Why Every Student Needs To Complete a Financial Plan BEFORE Entering College

Oct 02, 2014
Behavioral Finance, Paying for College, Financial Literacy, Student Loans

How about this for a case study for your students to evaluate:

I got a call yesterday from a college freshman at a private liberal arts college.  She was inquiring about student loans.  I asked her to give me more details and she said she had maxed out her federal student loans, applied for all scholarships and grants that she could and still had need.  I asked if she had thought about her financial need beyond her freshman year and she said yes, she had figured it out for the next four years.  Starting with spring semester, she said she would need $18,000 per semester.  I played this back to her to make sure that I was not misunderstanding her.  Was it $18,000 over the next four years or per semester?  Nope, she said it was $18,000 per semester and she would need to find a loan to cover that amount.  

Her parents were not interested in Parent PLUS loans but said they would co-sign a private loan.  When I told her that $18,000 per semester for next 7 semesters (assuming on-time graduation) amounts to $126,000 in debt (optimistic as she will be accruing interest on these loans and college costs will rise too so she will likely need more), she seemed nonplussed.  When I told her that amount of debt would be unmanageable and make life difficult after she graduates, she said that her parents were going to help with repayment.   Hmmm..and how much would they repay?  She didn’t have an answer.  So that difficult conversation has been put off far into the future when memories are foggy and debt loads are excessive.  Another headline waiting to happen, “I graduated with over $120K in debt and now my parents want to retire and won’t help me repay my debt..”

For those of you keeping score at home, assuming an 8% interest rate and $126,000 in debt, the monthly payment comes to over $1,500 per month FOR TEN YEARS.  So, you want to know what motivates me?  It is the opportunity to ensure that every college senior BEFORE they go to college, completes a 4-5 year financial plan about how they are going to pay for college.  They need to have that conversation with a parent or guardian so everyone is on the same page and understands the ramifications.  We can’t let a bad decision at 18 hamper a young adult for the rest of their lives.  Look for our Paying for College lessons later this month.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.