I know the ideal situation would be to graduate college debt free. However, I also don’t see the problem with some loans. My parents are willing to take out some loans themselves to help for college since they don’t have a ton saved up, but can afford to make a few hundred dollar monthly payments for loans. Is it still a bad idea if my parents can afford to do that? A lot of the advice against loans seem to be against the student borrowing or cosigning for too much, but if my parents can afford loan payments, is it still bad?
There’s nothing wrong with an AFFORDABLE loan amount. But when the loan size will preclude you from “starting your life” (i.e. saving to buy a car, buy a house, saving for retirement), then it’s a bad idea… Quite a number of posters are toying with taking on debt amounts which will saddle them with 4-figure monthly loan payments for a decade or more.
You do realize that students and parent have to pay back those loans, with interest?
The reason people don’t recommend large loans is that the loans can become unmanageable:
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Are you are your parents aware that some loans require repayment immediately after being disbursed?
Are you aware that once you graduate from college, you will start repaying 6 months later?
Are you aware that if you don’t finish college, you need to pay back those loans immediately?
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If the loans aren’t too large and are manageable and won’t put your family in debt for years and years, then maybe it’s okay. But, if your personal student loans aren’t enough to cover your tuition and fees, with your merit aid, then it might not be such a good idea to have your parents get loans.
@Classof2017 Sounds like you are a junior starting to plan early, good for you!
In answer to your question, I ask two questions 
- If your parents can afford to pay a few hundred dollars a month in a loan payment, why haven't they been able to save that same amount over the last number of years?
- Do you understand how much a "few hundred" translates back to in terms of a base loan amount? The simple answer is that the base loan amount is probably not as big as you thought it would be.
I did some calculating and came up with a payment of $338 a month for 10 years for borrowing $28,000
(spread over 4 years and with $12,500 of interest added in to the total owed).
from this site https://bigfuture.collegeboard.org/pay-for-college/loans/parent-loan-repayment#results
Another point - you need to think of college as a total cost, not just 1 year, but 4 (or 5 or 6 years). So let’s pick a school, say cost is $50,000 a year cost of attendance.
Multiply by 4 years and you get 200,000 needed to attend for 4 years.
Subtract out the amount your parents can borrow. Since they can afford “a few hundred a month” which I said was 28,000, let’s go with that amount.
200,000 - 28,000. $172,000 left to pay.
Now let’s subtract out the amount of loans (max) you(the student) can take out, pretty sure this is about 28,000.
That leaves you and your parents with $144,000 to pay. Where is that money coming from?
This is why it is SO IMPORTANT to look at what you can afford now, and start researching schools you can afford, then narrowing that lists down to schools you like, then applying. Do not do what some of the kids in the class of 2016 have done, which is NOT to have that money talk with their parents and live in some fantasy world where the money just drops from the sky and/or you are asking Grandma to mortgage her house so you can go to your “dream school”.
Once again, congrats to you for starting this process early and asking good questions. You may not initially like the answers (I sure didn’t!), but think it thru, ask for help here, make a plan and a year from now you will be like my family - sitting proudly at high school graduation knowing you will be able to attend college and graduate with either very little, or a reasonable amount of debt.
SOME small loans are OK in my opinion.
Our son completed undergrad at instate public, total cost about $85000 for 4.5 yrs.
Yep, extra semester. He finished in 2009, costs higher now.
He took maximum $18000ish loans at that time in his name, we borrowed 15k and we contributed remainder from savings in his 529 and from current income.
He has no problem paying his loans monthly, and may decide to retire them early.
He completed masters with merit funding from school.
No way our family would sign on to large loans.
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your parents can afford to pay a few hundred dollars a month in a loan payment, why haven’t they been able to save that same amount over the last number of years?
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Excellent point. They haven’t been able to save so far, so why would they be able to pay a few hundred a month for a loan?
You’re a junior…test your claim. Ask your parents to NOW set aside a few hundred a month towards college costs. See how much they’ve saved after 3 months, 6 months, 9 months, etc.
In the meantime, be looking for schools that will give you large merit for your stats.
We have a rising senior and we are doing just that as our test. We set what we think we can pay per month and we are putting that in a separate savings account (not 529, etc). We started in March and will have a 12 month test by the time we have to decide where to attend. It will test our cash flow plan as well as have a minimum of one year’s expenses in the bank.
@NJRoadie @mom2collegekids They made less money a few years ago and were in a tougher financial spot but can now afford it. They did save a decent amount but we its not enough considering our EFC.
I know a few hundred doesn’t amount to paying for a 50k/year school. I know this isn’t exact but I’ve heard it’s about each $100/month equals $10,000 loan. I am targeting a FA at top schools and merit at lower schools so I’m not looking at schools with large net prices. The breakdown is more like ~40k saved, ~28k from student loans, and then about 10-15k from parents loan. This would allow a school with a net price of a little over 20k/year.
My top choices would come out to a little less than that because they are 100% need met schools. My matches right now claim to meet 100% need too and I’m going for some merit scholarships there but they aren’t considered as generous as the top schools so I’m not as confident. My safeties would give around a full tuition which would still be 15k/year for everything else. If I get into a top school it could even come out to be less than the 15k/year.
I do NPCs but we have a small business and rental property so I don’t know how much to trust those. Our income is still quite small and not much is assests as those properties are on loans so I’m not sure how much those could possibly affect my NPC. I exaggerated all of the numbers in the NPCs and they still came around 20k/year but still don’t want to put too much hope into those.
My parents have really good credit too if that means anything.
