How Much Student Debt Should Parents Take On?
We are getting back to into the swing of the school year and for many, school means college. College soon, or college now, and the angst of paying for it.
I went to a seminar last year by Joe Messinger, CFP ® of Capstone Wealth Partners. He gave us amazing perspective on the student loan crises and how advisers and parents (one family at a time) can stop this madness.
His first concept was showing us a photo of Kobe Bryant’s house next to a picture of his own house. He told us (and we know this!) that as much as he would like Kobe’s house, he can’t have it because he doesn’t have the income to support the payments. No mortgage company in their right mind would lend him the money to buy a $10,000,000 house on a meager financial advisor’s income.
So, why isn’t college lending the same way? A person can take out $150,000 worth of student loans to become a teacher earning $40,000 his first year out of college (with the help of his unwitting parents, of course). It sounds mean, but does this make any sense at all? No! The college loan system SHOULD be like the mortgage industry – there should be at least some reason for the amount of the loan besides the student just wanting to go to school where the fall leaves are the prettiest.
Mr. Messinger’s idea is that families should not take out more in loans than what the student will likely make in her first year’s salary of her chosen major. So, if that major is Computer Science, with a median first year income of $80,000, that’s the cap of the loans that should be taken. Total! Not every year! If the student wants to be a Social Worker earning $35,000 in his first year, that is the maximum loan that should be taken.
That doesn’t mean the education should only cost $35,000. There are other ways the bills can be paid, such as merit scholarships, need-based grants, work-study, family assistance, savings, and the student just getting a part-time job during school. Starting college at a community college for the first year or two can offer huge savings on the total cost of tuition for a bachelor’s degree.
The point here is that student wants cannot trump the family’s overall financial needs. Parents need to not be in 6-figure student debt heading into retirement, and students will have a hard time launching into adulthood saddled with unreasonable debt.