BLOG: The 'Four Letter Words' of College Financing

College admissions reps avoid using them. Parents cringe at their sound. High school and college students don’t usually understand the true ramifications and reality of them. What are they? They are the dirty four letter words of college financing: COST, LOAN, and DEBT.

The COST of college has long been spiraling out of control for families trying to assist their children in obtaining at least a bachelors degree. Far exceeding the rate of inflation over the past 25 years or so, tuition and associated college expenses have become, in most cases, the second largest purchase incurred by a family. For those with multiple children, the total COST of college can easily exceed the purchase price of their home.

Since saving as a means to pay for the total college expenses has become an almost impossibility and “working your way through college” went out in the 70′s, families must pursue the dreaded college LOAN. As multiple borrowings over several years are most often needed, the sum of all of these until graduation (hopefully) creates a nasty thing referred to as total college DEBT. But borrowing for college is a wise investment, right? …Yes, almost all of the math for potential career earnings would agree but there are many factors to consider when making decisions to increase the total DEBT. Here are a few that should be considered:

1) Who is going to pay back which LOAN? This needs to be very clear in family discussions. I’ve seen many situations where the students assumed the parents were going to pay it back whereas although they agreed to co-sign, the parents intended the complete opposite.

2) If the student is going to be responsible for repaying, is their planned major leading to an occupation that will provide them the salary to make the payments and still be able to pay for basic living essentials? Twenty-Five percent of students who borrowed for college are behind on their LOAN payments at the present time. Yes there are some new “income-based” loan repayment programs available now that could help lessen the blow but it will still require prudent money management especially in lower paying occupations such as social work or teaching.

3) Is extensive borrowing planned to attend a higher COST private college or university when a public institution would have led to much smaller overall DEBT? Is the return on the private school investment going to be worth the additional LOAN amounts? For a fairly short list of private schools the answer could be yes, but for the vast majority I doubt it very much.

So setting aside what parents may borrow and intend to pay back themselves, how much DEBT is just too much for an undergraduate degree? Current projections would indicate that the class of 2012 will graduate with an average DEBT of about $28,500. Total amounts are higher in the northeast and midwest while lower in the west where more students attend lower COST public universities. In my opinion, any projected total DEBT that is around 50K or higher really needs to be thought through for reasonableness and a review of potential alternatives even if it means considering community college for two years. I would also suggest that all “federal” LOAN options such as the Stafford and Plus Programs be exercised before looking at private options as there will likely be more opportunity for income-based repayments and LOAN consolidation after graduation with federal borrowing.

These four letter words, especially as they pertain to college financing, are becoming “dirtier” by the year. But if parents and students take the time to carefully consider all factors objectively before making critical financing decisions, these words may become only mildly offensive.