With high school graduation on the horizon for so many teens, and paying for college looming just beyond, I want to revisit the topic of avoiding student loan debt like the plague that it is.
It breaks my heart to hear the horror stories of young people – teens and millennials – who are burdened with huge amounts of debt so early in their journeys. Worse, it makes me angry to hear stories of rampant irresponsibility, like the one I heard recently, about kids who take out loans to finance spring break vacations, which are highly questionable in nature in the first place.
If you care about your financial future, and that of your teen, then keep reading. There are some eye-opening facts to consider when you’re thinking about racking up student loan debt.
Teenagers in high school often dream of going to college and pursuing a degree. But what if a teen goes into a huge amount of debt in order to make that dream a reality? All four years, the student is racking up thousands of dollars in debt just to pursue that dream.
Then she graduates, and the nightmare begins.
Who wants their dream to end when they are only in their early to mid 20’s? There is a whole heck of lot of living left after that! Going into massive debt to get a college education is one huge step toward turning your dream into a living nightmare.
But it doesn’t have to be this way. Hang with me for a minute, and I’ll give you some alternatives to going into debt to pay for college.
In the world of finances, people invest money with an expectation of receiving a return on that investment. The TV show Shark Tank is a prime example of this principle. The sharks listen to the sales pitches of the entrepreneurs, and then decide if they want to invest in the idea presented based on whether they will receive a good, fairly quick return on their investment.
Shouldn’t we teach our teens to view their college educations in a similar light?
The average amount owed for student loan debt right now is around $31,000, which means a lot of people owe a whole lot more than that. Young people who graduate college with upwards of $40,000, $60,000, or even $100,000 or more in student loan debt are putting the equivalent of a financial millstone around their necks. The return on investment frequently is not worth it.
Let’s do the math.
If a student goes to college to get a degree in Human Development and Family Studies, for example, (incidentally on the list of 30 Worst Paying College Majors: 2016) and he doesn’t have a solid plan for what he will do with the degree to earn money after graduation, and he racks up $80,000 in student loan debt to get that degree ($20,000 per year), then how will he start to pay off the debt? And how long will it take? 10 years? 20? Maybe longer.
Continuing with our example, Ohio State University offers this major for a Bachelor’s degree. For the year 2016-2017 to go to Ohio State University for one year – tuition & fees, room & board, books & supplies, other misc. expenses – is a little more than $25,000 in state. Multiply that out for four years and you are into it for $100,000.
For Human Development and Family Studies, the starting annual salary is around $35,000. Mid-career salary is $48,500.
Let’s say your student is fortunate enough to find a job in that field that pays $35,000 per year, which is about $2,400 per month in take home pay.
According to FinAid.org, an online financial aid loan calculator, the breakdown is as follows:
Loan of $80,000 (Because somehow you were able to pay $20,000 of the total)
$611 monthly payment (more than 25% of your monthly take home pay)
6.8% fixed interest rate, standard for the Stafford Loan (as a realistic example)
20 year payback.
Your student will end up making 240 payments, and will pay back a total of about $146,500, which includes about $66,500 in interest.
That means if everything goes exactly right, she will have her student loan debt paid off by the time she is 42 – if she’s lucky. Life happens, and things like loss of job, accidents, and illnesses don’t factor into this scenario.
In the loan payment calculator I used for this example, it recommended that a salary of no less than $73,000 per year is needed to pay off this loan on these terms.
That is more than two times higher than the starting salary of $35,000, and about 1 ½ times higher than the mid-career salary of $48,500.
I think you can see that your teen will be digging herself into a hole that is nearly impossible to get out of any time soon, or even at all.
Of course, some unfortunate parents think the answer is for them to take out loans themselves, or worse, co-sign on their kids’ loans. This results in huge debt burdens on parents who are trying desperately to save for their own retirements.
Don’t do it!!
We are raising a whole generation of people who will have to put other dreams, big dreams, on long term or even permanent hold because of student loan debt. Marriage, parenthood, house purchase, car purchase, starting a business, traveling – all might be delayed or forsaken because student loan debt has sapped their funds and robbed them of the happiness and peace of mind that comes from having the freedom to live life without the burden of insurmountable debt.
Don’t let this happen to you.
Instead of making loan payments, your teen could pay himself and watch the growth.
For example, if a person invests $600 per month for 20 years, at a very conservative 8% growth rate, he will have accumulated nearly $356,000 at the end of that 20 years!
Now, here’s the part about what they can do instead of racking up debt:
- Apply for scholarships
Scholarships are an excellent way to cover some of your student’s expenses, because the money does not have to be paid back.
