Avoid a Higher Education Money Pit

Physician's Money Digest, Spring 2013, Volume 15, Issue 1

Late last year, it was reported that Americans hold nearly $1 trillion worth of student loan debt. And borrowers, whether they are student or parents who co-signed, are having trouble paying those loans back. Now, more than ever, it’s important to contain your child’s secondary education costs — and to ensure that any loans assumed can be paid back in a timely fashion.

Step one? Help your child select an appropriate career.

Selection

Before identifying colleges — and their costs — talk to your son or daughter about his or her career aspirations. It’s important that children distinguish between fields that interest them and those that will help them acquire practical skills that will lead to a fulfilling career. Point them in the direction of professional and personal contacts they can call, including alumni networks and professional associations. These will give them a realistic picture of possible careers and other important information.

Helping your child focus on his future career should lead to an estimate of what his salary is likely to be as well as his ability to pay back his student loans. A general rule of thumb (with many exceptions) is that the total amount borrowed should not exceed your child’s annual starting salary.

Lifestyle

Your child’s career choice is also key to understanding the kind of lifestyle he will likely lead once he graduates. Besides expected salary, consider the work/life balance. The salary may be attractive, but the job may routinely call for 60- or 70-hour weeks, which may not be expected, nor appreciated. Another factor is location. Can the job responsibilities be performed anywhere or only in certain geographic areas?

Evaluating all aspects of a career up front can help your child avoid a costly correction in the future. We’ve all heard stories about the perennial student who has been going to college for six years because he initially chose to study something he was interested in as opposed to a field that was a bit more practical.

Worse yet is a career choice that leads to a mid-life change of occupation, often when there is a family in the picture and significant financial obligations to meet.

How to Keep Costs Down

Once your child identifies a suitable career path, it’s time for him to explore what level of education — as well as what school — is realistic and necessary for your child to pursue his goals.

Once you identify several potential schools and/or programs, assess how successful they are at placing students after graduation. Do they have internships available that provide an entrée into a first job? Many colleges have career placement centers — inquire about the number of students who obtain jobs after they graduate.

It is also possible that your child’s career path doesn’t require a four-year degree. Some jobs in the health care, information technology and public services fields are among them, according to a recent article in Kiplinger’s Personal Finance. Perhaps a two-year degree or a certificate program is sufficient for your child’s dream job. This is one way that parents and children can save on post-secondary education expenses.

Other potential ways to corral expenses include having your child earn credits toward a degree at a community college, signing him up for Advanced Placement courses in high school that may translate to college credit (depending on his AP exam grade) and work-study programs.

Repayment

A final word of advice to parents: tread carefully before deciding to assume total repayment of your child’s college loan debt.

Generally speaking, when a child is responsible for paying a portion of their college costs or tuition, he feels more “invested” and tends to earn better grades. At the same time, be aware that when you co-sign a student loan for your child, if he is unable to make the monthly payments, you will be responsible, ultimately.

Also, don’t jeopardize your retirement in order to fund your child’s education. You need that money to live on in the future and once you tap into your 401(k) or IRA, it may be difficult to replenish it.

Remember, student loan debt is not going to go away and must be paid back in fairly short order. Even if your child declares personal bankruptcy, he will still have to pay back his student loans.

By researching and planning in advance, you can help your child select an appropriate school and, importantly, an affordable financing plan (your financial advisor can assist). These actions will help set the stage for the timely and responsible repayment of his student debt.

Marina Goodman, CFP, is an Investment Strategist at Brinton Eaton, a wealth management firm in Madison, N.J. She can be reached at goodman@brintoneaton or (973) 984-3352. For more information, visit www.brintoneaton.com.