5 Tips for Parents- Tip 4- General Tips on School Loans

John, still recovering from the really surprising news of that there were additional scholarships I had no idea about. Something I should have known about going back. So fourth tip is really around school loans. What type should you take? How much should you take? If you have multiple options, which ones are better?

So walk us through some general tips around school loans when a child is navigating a transition from high school to college. Submit the FAFSA, so the free application of federal student aid. Yes, it is an application that is based on the parent’s assets and income.

But what it does, even though if a student is not eligible for free federal grant money, everybody who applies is awarded the $5 ,500 staffer loan. So as an incoming freshman, they are capped at the $5 ,500. That is then based on eligibility decided whether a portion of it is subsidized or unsubsidized.

So my first rule of thumb is apply for the FAFSA. Worst case scenario, you’re not giving any federal aid. You’re not giving any free grant money, I should say. And then you have the option to either accept or decline these staffer loans.

Now, the difference between subsidized and unsubsidized, a subsidized loan means that up to a certain amount, which they’ve awarded, is interest free until the student finishes school and then after that six -month grace period, that’s where the loans, the payments and the interest rate kicks in.

When a loan is unsubsidized, that means that when the money is distributed to the university starting in August, interest accrues. Now, there is one additional type of loan that is available through financial aid, which is called the Parent Plus Loan. This is when you start to get into different circumstances.

So every dynamic is different. A lot of it depends on what the parent’s credit score is, what type of private loans can they get. The Parent Plus Loan is great for some people. I know other people choose not to do it because the interest rate tends to be a little bit higher and there’s also an additional origination fee that families need to pay on.

So for that, I would strongly suggest like talk to Matt, talk to your financial advisor because they’re going to be the one to give you the best guidance. Thanks, John. That’s great advice. So if I heard you right, the type of loans that don’t have interest or in college, obviously no brand or if there’s loans that are needed.

One other thing I’d add to, it’s not as simple as just looking at an interest rate sometimes because there are forgiveness opportunities that do exist when you’re through college. So for example, if you’re working in a non -for -profit, so if you’re a doctor, nurse, PA, many other professions on government or non -for -profit, if you work there for 10 years and make income -based repayments during those 10 years, then the remaining balance does get forgiven.

It’s actually not tax on a federal perspective. There’s 20 and 25 year plans regardless of where you work that does get taxed. So those are heavily dependent on income, expectancy versus loan amounts. But in general, a major should be taken into consideration when we’re taking out what type of loans.

So the other thing I would add from a pure financial advising standpoint is that a 529 plan can be transferred from child to child. However, the 529 plan can not be utilized to pay off school loans on the back end and maintain its tax -free nature or all the growth against distributed tax -free and penalty -free.

So our general role of advice is if you have an opportunity where the market’s up and there’s a school loan or there’s a school bill that’s due, that’s live, use the 529 plan first. You should absolutely empty the 529 plan. It’s there for college and it’s there for college tax -free and penalty -free.

So if there is a bill to be paid, use the 529 plan and then utilize loans once the 529 plan is exhausted. Now if the market’s down and your 529 plan has not been adjusted properly, that’s the time where it may make sense for a school loan.

If you have the child’s a freshman and there’s three more years or if you have a second or third child that are coming into college and you’re sure that that money can be used at some point in the future, we’d never recommend actually take a loss with in the midst of a stock market dip.

And one of the most important things I can offer from a financial advising standpoint, because you know, John really puts in the hard work on the front end when the kids get them successfully transitioned to college. A lot of our conversations come on the back end when the kids have graduated college, have a large amount of school loans, are starting their careers, are trying to buy their first house.

So in generalities, I would recommend to any child considering taking out school loans that look at your major, look up data, and there’s tons of technology, tons of websites that you can look on. Now if you’re an accountant and what’s your income expected to be three years into your career?

So as an accountant, you’re probably going to make, depending on the state you live in, 55 to 65 ,000 your first year, you’re probably going to end up making 75 to 100 ,000 within the third year.

So for an accounting major, I would recommend that you look that data up in your state specifically, where you expect to be working after college, and then cap the total amount of school loans that you take to that one year’s worth of salary.

So the accountant is expected to make $75 ,000 three years out of their college, then I would recommend they should not exit college with more than $75 ,000 of school debt. Now I realize this is way under the averages, but just in best practices of major and the amount of school loans you take out should be highly, highly considered.

You know if you’re planning on being a social worker, if your child’s planning on being a social worker because they have a huge heart and want to help, and they’re going to Harvard and they’re going to take out $300 ,000 of school debt and come out making $30 ,000, it’s probably not physically possible for them to ever pay those school loans off if that responsibility is going to fall on them.

So we do recommend a very proactive conversation around the amount of school loans expected versus the income that the child expects after their major is complete. So if your child has no money help, that advice is probably going to be impossible without help from the parent or with scholarships because the average state school we see right now around the country is approximately about $30 ,000 a year, so $120 ,000 over the four years and there’s not many majors that you can make $120 ,000 out.

So if there’s no funding from the parents, if there’s no scholarships, it is worth the tough conversation of you know maybe a community college makes sense for the first two years, cut that cost almost in half.

Maybe consider having a job during college and hustling, but having that ratio down will, unless the parent plans on helping the child pay the school loans off in the back end, at that point that the amount could be higher, it’s going to relieve a ton of financial pressure as a kid graduates college and tries to start their career, family, etc.

Matt, one thing I do want to add to that and what I see often is a lot of kids allow themselves to fall in love with an idea or fall in love with a particular school. A lot of times and you know you touched on having these difficult conversations in life, there’s times where you do things because you want to do them and then there’s times where you do things because it makes the most sense and I’ve seen kids and so many kids often you know they choose a school because the perception or because the football team or because they think it’s you know going to be so much fun or have the best experience or whatever the case may be and they are usually willing to pay more for that and if you have the means that’s fine, but a lot of times students follow the heart instead of following their brain as far as you know I can go to this school for $40 ,000 a year, get the same degree, get the same job versus I could have gone to this school for $22 ,000 a year and you would have saved a substantial amount of money so it’s really just those conversations and figuring out you know what is what’s the intention and you know what is the purpose of going to school for.

If you want the experience and you’re willing to pay for it great, but if you want the job and you want the investment. That’s when sometimes you do things that just make more sense. One of the top principles that our company has is easy decisions lead to hard life, hard decisions lead to an easy life.

So this is a perfect example. Same thing goes with conversations. Easy conversations can lead to hard results in the future. Hard conversations can lead to an easy life. And having a hard conversation with your child, making sure they’re going down the right path, the right major, what’s in the best interest of their long -term future and not just the short term, where they can have the most fun, can lead to a dramatic life differences from a financial and well -being perspective long -term.