College Debt: How Much Is Too Much?
According to a recent survey by the nonprofit College Savings Foundation, the confidence of parents in their ability to save for college dropped significantly over the past year (go to www.collegesavingsfoundation.org to read the survey). That's not entirely surprising, considering the economic climate. But what is surprising is that, of parents surveyed, a whopping 41% reported having saved nothing at all, and 28% reported having saved less than $5,000 per child.
The loan factor
The trend of not saving enough makes families heavily dependent on borrowing to fund college. In the survey above, 47% of parents said they expected to utilize student loans to pay for college. And parents seem inclined to borrow whatever it takes: 76% don't expect to narrow their children's college choices.
The cost factor
Loans matter when you consider the cost of college. According to the College Board's Trends in College Pricing 2009 report, even though the Consumer Price Index declined 2.1% between July 2008 and July 2009, college costs rose across the board--a disturbing but familiar pattern (to read the report, go to www.trends-collegeboard.com).
For the 2009/10 school year, the average cost of a public college increased 5.9% to $19,388, while the average cost of a private college increased 4.3% to $39,028, with elite private colleges topping out at over $50,000 per year.
The College Board also noted that about two-thirds of students receive grants, with the average private college student receiving $14,400 in total grant aid and federal tax benefits for 2009/10, and the average public college student receiving $5,400. But this still leaves approximately $25,000 for private undergraduates and $14,000 for public undergraduates to fund. Absent additional college merit aid and/or outside scholarships to make up the difference, parents and/or their children must fill the gap.
How much borrowing is too much?
The gap is where families can get in over their heads. Is there such a thing as borrowing too much for college? In the iconic words of the Magic 8 Ball®, "signs point to yes."
The average student now leaves school with $23,186 in federal student loans (Source: National Postsecondary Student Aid Study). And this doesn't include private student loan debt, which has exploded in recent years due to the inability of federal loan borrowing limits to keep pace with skyrocketing college costs.
The result is a new paradigm for millions of young adults--a crushing amount of student loan debt that stretches from early to middle adulthood and can affect all major life decisions, from what career path to choose, to where to live, whether to go to graduate school, when to marry, have children, buy a home, begin saving for retirement, and so on.
And it doesn't end there. Parents who engage in "extreme borrowing"--routinely taking out large home equity loans, federal PLUS Loans, or other private loans to fully fund the gap without regard for the consequences--can hamper themselves financially for years.
How much is too much? Obviously, the answer is different for every family. But waiting until spring of your child's senior year--as you review individual financial aid awards--to think about college affordability can be a mistake. To avoid falling into the "I guess we'll just borrow whatever it takes" trap, families should start thinking about costs much earlier.
Before filling out a college application...
The 360 Degrees of Financial Literacy Web site offers general information for managing personal finances and does not recommend specific financial actions. For financial advice tailored to your situation, please contact an expert such as a CPA or a personal financial advisor.