OP, in terms of NPCs, while certain self employed will come out the same, if you have a straight business, with very little depreciation or losses, and every expense is for real items such as salaries to unrelated employees, supplies and other business expenses that are actually paid out. Hhowever, rentals usually have depreciation so depending on the school a lot of losses/depreciation may be dissallowed, Try to do an NPC with the more knowledgeable of your parents so that you get real numbers. Maybe run them again without any losses or depreciation your parents take and see how much aid you get.
Some people say all loans are bad! Like Dave Ramsey. Some say some student loans are a wise investment.
So you are still swinging between the 1 year cost vs the total (4 year) cost with your numbers. Please look at it as a total cost.
The breakdown is more like ~40k saved, ~28k from student loans, and then about 10-15k from parents loan. This would allow a school with a net price of a little over 20k/year.
So let’s add it up: 40+28+15= 83,000 of money for 4 years.
(do you get access to the full 40 or is some of that for siblings?)
if the cost for 4 years is $30 x 4 = 120,000, that means you have a $37,000 gap.(divide that by 4 and you have >$9,000 a year more money to come up with)
What are the Cost Of Attendance (COA) for the schools on your list? Are you looking at $30,000 a year schools?
<My top choices would come out to a little less than that because they are 100% need met schools.
Be careful - you may feel like you have “need”, but the schools will likely not think you have as much need as you think you do. Listen to the more experienced folks here on what are true need met (and what income level) schools.
Honestly, from what I’ve seen, need as defined by these schools pretty much means you are qualifying for free/reduced price lunch.
<My safeties would give around a full tuition which would still be 15k/year for everything else.
Is that $15,000 a year after the loans are taken out?
Where is that money coming from?
Please have these conversations with your parents now. Do not let them tell you thinks like “Don’t worry, if you get in, we’ll pay for it.” Too often I have seen kids/parents who have gone this path find out about March that it is WAY more money then they realized and they are now looking at a complete replan.
Ask Greece
(to be fair, their main problem is due to handing out overlarge pensions for relatively short labor contributions – in other words, paying and promising too much for too little work, which is inefficient. But taking out loans they had little hope to pay back made things worse.)
Greece took out loans not knowing how they would pay back those loans. And until you are (pretty well) employed after graduation, you won’t know how you’ll pay back yours either. Debt is risk that, if possible, you should avoid.
It is generally a bad idea to spend what you do not have. Mortgage and education might be an exclusion to the degree. It depends on your prospective earnings.
@NJRoadie I added up the total amounts could pay and divided by 4 to get my estimate of a little bit over 20k per year which is accurate so I don’t know why you said i was making a mistake by swinging from total to per year.
Also, I’m not quite sure where you got 30k/year from. I said my reaches would be around 10-20k/year after FA or 15k/year from my safety which would be a full tuition scholarship. That 15k/year is enough from parents saved money and some federal student loans. I got the net prices for my matches and reaches from NPCs which is as accurate as i can get. It’s not like my parents are making 200k/year and I’m expecting to pay nothing. My parents income is around 65k/year so I’m not looking at schools where I’m likely to pay sticker price, either through need based FA or merit scholarships.
Some thoughts/answers to your original questions.
Not all loans are bad. Often loans can be necessary for major purchase such as an house or car. However some aspects of student loans set them apart from regular loans.
Student loans are unsecured. There is no underlining asset that can sold. If you find yourself unable to pay, you have no asset to sell and bankruptcy is not an option.
Student loans are often justified on assumptions about future earnings. These assumptions are not always accurate. Most careers have cycles where jobs are plentiful and scare. Hard to predict.
Most student loans are long term loans spread over 10-20 years depending on the loan type. Over such a long time period it is not uncommon to have a financial hiccup that could make repayment tough.
Often student choose income based repayment where the amount owed actually increases with time. If you are not careful, a manageable debt becomes unmanageable.
Debt limits your options in life. Want to quit to take a lower paying job? Want to take time off to start a family? Want to get your own apartment? Might not be an option due to loans. For your parents, debt could impact their retirement plans.
What seems reasonable and affordable today might change over time. During the great recession, many parents lost what they thought were secure well paying jobs and had difficulty finding a new job. You cannot downsize student loans like you can with houses, cars and lifestyle.
Another risk is that you do not graduate on time or at all. You might get sick and need to withdraw for a semester. FA is usually good for 8 semester. The extra loans for the ninth semester might not be financially possible if your debt load is high.
What most posters here are adamant about are high loans taken to attend dream schools that the student feels is the only possible school that will allow to achieve their dream. Most posters seem to recommended that the student take out no more than the student direct loans for an undergraduate degree.
OP just check that schools that you think meet 100% need, really do. Lots of school make that claim but include loans as part of the FA package. Often the school’s idea of meeting need means they accept the FAFSA EFC number, which many people find hard to meet. Run a few net price calculators now and look closely at how they offer to meet need.
Also if you have rental property, the rental income will be added to your parents’ other income and the value of the rental property will be considered an asset.
When you ran the NPC, did you just use the $65,000 income or did you add the rental income and asset?
Taking your federal student loans makes some sense. There are more protections around those loans than some other kinds of loans, too. That is a total of $5,500 freshman year, $6,500 soph year, and $7500 each year jr & sr year for a total of $27K over 4 years. It is a good idea to avoid loans beyond that if you can. It depends somewhat on proposed major, school/program you would be attending, and plans post graduation (higher level degree that will cost money? Then you want to avoid much in UG loans).
OP has stated that the rentals are heavily mortgaged so have little value as an asset.
@scmom12 the NPCs had aid that included the federal loan, work study, and the rest was a grant
@mommdc I included the rental income and added the asset(which isn’t much anyways).
@intparent I plan on going into finance, but I am not planning on getting an MBA unless its absolutely necessary to moving up in a company to a higher role.