My recommendation is to use the calculator at the College Board website (
www.collegeboard.com
) to get an estimate of what your payments would be. You are to borrow only an amount that you are confident you can repay out of your monthly cash flow and within 10 years of your child leaving school.
For parents who may have used a PLUS loan in the past, I want to point out that an important change was instituted in 2008. Instead of being required to start your repayment of the PLUS loan within six months of receiving the loan, you can now defer your payments until your child leaves school. This can make it easier to pay some costs while your child is in school, and then handle the repayment after school. It also means that your child will be out of school and may be able to chip in some money to help get your PLUS loan paid off sooner rather than later.
HOW TO CHOOSE THE RIGHT SCHOOL
Okay, let’s pull this all together. When your child is accepted to colleges, you will be given your aid package and what your family’s contribution is expected to be. I am not exaggerating here: This could be the biggest stand-in-the-truth moment for all of you. I need you to understand what I mean by “the right school.” The right school is the best school that is also affordable. That means you and your child can swing the tuition from a combination of current income, 529 savings, Staffords, and borrowing a reasonable amount in a PLUS.
If you find yourself contemplating borrowing more from a PLUS, or you or your child is considering a private student loan, please stop yourself right there. Take a deep breath and stand in the truth. You are about to make a financially dishonest choice that could undermine your family’s long-term financial stability. Remember, cost matters. The annual cost for a four-year state school for an in-state resident was about $15,000 in 2010. For an out-of-state student attending a public school the average cost was $26,000. At a private four-year school the average cost was more than $35,000. If the more expensive schools do not offer you enough financial aid, the honest move is to consider the school that will not hijack your ability to realize all of your family’s financial dreams, not just paying for college.
And if the cost of an in-state school is still too high, you and your child should consider having him start at a community college. Your child could live at home—a big cost savings—and then after the first year or two, he can look into transferring to the in-state school.
LESSON 4.
HOW TO HELP ADULT CHILDREN FACING FINANCIAL CHALLENGES
The empty nest isn’t what it used to be. Life postcrisis shows that more college graduates are moving back home with Mom and Dad, sometimes out of necessity if they have yet to find a job, but also because they know that the house they grew up in is going to be a lot nicer than what they could afford on their own. And having to move back with your parents doesn’t carry the same stigma as it did years ago. A survey by
Monster.com
reported that 52% of 2010 college graduates
who have a job
had nonetheless moved back in with a parent or guardian. At the same time, many adult children who have been independent for years are now facing financial challenges—a layoff, a too expensive mortgage—that have them turning to their parents (and grandparents) for help.
The truth is, there is no age when a parent stops worrying about the welfare of a child. And the instinct is always there to step in and ease the pain. But it is very important for both parent and adult child to navigate these new family dynamics with care and respect for each other’s financial well-being. To that end, I would encourage you and your children to proceed with a few ground rules:
Every child who moves back home must pay rent
. Even if they have yet to find a full-time job, I think it is important that they contribute to the family finances. If you want to give them a six-month grace period while they adjust, that’s fine. But then start charging rent. Look, they need to understand they are no longer your babies; you are helping them start to make the transition to being an independent adult. This is not about whether you can afford to take care of them or not. You will be helping them stand in their truth if you treat them like the adults they are.
One idea for those of you who are squirming at charging your kids is to quietly—without your child’s knowledge—put their rent into a separate savings account. Once they are ready to step out on their own you can return all that money to them.
Make sure they have health insurance
. Young people get sick and have accidents. If they do not yet have a job with health insurance coverage you have two options for getting them insured:
Get them on schedule with their student loan repayments
. After a six-month grace period upon leaving school, all students must start repaying their federal student loans. If they have yet to find a job they will be able to apply for a loan deferment. But they cannot afford to ignore their loans. Fees and penalties will just make matters worse, and they could end up having part of their salary—once they get a job—siphoned off to repay the loan. I also want you to make sure your college graduate understands that even if they were to someday declare bankruptcy, their student loan debt would not be forgiven. Please make sure your child stays on top of this debt. Their school’s financial aid office should have given them a lecture on all of this before they left school. If not, they—and you—can learn more at
www.studentaid.ed.gov
.
How to Handle Student Loans That Are in Default
If you have existing student loans that have already fallen into default—that is, you have not made your payments, for whatever reason—then I am asking you now to face up to the consequences of these actions with all the courage you can muster. You must do everything you can to get your loans out of default. If you fail to work out a payment plan, you may find your wages garnished up to 15% to settle your debts and your credit score will be such a mess you will find it hard to borrow for a home or car at an affordable rate. That’s right, take a deep breath. I urge you to deal with this problem now, because no matter what you may be thinking, you cannot outrun it.
Some resources to help you figure out your options:
• If you have a federal loan, start at the Department of Education’s website (
www.ed.gov
), which explains your options for getting back on track with a defaulted loan.
• The
FinAid.org
website, run by student loan expert Mark Kantrowitz, has a clear explanation of what’s at stake, and how to address a default:
www.finaid.org/loans/default.phtml
.
