Skin in the game?

Paying for College
1

<p>We will not qualify for any need based FA. Will our kids still be eligible for student loans? Our financial guy is really pushing the idea that our kids take out the $5500 in loans so they have some so-called "skin in the game". I guess he feels like they will be more responsible if they have a financial stake? Both of my kids are excellent students and hold themselves to a high standard. So I'm not sure this would be an incentive. </p>

<p>Also, if they did qualify for the loan and if we decided to go that route, could we pay the loans off while they were in school without them knowing?</p>

<p>Thanks...</p>

2

<p>Here is a good website that answers a lot of question about federal student loans:</p>

<p>[Subsidized</a> and Unsubsidized Loans | Federal Student Aid](<a href=“http://studentaid.ed.gov/types/loans/subsidized-unsubsidized]Subsidized”>http://studentaid.ed.gov/types/loans/subsidized-unsubsidized) </p>

<p>But I have to say that I find this statement coming from your financial adviser to be really out of line. It is none of his business, really, whether your kids have “skin in the game”. And there are other ways for them to have a stake in their education without taking out loans if they don’t need to.</p>

<p>Our kids have both been responsible for their own spending money and book/supply expenses while at college. They also have to cover any expenses related to unpaid internships if they choose to take one during college. I do cover their cell phones (not smart phones) – mostly because I want them to call and text me. :slight_smile: We also have general rule that they have to work or research or something productive in the summer. D1 handled this just fine, including covering the cost of an unpaid DC internship one summer. She also worked on campus during the school year (writing center, which was also good on her resume). She came out of college with a few thousand dollars in the bank and was well positioned to put down a deposit for an apartment rental, front her moving expenses until her company paid her back, etc. She got a great job before graduation. With no student loan payment, she was able to invest in a Roth last year. </p>

<p>Some parents have their kids take out loans and then pay them off as a “graduation present” to their kids when they graduate. I was talking about this with D2 the other day, as we have decided to take out the direct loans for the next four years. But I plan to pay them off when she graduates before payments come due. And I have told her this. It seems unnecessarily stressful for kids who are already doing well and working hard in college to “hide” the fact that you intend to allow them to graduate without debt.</p>

<p>If your kids are already responsible and hardworking, know that they really need to get done with school in four years, and you feel that they understand and appreciate the gift you are giving them of allowing them to graduate without debt, then don’t take out the loans unless you need them.</p>

3

<p>I appreciate the sentiment that kids should have skin in the game, and how we have done that in our family is starting out, they have used their summer job money to pay for books and all of their spending money during the year. Also, they pay me the difference in the cost between a regular phone and a smart phone. Now that they are Juniors they are paying more. Now that they have a car at school they are helping pay for the car expenses. Both kids just finished summer internships that were very nicely paid so they are each paying a portion of their tuition along with the books and spending money. Granted, it is a very small portion of their tuition but it is a portion just the same. Also, I have told both kids that whatever they can put into a Roth IRA from their summer earnings I would match. My son already has a nice amount accumulating in his ROTh and hopefully my daughter will see her way to get something started this year. Both kids are very dedicated to school, will graduate with no loans, and I feel they still have skin in the game. Also, we filled out the FAFSA the first year, then haven’t ever since. I am not sure if that is something you would need to do if you wanted your kids to take out a loan. If they loans are not subsidised, do you need to fill out the fafsa? That to me is too much trouble just so they can take out loans that I don’t want them to have. We are self employed and have a complicated financial situation so it is not a two minute task to fill out the fafsa.</p>

<p>Now if my kids weren’t doing well, and were goofing off in school, then I may take a different approach but that is not the case.</p>

4

<p>One other thing. Both kids went to schools that we could afford with no loans. If they had selected more expensive schools they would have had to take out loans - and I would have expected them to pay back those loans when they graduated. The deal was if they go to a school that was affordable they could graduate with no loans - and they would be responsible for the cost of a school that was more expensive.</p>

5

<p>I think it’s fine to expect your kids to contribute to college costs, but that’s a decision for your family to make based on your own situation.</p>

<p>D never held a job in HS. She took a tough class load, got very high grades and was in an EC that was literally 6-7 days a week/3-4 hours a day year round. She had no time for a job.
No she was not able to contribute financially. Graduated with honors in 3.5 years (double major plus grad level certificate). Did 3 internships in college. Now has a job in her chosen field and works hard. Did she slack off? No way.</p>

6

<p>I think every family is different. We expected our S to work for his own spending money and contribute to his car insurance. I find it hard to believe that most kids even think for one second about having loans they will have to pay off years down the line.</p>

7

<p>“Skin in the Game” is a subjective thing. I have to say, that if my kids who are now out of college had the full Direct loans to repay, which would be more than $30K with interest (since they would be in the unsubsidized loan category), those loans whould be hampering them terribly. Some of them did not get great paying jobs right out of college, and are still barely making it financially. That they do not have a required loan payment has made the difference between their being able to make rent or not. Having a car or not, Paying for full coverage insurance or not. They can also consider taking out loans for further education as they don’t have the undergrad loan monkeys on their backs.</p>

