Originally seen in USA Today and The Indianapolis Star
Just as millions of first-year college students matriculate for the first time, millions of parents stand ready to transition into a new stage of parental support and guidance. While teaching please and thank you, and ensuring their students know that keeping their hands to themselves is a reasonable standard throughout life, the financial guidance which is needed over the next four years can mean the difference between a peaceful life and a chaotic life post-graduation for both students and their parents.
The problems often begin when parents reach deep into their brains to search for past college experiences which might be relatable to their children’s current financial challenges. Assumptions are made, new processes are ignored, and unrealistic views of college finances are employed. Let’s cut to the chase – the greasy burger joint near campus is oddly the same, but nothing else is. Nothing.
Total student loan debt has increased by nearly $1.4 trillion since 1999, and now accounts for roughly 7.5 percent of GDP. When today’s parents were yesterday’s recent graduates with no kids, there were only $90 billion dollars worth of student loans floating around higher ed. When parents make financial decisions based on the college financial realities they once knew, gigantic mistakes are made.
The goal is to earn a degree while taking on as little debt as possible. As strange as this sounds, that wasn’t always the goal, because it didn’t have to be the goal.
Mistakes often occur with the omission of the most basic current practices. Today’s parents must complete the FAFSA (Free Application for Federal Student Aid) for every school year their student participates in. The temptation is to do it the first year, get disappointed in the results, and then dismiss the process as frustrating and unnecessary during the remaining years. Don’t do that. Invest the hour it takes to complete the FAFSA every year. FAFSA determines eligibility for student aid. The financial changes which take place in your life from year to year will influence your student’s aid eligibility. Do not assume it’s a lost cause forever if you happen to get stiffed on your student’s aid package. You must complete the FAFSA every year.
If FAFSA is the most ignored concept, then Parent PLUS loans are the most blindly accepted concept. My biggest concern for parents is the prospect of taking-on Parent PLUS loans, especially if they can avoid them with solid planning and making tough decisions. Essentially, Parent PLUS loans are student loans parents obtain when their students max-out the amount of student loan debt they are personally able to acquire.
Parent PLUS loans leave parents stranded with unsecured debt on someone else’s education, at a not-so-great interest rate. When a student and their parents choose an expensive school without a reasonable plan to pay for it, Parent PLUS loans will happen. As college expenses continue to rise, mark my words, Parent PLUS loans will become the great retirement ruiner, right next to healthcare expense.
To navigate this stage of parenting correctly, it’s worth taking a few minutes to consider what could go wrong. The worst-case scenario is your student drops out of school with tens of thousands of dollars of debt, no degree, and moves back in with you. Situations like this often occur when financial realities aren’t acknowledged. Don’t dismiss this as callous. If you’re tempted to do so, you’re looking at this wrong. Painful but necessary conversations have to be had between parents and students. These conversation need to begin in late middle school or early high school, and they must clearly state the economics of a parent’s financial reality. Student loans and the college experience should not ignore a parent’s finances or math in general.
Borrowing money without a reasonable plan to pay it back is not a good idea, even if several unknowns of a college education exist. Fight the urge to adopt the “we’ll just figure it out later” stance. This advice applies to student loans, earning potential for various fields of study, and post-graduation realities.
Both parents and students swing wildly in the wind when they don’t establish financial goals before, during, and after college. Every parent of a college student in this country, and the students themselves, should know exactly how much their college experience will cost them, how they’re going to pay for it, and how they’re going to pay back student loans. In addition, college should signify the beginning of the end of the financial relationship between students and their parents. Ideally, parents should consider using the four year experience to ween their student off of the family payroll. Too often, parents wait too long to stop funding a student’s lifestyle expenses, and in failing to do this, can often end up with a student boomeranging back into the family home post-graduation when they can’t handle the complexities of matching income with expenses.
If done correctly, the conversation about money and college between a parent and their child will be some of the most difficult conversations they ever have. There’s that much at stake. Stability, independence, retirement, careers, and relationships all hang in the balance.
Have a question for Pete the Planner? Email him at AskPete@petetheplanner.com or visit petetheplanner.com.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.