Are college loans a good way to learn how to save?

[Anonymous]

My DS, currently choosing a college, is terrible with money. He gets it from me - spends every penny, doesn't work (for money) unless he has to. But he's very strong academically, STEM. We're trying to decide between an instate school that we can easily cover with the 529, and an OOS top-ranked program that would require him to take out about $40,000 in loans total. We don't love the idea of debt, but it's a great program and he loves the school. For the sake of thinking about all the angles, I'm trying to consider any upside to this debt. For example, will it teach him any lessons -- at a fairly young age before the stakes are too high -- about the burdensomeness of debt, how to tighten his belt and save for the payments? (I ask because I never learned how to save as a kid, and when I started my career in a high-paying field, I spent everything I earned for the first 10 years, which was obviously dumb. I wonder if an albatross of debt early on would have helped me build better habits before I frittered away real-world salaries.)

[Anonymous]

Most kids don’t actually learn to swim if you drop them in the deep end, they either start to to sink or they just float, and often come out hating water. I would try to teach a young adult how to save by saddling him with $40k of debt right out of school, especially if he’s had a poor financial role model. He could easily end up in serious and lasting financial trouble that would affect his credit rating for YEARS. Do the school you can afford without debt and encourage him to take some classes (in college or even just your local community center or something) on basic personal fiscal management.

[Anonymous]

^I would NOT try to teach a young adult — sorry for typo that changed my entire meaning. 🤦‍♀️

[Anonymous]

Can’t you just keep him at home and make him work until he earns the 40k?

[Anonymous]

Anonymous wrote:My DS, currently choosing a college, is terrible with money. He gets it from me - spends every penny, doesn't work (for money) unless he has to. But he's very strong academically, STEM. We're trying to decide between an instate school that we can easily cover with the 529, and an OOS top-ranked program that would require him to take out about $40,000 in loans total. We don't love the idea of debt, but it's a great program and he loves the school. For the sake of thinking about all the angles, I'm trying to consider any upside to this debt. For example, will it teach him any lessons -- at a fairly young age before the stakes are too high -- about the burdensomeness of debt, how to tighten his belt and save for the payments? (I ask because I never learned how to save as a kid, and when I started my career in a high-paying field, I spent everything I earned for the first 10 years, which was obviously dumb. I wonder if an albatross of debt early on would have helped me build better habits before I frittered away real-world salaries.)

1. He doesn't get it from you - it's not a genetic thing. He can and must learn to manage money.
2. He cannot take out $40K in loans as that exceeds the maximum permitted for a student to borrow. You would need to take out a Parent Plus loan.
3. There is no upside to student debt.

[Anonymous]

Anonymous wrote:Most kids don’t actually learn to swim if you drop them in the deep end, they either start to to sink or they just float, and often come out hating water. I would try to teach a young adult how to save by saddling him with $40k of debt right out of school, especially if he’s had a poor financial role model. He could easily end up in serious and lasting financial trouble that would affect his credit rating for YEARS. Do the school you can afford without debt and encourage him to take some classes (in college or even just your local community center or something) on basic personal fiscal management.

+1. Giving a kid a smaller budget and making the, work summers and up to 10 hours a week to cover “extras” is a much better introduction to financial management.

Also, be sure you aren’t basing your loan amounts on this year’s tuition. Look at the college’s historical rate of increase for tuition and room and board and factor that in. It goes up surprisingly fast.

[Anonymous]

Anonymous wrote:

Anonymous wrote:My DS, currently choosing a college, is terrible with money. He gets it from me - spends every penny, doesn't work (for money) unless he has to. But he's very strong academically, STEM. We're trying to decide between an instate school that we can easily cover with the 529, and an OOS top-ranked program that would require him to take out about $40,000 in loans total. We don't love the idea of debt, but it's a great program and he loves the school. For the sake of thinking about all the angles, I'm trying to consider any upside to this debt. For example, will it teach him any lessons -- at a fairly young age before the stakes are too high -- about the burdensomeness of debt, how to tighten his belt and save for the payments? (I ask because I never learned how to save as a kid, and when I started my career in a high-paying field, I spent everything I earned for the first 10 years, which was obviously dumb. I wonder if an albatross of debt early on would have helped me build better habits before I frittered away real-world salaries.)

1. He doesn't get it from you - it's not a genetic thing. He can and must learn to manage money.
2. He cannot take out $40K in loans as that exceeds the maximum permitted for a student to borrow. You would need to take out a Parent Plus loan.
3. There is no upside to student debt.

Subsidized stafford loans are a good way to build credit without ballooning the principal while the student is in school. That assumes that 1. the student will qualify for subsidized loans and 2. they will be capable of paying them off at graduation without using a payment plan that sets payment amounts below principal (that's how a lot of loan debt explodes into the absurd numbers you read about)

[Anonymous]

I don't think is a good idea, but I will say for sake of argument, that about thirty five years ago when I graduated law school my spouse and I had about $160,000 in debt between us. It did force us to live carefully during those six or seven years that we paid the debt off, and we lived much more frugally and ultimately accumulated more wealth than some of our friends who started in BigLaw without debt. I think it made us more careful about money even after the debt was paid-- we got in the habit of living within our means. That said, would I want my kids to learn that lesson with educational debt? No! We also came of age in the era of MBNA credit cards (remember those?) and those high interest rates. I learned some lessons there as well, but am glad my kids can't get those. There are other ways to teach that lesson. I am assuming that your DC, like my own, does not work for money unless he has to because he doesn't have to. You can change that if you want to.

