Can we talk?
By that, I mean that what I am about to say may hurt your feelings. It may also save your future.
The topic is student loans. You may be thinking about guaranteeing a student loan or taking out a loan in your own name to pay for college for your child or grandchild.
Don’t do it.
Student Loans Are Business Arrangements
A loan is a business arrangement. The lender gives you money, and you promise to pay it back on the stated terms.
Buying into your child or grandchild’s dream of going to a certain college or trade school is an emotional decision.
Entering into a business arrangement for an emotional reason is always a bad idea.
If you are like most folks, then you are taking out the loan because you haven’t invested in an educational savings account, or you do not have readily available funds to pay cash. The loan will be a financial stretch for you.
The Financial Risks of Taking on Your Child’s Debt
But you are older and have a finite number of earning years. To repay the loan you will have to steal it from your monthly cash flow or nest egg, and that could later leave you strapped for cash.
There is another cost to the loan that many people do not consider: it will go against your credit. As long as it remains unpaid, it will diminish your opportunity to qualify for credit cards or other loans. There will be no available financial lifeline if the stock market crashes, your spouse dies, you lose your job, you need to qualify for a mortgage, or you have a medical emergency.
You have, in a word, mortgaged your future to pay for an educational decision made by an 18-year-old.
Have an Honest Conversation About the Cost
There is a better way. Sit down with your child or grandchild and tell them:
- “You have decided to go to a certain college and major in a certain subject. Those are your choices and I respect them.”
- “Now we need to look at how you are going to pay for your annual tuition, room and board, books and equipment, pizzas, and clothes. Let’s add together those figures now.”
- “Now let’s look at the money available to you: gifts, the cash your parents and/or grandparents are willing to pay, an education savings account, scholarships, your own savings, and your projected net earnings if you decide to work during school.”
- “See this shortfall? Multiply it by four or five to cover the years you will be in school. We’ll assume you take out a loan in that amount at today’s interest rate, run the amortization schedule, and look at your monthly payment.”
- “How will you repay the loan? Let’s research the average earnings for an entry-level job in the major or trade you’ve chosen. Then we’ll put in a discount, say 10%, to cover the possibility that the job you want may no longer be there. or no one is hiring when you graduate.”
- “Divide that figure by 12. Subtract taxes and the other withholdings. Subtract your monthly loan payment. Compile your estimated monthly expenses, including insurance, food, lodging, utilities, transportation, and subtract those, too.”
- “Now you have a realistic look at the cost of your education decisions. Don’t like the result? Then consider a less expensive school, a more lucrative major, taking a gap year or two to work, or enlisting in the military for the GI Bill and the Hazelwood Act.”
- “You see, I have paid for my decisions. I am not going to pay for yours, too.”
Think Carefully Before Borrowing for College
Helping a child or grandchild pursue an education can be deeply meaningful. But before guaranteeing a student loan or borrowing money in your own name, make sure you understand how the decision could affect your cash flow, credit, retirement savings, and future financial flexibility.
Need Help Thinking Through Your Estate Planning?
Decisions about education costs can affect your broader financial and estate planning goals. If you need help creating a plan that protects your future while providing for the people you love, schedule a consultation with the estate planning attorneys at Hammerle Morris.
Virginia Hammerle is an accredited estate planner whose practice includes estate planning, probate, guardianship, and litigation.
This article is for informational purposes only and does not constitute legal advice. Hammerle Morris Law Firm does not provide financial or tax advice.