<p>My one son who did find a very high paying job out of college, is still grateful that he doesn’t have the loans that a lot of the young people he knows, at work and from college and other places. It gave him enormous flexibility, and he can get a jump start in building his portfolio, having a good living situation and some options with the extra money. He has a good car in good condition with full insurance. He can afford to travel, he can help out his brothers, go out on a special date, drive without counting the miles and gas costs. He has helped us out enomously, as he paid all of the costs to get situated, and reimbursed us for anything we paid. It can cost money to find a good job and settle some distance from home and having to buy what is needed. We would have done ti for him but it was a big help that he has the money to pay for a vacuum cleaner, a bed, shower curtain, pots and pans in his new apartment, and that he is living in a good area, as this is all new to all of us–he’s working someplace we know nothing about, have no close family or friends there, and it’s a distance away. He’s considering grad school or professional school, and it’s a viable option because he can afford it the way he is situated.</p>

<p>My other ones have had a number of set backs, but they just need to meet rent and transportation costs when it comes down to it, which gives them enormous flexiblity. They couldn’t even meet that at times. That relentless grind of loan payments would have been just even more of a stress, and the interest rate is tough. In 6 years, the amount would be doubled, and they’d be hard put to be making these payments. Only so much forebearance would be possible. </p>

<p>My one currently in college took out $3500 or so in loans last year when he found himself in a scrunch. Job at school conflicted with some course things, and he was having trouble with his classes. Needed summer school to get what he wants. Got an opportunity to travel with friends, which meant more costs and time away from summer job to make it work. THrow in some other disasters and he was behind the eight ball financially on what he committed to pay. Had he already taken out those loans, he’d have had no where to go. He took out the loans , which can be taken any time before the end of the school year, paid for summer courses and has been working on paying them back. He is floored by what a 7% interest does to a loan. It will take him two years to pay this off as long as there are no other disasters, and he is ahead of schedule and optimistic that it will happen as he has earned overage this summer and expects to work this school year. But it’s hard to pay back that money. </p>

<p>Do I think he’s be better off with $30K in loans as his “Skin in the game”? Nope. It’s there as some protection as it was there when he needed it last year. </p>

<p>But had my son selected some more expensive choices in terms of school, with what we had on the table as what we would pay, the only way to make it work would have been those loans, and some mandatory work and earnings over the summer and school year. In some cases, the kid wants that choice so much, it’s worth it to him. That is a choice. My son chose something that gave a little leeway, namely those loans.</p>

8

<p>Bigdaddy, your kids would most likely, really most certainly qualify for the Direct loans (formerly known as the Staffords) $5500 Freshman year, $6500 sophomore year, $7500 for junior and senior years. They are very lucky not to HAVE to take those loans as most financial aid recipients get them in their packages as a given. </p>

<p>Yes, you could pay the loans behind their backs, but usually, part of taking out of these loans means monitoring them, as one can do on line and getting statements as to where you are in those loans. So, unless you want to go through the charade of making them take out the loans and not act responsibly as one who has loans should be, no, you cannot pay them back and have the statements look like they still owe. In reality, kids will generally ignore the loans, so most of the time a parent could get away with this, but if the whole purpose is to give them some “skin in the game”, it’s usually a good thing to get their brain cells in synch with the process too. It’s not really a game, you know, but real life. </p>

<p>What some parents do is save up the money and present it as a graduation present… But a lot of kids take detours in college and graduation might not happen for a while, and if the kid is not in school, loan payments become due. And usually kids who have some problems during the college years, are not in posititon to pay back loans. With all of my kids, I’ve seen a lot of the possibilities occur. And that interest rate is like a taxi meter ticking.</p>

9

<p>I bristle at the words “skin in the game” when it comes to tuition. I agree that the suggestion from your financial planner was out of line and will raise it by saying it is a stupid suggestion. I’m sure parents like to think that the “skin in the game” ruse will turn little ne’er-do-wells into responsible adults but it is little more than wishful thinking. Even the questionable studies suggesting that GPAs go down as the money given to kids goes up do not show any causation with regard to loans, since no immediate strings are attached. In fact, loans are put into the same category as other money supplied by parents so the only thing accomplished is enriching the lender. Scholarships contingent on GPA are a different matter in that the sword is poised directly over the head.</p>

10

<p>Cartera, Direct Loans are NOT counted as money provided by parents. The Direct Loans are in the student’s name only.</p>

<p>I agree with Fallgirl…this is a family decision. Our kids did take the Direct Loans. As a graduation gift, we are repaying them. The repayments are a drop in the bucket compared to our college payments.</p>

<p>Re: helping with college costs…our kids were responsible for earning money for all discretionary spending and for books. Both worked 10-15 hours per week, and full time in the summers. We paid all other costs minus those Direct Loans.</p>

