Critical Thoughts on Meeting College Costs

July 23, 2018
In the nearly two decades that we have written about college financial planning and helped client families figure out how to pay/finance college expenses, we’ve come to some sobering conclusions.  Since it is September and the college admission and financial aid application season will begin October 1st, we’re hoping these will resonate and help readers make good decisions about college choice and funding.

An Internet search will likely show you that total student loan debt is about $1.5 trillion dollars in the US today.  That’s 5x the amount of debt in 2005, according to the Federal Reserve.  If you were to research “Why all of this debt?”, you’ll get; More students are going to college today, more are taking out loans, college costs have increased faster than inflation,  states don’t have the money to subsidize public colleges, etc.

But there are little-understood, more subtle reasons for this crisis and it starts with family finances.  First, stagnant “wages” for the average family is a huge problem.  Most middle and upper income families are finding it difficult to pay their bills and perhaps put a little aside in the 401k for retirement.  A chart I keep in my office shows college costs rising at a steady 45 degree angle for the past 20 years, yet average wage growth per capita (adjusted for inflation) is flat.  So without savings or extra cash flow, the family has little choice but to borrow (heavily) if they want their student to attend a good college.

 The next reason is consumer debt and the inability to live within one’s means. An oft-cited statistic reveals that 46% of American households would be unable to pay a $400 extra expense without selling something or going into debt.  Add the cost of one or two college degree costs at $25,000/year or so (after financial aid is figured in) and the family budget is at DEFCON 1.  
Lastly, college students and their parents should copy/paste this next sentence as their smartphone screen wallpaper:  Every student borrower must fully understand and calculate their future ability to repay their loans upon graduation, given the career choice and the earning potential of their first job(s) during the repayment process.  

What does this mean, exactly?  It means the student and their parents must research what the student’s earning potential will be after graduation, calculate normal after-tax living expenses, then the “carrying cost” of the aggregate student loan debt in monthly payments, and then determine whether all of that debt is affordable to attend the chosen college.  If not, move on to a less expensive school choice.

 It’s that simple, but that critical.  Otherwise, the student is possibly being set up for financial disaster in the future.   Current debt counseling at the colleges doesn’t go this far, but students and their families need to.  “College financial planning” means exactly that – families need to have a thoughtful, thorough plan to tackle college costs and financing from middle school right through to the last college loan payment.  Otherwise they and their student(s) could be flying blind into a financial hailstorm.