• The website for Student Loan Borrower Assistance (
www.studentloanborrowerassistance.org
) has terrific advice on dealing with defaults and how to deal with loan servicers and collection agencies from a place of strength. Click on the “Default and Delinquency” tab on the left side of the site’s homepage.
HOW AND WHEN TO HELP INDEPENDENT CHILDREN WHO ARE IN FINANCIAL TROUBLE
It is a fact of the times we live in that many young families that might have been doing just fine are now in dire straits because of the recessionary economy. If your grown children come to you asking for financial help I need you first of all to stand in two truths: yours and theirs.
Your truth:
Can you afford to offer financial assistance? I am asking you for just one moment to suspend your parental instinct to help without hesitation. I need you to do a financial accounting of what you can honestly afford to give them without putting yourself at risk. I understand how hard this is, but if you end up on shaky financial ground, and they are on shaky financial ground, you haven’t helped anyone but have only increased your family’s financial problems.
Their truth:
Is their financial problem short-term or long-term? If they need your help to bridge a short-term problem, then by all means, if you have the ability to give them money, go right ahead. But in many instances I think you will find that your children have a bigger, more persistent issue causing the hardship and that might well require more than just the immediate boost that a gift or loan from you can provide.
For example, if your daughter and son-in-law cannot afford their mortgage and are hoping to get a loan modification, I would tell you to resist giving them money to float them while they go explore this option. As I explain in the Home Class, very few borrowers are able to qualify for a loan modification. It makes no sense to give money when the sooner they can accept the truth, the better: They probably need to walk away from that home. The same is true if your child’s family is coping with a layoff. I understand helping out for a few months, but you need to clearly define how long you will be able to offer help. You—and they—also need to stand in the truth that even once they find a new job, in this economy, it may not necessarily pay as well as their prior job. If that means they can’t afford to maintain their current living costs, the solution should be for them to find ways to reduce their living costs.
Cosigning Loans: Be Very Careful
When your adult child asks you to cosign a loan I need you to promise me—and yourself—that you will make your decision once you are firmly standing in some very crucial truths. Begin by considering the following matters:
•
Why is your child asking for your help?
If it is because a lender doesn’t think your child is qualified to handle this loan, then you should be cautious as well. Is the issue that your child is trying to spend too much money? If he were to lower the price tag of the car or home he has his eye on, would he be able to qualify on his own? If so, that is the far better move. I know you only want to help; but encouraging self-sufficiency is incredibly helpful. And if the lender is hesitant because your child has a low FICO credit score, well, that should be a big warning signal. Look, if your child has a bad score because of one inadvertent slipup, that’s okay; maybe they were slow to grasp how important it was to be on schedule with their student loan repayments, but are now doing great, making timely payments. But if your child has a low credit score because of poor credit card management that’s a different story. That tells me she hasn’t yet learned how to be financially responsible. By cosigning the loan you are not just potentially walking into a money pit of a deal, but you are enabling your child to continue her irresponsible behavior. I am not saying you can never cosign for her. But how about waiting a year and in the interim, you work with your child to help her get a firm grasp of what it takes to be financially responsible?
•
Can you truthfully afford to cosign?
Mom and Dad, the minute you cosign you are committing to making good on the entire amount of the loan if your child falls behind in the payments. I know your child is wonderful. I know how much you love her. And I am not even suggesting she is actually irresponsible. But what if she is laid off? And the next job doesn’t pay as well? Or an illness prevents her from continuing at the same job? Life happens. To all of us. I am asking you to consider how prepared you would be to take over the loan if your child were not able to handle it on her own, for reasons completely beyond her control.
I want you to ask yourself: If I had to make the monthly payments—for the life of the loan—would it in any way impact my financial goals? If making those payments would eat into your emergency savings, or cause you to scale back or stop saving for retirement, then you must stand in your financial truth first. That is not selfish. Putting your own financial stability at risk is never a good idea, for all parties. I also want you to think this through for the life of the loan. If you are 50 years old and your child asks you to cosign a 30-year mortgage, could you in fact handle the payments once you retire?
•
Rules for cosigning
: If you can in fact afford to cosign, go right ahead. But I hope you will also require that you receive formal confirmation each month that the payment was made on time. Your child can arrange for you to receive a duplicate statement or email alert that confirms the payment. Think that’s invasive and infantilizes your adult child? I don’t. If your child is standing in his truth he would volunteer to do this without your even having to ask. You have just taken on a huge financial responsibility. I think the least your child can do is show you he respects that gift and wants to give you peace of mind that he is on top of the payments.
And if you are cosigning a loan for a child who has struggled with on-time bill payments, I would go as far as having your child pay you the amount of the monthly payment—at least 10 business days before the payment is due—and then you can be the one to make the payment to the lender. This isn’t just about your kid; this is about protecting your FICO credit score.
LESSON 5.
THE CONVERSATION EVERY ADULT CHILD SHOULD HAVE WITH HIS OR HER PARENTS