, not in their junior year of high school.
“If you have 18 or 19 years to save for college, even low-income families can really accumulate significant assets," she says.
She says a child knowing they have a college savings account can have a huge impact on their K-12 education.
“Being able to tell a kid, 'This is your money for when you go to college,' makes that child have better social and emotional competency when they get ready to enter kindergarten," Lewis says. "It can have effects on reading and math scores, on attendance and engagement in school. So there are all these advantages if we start financing college from birth rather than a promissory note when you’re 18.”
Lewis mentions a program in Maine that provides a $500 higher education grant to each child born in the state. The grant can be used at any accredited school in the country.
She also suggests providing more relief to those who have already graduated, those who are in college, and those who will enter college before anything changes.
“This has had consequences that we never predicted and that nobody is happy with," she says. "And so, let's find ways to make sure that those student borrowers are not so disadvantaged just because of the way that they had to finance college."
Lewis says that income-based repayment plans are a step in the right direction. She also supports providing relief in other areas, like underwriting for mortgages or help with retirement plans. This would allow borrowers to keep pace with those peers who avoided student loans.
As the national dialogue continues to talk about a student loan epidemic, Lewis says we can’t afford to scare kids away from higher education. Even if nothing changes, there are mountains of evidence that show that not having a degree is far worse than any amount of debt.
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Follow Sean Sandefur on Twitter @SeanSandefur.
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