4:20 PM EDT, April 25, 2012
Just as parents and their high school seniors are about to sign those college acceptance letters, there is news that unless Congress acts by July 1, the interest rate on federal student loans will double from 3.4 percent to 6.8 percent.
President Barack Obama has been touring college campuses (in swing states) and chatting up Jimmy Fallon to show his support for keeping interest rates on new loans low, and he talks about "the mountain of debt" he and his wife were under after law school. Republicans, of course, demand to know how he plans to pay for it.
The better question might be, how do students and their parents plan to pay for college?
Student loan debt in this country is higher than credit card debt — $867 billion versus $704 billion for credit cards, according to the Federal Reserve Bank of New York. And while the average student debt is $12,500 after four years at a public school, almost 28 percent of student loans are in the $25,000 to $200,000-plus range.
When asked how they got into so much debt, most of those students said they just didn't run the numbers.
As Americans, we are famous for pulling out the credit card to satisfy a whim, but generally speaking we have an idea of what we can afford to buy.
We know how much house we can afford, and what kind of car we can afford, even if we don't always exercise our best judgment in these purchases. But we have no idea how much college we can afford.
Student loans are an investment in human capital, in the future, and the difference in lifetime earnings for those with a high school diploma and those with a college diploma makes college a better place to park your money than gold or real estate. But we aren't very smart about that investment.
We tend to open our checkbooks to make our children's dreams come true, or we buy into the idea that an expensive brand-name college will ensure their success in an increasingly competitive world.
The result is our kids end up buried in debt that forces them to postpone the very future we thought to ensure. Student debt is often the reason young people give for returning home to live, postponing marriage or children or the purchase of a home.
And if it is the parents who take on this debt — as my husband and I did — our choices about work, retirement, trave and lots of other decisions that effect the economy are made under the shadow of what we still owe.
What parents need is a sharp pencil and some tough love.
Figure out how much in student loan debt you can afford to pay each month. Is that number $400 a month — kind of a car payment? Or is it $1,000 a month, which is more like a mortgage payment?
Then figure out what is a reasonable debt for your child to shoulder, based on the monthly payments they will have to make when they graduate. This is harder to calculate because their job prospects are so uncertain. But it is important, I think, that they have a financial stake in the success of this enterprise, too.
It may be the case that these numbers don't add up to four years at a private college. Perhaps they add up to two years at a community college while living at home and two years at a state school.
That is the hard conversation to have. We want what our children want, and those planning to go to college want to actually go to college, like their friends. And some of them have the stuff to make it at those brand-name schools — schools that are financially out of reach if you are honest in your calculations.
My daughter won't pay off her share of student loans, she says, until she is 30. She groans at the number she has to pay every month, but if she is lucky and the economy holds up, it might then be the smallest bill on her ledger.
We, her parents, have another five or six years to go, and we are holding our breath.
"If you want to see a motivated worker," my husband says, "take a look at the dad who still has a pile of student loans to pay off."
Parents, do the math and make the responsible decision: Don't buy more college than you can afford.
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