11

<p>DS does have 18k in Staffords.
He also has an undergrad and masters and a fine job in his field with full benefits.
Those loans do not hamper his frugal lifestyle and we have no intention of paying them.
We covered all other tuition, room, food, insurance, etc.</p>

<p>We’re enjoying being able to make some long needed home repairs.</p>

<p>Agree this is a family decision.</p>

12

<p>Thanks for all the responses. First I’d like to address our financial planner. He has been phenomenal! We have been with him for awhile and we have exceeded our goals by a mile. Over this time, he’s become a friend of the family. He makes suggestions on all sorts of things and I was not at all offended by his remarks. He truly has our best interest in mind and is always trying to be helpful. </p>

<p>My D is a terrific student and has great stats. She’s also responsible enough to play two varsity sports, work part time and volunteer at a local charity. We have already told her what we are willing to pay for college and exactly what we expect her to pay for. She wants to get a job in college to help pay for her social life. She is also applying to a host of schools that give her the bet chance at merit aid. </p>

<p>I asked the question because I wanted some thoughts from the good folks on CC. As usual, the opinions and experiences are all over the map. I can see both sides of this issue. I will say, that back in the day, I paid for my college education 100% on my own with loans and work. Knowing that I was paying for school definetly helped me make good choices when it came to school. I knew kids that weren’t paying for anything. Many of them did more partying than studying. It always occurred to me that they wouldn’t be doing that if they were footing the bill.</p>

<p>As far as repaying the loans, I just wanted to do it before the interest really kicked in.</p>

13

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<p>I know the loans are in the student’s name. I am referring to studies that suggest that “skin in the game” works in that GPA’s go down as the amount of money supplied by parents goes up. The study noted that loans have the same effect as money provided by parents because there are no strings attached immediately. The difference in GPA came with scholarships attached to GPA, work study and working part time so the student has an immediate connection to his/her effort and feels invested. Having to pay back loans in the future, with the likely knowledge that parents will kick in if necessary was not recognized as a motivator.</p>

14

<p>OP, regarding your post #12, that would be only the subsidized loans where your student does not start paying interest until they graduate. The unsubsidized loans start accruing interest right away that your student eventually has to pay, even though they don’t have to make actual payments until they graduate. So your student can actually only borrow $3,500 subsidized freshman year, $4,500 sophomore year, and $5,500 the last two years. If your financial adviser did not know this… consider whether he is giving you the best advice on this. Note that the advice hasn’t really been “all over the board” here. One poster has indicated that this seems like a good idea. The rest have used other methods to get “skin in the game” or don’t think the fact that their kids took out loans is such a good thing.</p>

15

<p>Rather than take student loans, why don’t you set up your own “loans” with a written agreement between you and your daughter. Set reasonable goals, and as long as she reaches those goals you forgive the loans. Why pay interest to someone else when you can pay it to yourself, unless you think you’ll make more investing your money?</p>

<p>Skin in the game can take many forms - if she has merit scholarships, and has to meet certain requirements to keep them, that is skin in the game (unless you promise to make up the difference if she loses them, no questions asked). </p>

<p>Only you know your daughter. What will help her to focus on what she needs to do to succeed in college? Will the possibility of losing merit aid be enough, or does she need more skin in the game?</p>

16

<p>The financial planner is not a psychologist so suggesting that having loans is some sort of motivator is out of his bailiwick. Advising someone to rack up interest when not necessary based on a hunch that it might be a motivator is not sound financial advice.</p>

17

<p>One way to keep repayment costs down is to actually pay the interest on those unsub loans as you go.</p>

18

<p>I understand wanting the kids to have some stake, but I don’t think loans are the way to go…especially for kids who aren’t that money-savvy…they just see loans as something “way out there”.</p>

<p>Instead, to motivate a child, I would think having them work over the summer and put $2k towards books and misc costs would work better than loans since it’s “in their face.” </p>

<p>Also, have them work a few hours a week during the school year for spending money. Often the “more lazy” child who doesn’t have a part-time job will just have too much free time on his hands to find more things to goof-off with.</p>

<p>However, Big Daddy, if your kids get nice merit scholarships and must maintain a high GPA to keep them, that’s their skin in the game…otherwise, they come home.</p>

19

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<p>This is what the OP said. The interest “kicks in” and starts accruing immediately on both subsidized and unsubsidized loans. Neither type of loan needs to be paid back until the student leaves school. But the goverment pays the interest on the subsidized loan that accrues until the payback starts, where the student is (eventually) on the hook for the interest on the subsidized loan accruing while they are in school. So in my mind the interest “kicks in” (starts to accrue and is added to what is owed) right away on the unsubsidized loan. Of course they could pay the interest while the student is in school. But I am not sure for someone who doesn’t have to borrow the money that it would be a good use of funds.</p>

20

<p>Just make sure that the skin in the game doesn’t hit flesh, cause bleeding and hurts to the marrow of the bone!</p>