When Rachel Ramsey Cruze, daughter of anti-debt guru Dave
Ramsey, was a senior at her Tennessee high school, she told her
parents that she wanted to attend Auburn University (in Alabama)
because her friends were going there. Does this conversation with a
college-bound teen sound familiar?
Cruze's parents sat her down and said they would not pay almost
double the price of University of Tennessee for her to cross the
state line. They showed her the cost differences and said that if
she wanted to go to Auburn, she could pay the difference
"That opened my eyes," says Cruze, who is now 25. "I didn't want
to pay $18,000 more per year myself, so I went to the University of
Tennessee and now see how smart that was."
Not every parent has a similar discussion about
with their children. Some parents may even cosign the student loans
necessary for a higher-priced education. But if that money turns
out to be a poor investment, it can lead to headaches for students
and parents alike.
Managing tomorrow's debt
Statistics from Collegeboard.org show that in 2010-11, about 57
percent of public four-year college students graduated with debt.
The average amount owed was $23,800.
"Student loan debt is largely unavoidable if parents cannot
afford to pay for all college costs," says Mark Kantrowitz,
publisher of Edvisors.com, a suite of college-planning websites.
"So the trick is to minimize this debt. Show your child that every
dollar borrowed costs $2 to pay back and how long it takes to pay
Both Kantrowitz and Cruze stress that the primary purpose of
college is to
earn a degree that leads to a higher-paying job
as soon as possible.
"Living it up or studying toward an impractical major for four
years on borrowed money is not the lesson to teach your student,"
says Cruze. Both say that going to the "best" school is unnecessary
in all but a few cases.
If you are considering co-signing a loan that allows your child
to attend a higher-priced school, these four warning signs should
make you think twice.
1. Poor academics in high school
Because some states now offer lottery-funded scholarship awards
for students who meet certain academic requirements, admissions at
many less-expensive state colleges have gotten much more
competitive. But if your student is ineligible because he or she
doesn't meet those requirements, opting for a pricier private
school that accepts lower academic standards may be a poor
"Community college is the way to improve academics for students
who don't meet four-year state college requirements," says Cruze.
2. Questionable future earnings
Kantrowitz offers this simple formula for determining how long it
will take students to pay off their loans: If total student loan
debt at graduation is less than the potential annual starting
salary, loan repayment will be possible in 10 years or less. For
larger loan amounts, repayment times can be significantly
If the career's potential salary pales in comparison to the
extra educational costs, borrowing more money is a questionable
3. The need to consider less-attractive loans
Direct subsidized student loans from the U.S Department of
Education come with low interest rates and can often cover most
in-state college costs, particularly if the student is able to
secure other grants or scholarships. But if your child's
educational bills force you to consider additional loans that have
less-attractive terms than a direct subsidized loan, think
carefully before choosing this route.
"Students never have to borrow all they are offered, especially
if parents can pay some costs," says Kantrowitz. If you are forced
to consider the federal Parent PLUS loan program or cosigning for a
direct unsubsidized or private student loan at higher rates, the
additional costs these loans impose may not be worth it.
4. A lack of certainty
A four-year college is not for everyone. Poor grades or a
decision to drop out or transfer schools may result in a loss of
paid-for credits, which can substantially increase college costs,
says Kantrowitz. Some students are more inclined toward career
paths that favor a technical certificate or two-year associate
"Don't take a year off to save money," Kantrowitz says. "It's
better to complete the degree to get to that higher-paying job
quicker, especially in today's unstable economy."
Think before you sign
Parents often think that cosigning simply means they are helping
their child get a loan, but a cosigner is equally obligated to
repay the debt if there is a default.
"Parents need to protect their own credit," says Kantrowitz.
"Realize that 'cosign' means 'your loan,' which can use up your own
credit resources. Also, I never advise even considering a
, using credit cards or borrowing from retirement savings to pay
Because they are the ones who will sign the checks, parents
ultimately have control over how much they'll help their children,
"Think long term," she says. "When your student graduates and
gets their first job
, and may be considering a mortgage loan, they will be so thankful
not to be burdened with payments for student debt that might have
been avoided by working hard and taking the least expensive route