There are a myriad of different ones. You child does not necessarily need to be a genius or an athletic star to receive scholarship money. Scholarships can be awarded based on a number of criteria including academic merit, talent, interest, volunteer service, parental employment, or family situation. There are even scholarships for left handed people and people with red hair.
Applying for scholarships takes some hard work and diligence, and a lot really hinges on your student’s ability to fill out paperwork and write a compelling essay. But in the end if your student gains any free money at all, the effort is worth it. You will be surprised at how much scholarship money is available for the asking.
Don’t forget that your student can still apply for scholarships during college. Go to the websites Federal Student Aid or Scholarships.com for more information on hunting down scholarships. You can also find out what scholarships are awarded locally at your child’s high school.
- Apply for grants
Grants are another form of financial aid that does not have to be paid back. Grants are frequently based on need and/or family situation. The same Federal Student Aid website also has information on applying for grants. Your teen will need to fill out the FAFSA in order to apply for grants, and he can do this online.
But be wary.
When your student goes to the financial aid office at the college or university to fill out paperwork, be sure he does not inadvertently wind up with a loan. It is easy for that paperwork to sneak its way in without your student being aware of it. Before he knows it, he has signed for a loan without intending to. I personally know two people who were in this situation.
- Consider trade school
You’re probably thinking, “Okay, so what am I supposed to do? Encourage my teen not to go to college?”
Perhaps. If your teen is interested in going to trade school, he or she could end up with a more marketable skill that pays a better salary, and with little or no debt. Such opportunities are not always presented to high school kids, because the college route seems to be preferred by administrators.
But trade skills are desperately needed in our economy, and finding a job is much easier than some college majors allow for. Trade opportunities include welder, electrician, auto or industrial mechanic, plumber, carpenter, and millwright, just to name a few. These skills can be combined with an entrepreneurial spirit to help your student eventually have his own business, which leads me to the next point…
- Start a business
If your child is motivated and entrepreneurial, he or she could start a business.
There are many jobs that can be created with a little ingenuity on the part of your teen. Online business opportunities are exploding, often with the need for very little or no up-front investment. Refer to this article to read about a teen who started his own successful business. Exceptional Teen Feature – Andrew Pfluger, August, 2016.
- Get a job
There is always the good, old fashioned method of working extra jobs. Your student can work during summers and even during school terms in tandem with attending school in order to earn as much for tuition, books, rent, and food as possible. Also, check into the possibility of doing intern or co-op work. It’s a fantastic way to earn money and gain experience in their particular field of interest.
- Save up
Parents and grandparents, listen up! No one in the history of histories ever looked at their bank account balance and said, “Darn! I wish I hadn’t saved so much money!” If you can start early and save money for college, that would be wonderful. You and your child will be relieved to have something in their storehouse to work with.
There are many ways to do this, including Education Savings Accounts, which are closely akin to IRA’s. However you do it, the point is to accumulate as much money as possible now to avoid debt later.
- Live cheap
I can’t emphasize this one enough. Every dollar your student does not have to borrow now is about $1.80 he won’t have to pay back later. This means that $3.00 package of Oreos you want at the grocery store will end up costing you $5.40 later if you are living on borrowed money.
And I don’t even want to think about what that spring break trip to Daytona would cost if financed with borrowed money. Oh, what the heck. Let’s do a quick math problem.
5 days @ $400 per day, including room, food, and travel expenses (probably does not include alcohol) = $2000
$2000 X 1.8 = $3600
It will take more than 6 months of hard work to pay that off, based on our numbers above.
Hope you had fun.
Some tips for living on the cheap are:
- Learn to cook! It’s way cheaper than eating out.
- Don’t buy alcohol. (Yes, I said it, and I’m sticking with it.)
- Cut back on your gourmet coffee habits.
- Live in an inexpensive apartment with roommates.
- Don’t buy expensive clothing.
- Be careful with your entertainment habits. It’s easy to blow a lot of money at the movie theater.
- Make a budget, and follow it. Tell your money what to do, and it will obey.
As Stephen Covey states in The 7 Habits of Highly Effective People, your teen should begin with the end in mind. Beginning college with a plan for how to pay for it and what he or she will do afterward is essential to a rewarding, happy, debt-free life later on.
It may seem hard to live like this for a few years, but your teen needs to understand that she must, as Dave Ramsey says, live like no one else now so that later she can live like no one else. When everyone around her is drowning in student loan debt, she will be relieved and happy that she will not be wearing the same concrete shoes as her friends.
Resources: For a good overview on how to go to college without racking up debt, refer to the book Debt Free U by Zac Bissonnette. Also, visit Dave Ramsey’s website to learn all about how to stay out of debt.
Do you have any suggestions for avoiding student loan debt? If so, or if you found this article helpful or beneficial, please scroll down and leave a comment below. As always,