[Anonymous]

No.

[Anonymous]

NO.

That's very stupid, OP. You might both have ADHD, but even that doesn't entirely explain it, since we're an ADHD family and have no trouble at all managing money, including my severely inattentive college freshman.

He has to learn how to budget, and you need to teach him explicitly, or get someone else to do it for you. Do NOT saddle someone bad with money with student loans! Do not saddle yourself with loans. You big silly! It's going to make it even harder for both of you.

[Anonymous]

Sounds like you are looking at a $10k gap in the first year, likely going up somewhat each year after that. If he really wants that school, I would...

Have him take out the federal student loans, $5500 per year, slightly more each year after that.
Start working NOW to save the money to contribute to the cost. There is no reason he can't earn $5K plus in a part time job during the school year + working 30+ hrs/week during summers.

If he's not willing to hustle to find a job now I would not support the more expensive school.

[Anonymous]

Anonymous wrote:No.

And to expand on this, having tens of thousands of dollars in debt in your 20s as you are starting your career can impede your ability to learn to save because it can just make it... hard to save. Even if you are financially responsible regarding your debt and pay it down diligently, it leaves less left over to save or invest, which means it takes you longer to realize the benefits to saving/investing. It can also lead to lifestyle creep more easily because as your income increases, there will be a lot of pressure from peers to spend it on your lifestyle. If you've spent years budgeting to put money towards your loan, the temptation to take salary increases and spend them on vacations and restaurant meals, or a nicer apartment, will be strong. You've been "responsible" so why not, right? But that money should be going into savings towards a down payment or retirement.

Graduating from school debt free allows you to start saving immediately without having to budget for loan payments. You can even frame it that way, now -- "if you go to this program, you will graduate without debt, which will enable you to put $X into retirement or savings for a down payment instead of using it to pay off school."

Student debt sucks because there's no collateral. You can't escape it. You just have to pay it until it's gone. It's not quite as bad as credit card debt, assuming you complete your degree program (but if you don't complete your degree program, it's as bad as credit card debt, in some cases worse) but it's not like a mortgage where you always have the option of selling the property to get out of debt. And unlike credit card debt, you can't even discharge student debt in bankruptcy.

[Anonymous]

Anonymous wrote:Sounds like you are looking at a $10k gap in the first year, likely going up somewhat each year after that. If he really wants that school, I would...

Have him take out the federal student loans, $5500 per year, slightly more each year after that.
Start working NOW to save the money to contribute to the cost. There is no reason he can't earn $5K plus in a part time job during the school year + working 30+ hrs/week during summers.

If he's not willing to hustle to find a job now I would not support the more expensive school.

+1 he needs to feel the impact of the choice NOW. Not some future debt that he won't really be able to understand. The basic federal student loans are not an unreasonable amount.

But if you do this you have to stick to your guns and not bail him out if he fails to earn the money he needs for his part of the payment. If that means he has to go to CC for a year because he didn't meet the commitment, then that's what does.

[Anonymous]

Anonymous wrote:

Anonymous wrote:No.

And to expand on this, having tens of thousands of dollars in debt in your 20s as you are starting your career can impede your ability to learn to save because it can just make it... hard to save. Even if you are financially responsible regarding your debt and pay it down diligently, it leaves less left over to save or invest, which means it takes you longer to realize the benefits to saving/investing. It can also lead to lifestyle creep more easily because as your income increases, there will be a lot of pressure from peers to spend it on your lifestyle. If you've spent years budgeting to put money towards your loan, the temptation to take salary increases and spend them on vacations and restaurant meals, or a nicer apartment, will be strong. You've been "responsible" so why not, right? But that money should be going into savings towards a down payment or retirement.

Graduating from school debt free allows you to start saving immediately without having to budget for loan payments. You can even frame it that way, now -- "if you go to this program, you will graduate without debt, which will enable you to put $X into retirement or savings for a down payment instead of using it to pay off school."

Student debt sucks because there's no collateral. You can't escape it. You just have to pay it until it's gone. It's not quite as bad as credit card debt, assuming you complete your degree program (but if you don't complete your degree program, it's as bad as credit card debt, in some cases worse) but it's not like a mortgage where you always have the option of selling the property to get out of debt. And unlike credit card debt, you can't even discharge student debt in bankruptcy.

All of this. Exactly.

[Anonymous]

My husband went to a private college and later straight to a private law school on full student loans. My parents paid for my public college and private law school in full. He did learn to be more frugal and a much better money manager than I ever was.

During college, my husband became an RA for multiple years to get free rent/dorm. He also learned to apply for every small academic award and scholarship by getting close to professors, he worked hard and graduated summa cum laude. He worked every summer while living with family and saved most of the money he earned. During law school, he became an RA again, worked as a summer associate at big firms each summer and saved more money, and then took the highest paid job he could get in biglaw. After working in biglaw firms for 4 years, he was able to pay off all of his student debt in full. I was never so proud of another person as I was when he showed me his last student loan payment (which we used to have framed).