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Archive for the ‘Saving For College’ Category

No, there’s no general rule of thumb regarding how much school-related debt a parent should take on relative to his or her income. But frankly, you don’t need broad guidelines or even specific rules of thumb to decide what’s best here from an economic standpoint. Private school is already relatively costly, certainly compared to getting a free public education. If you had to pay twice the amount for a new private school that would no doubt crimp your budget and set your family back in numerous ways.

Think honestly about what you’ve already said: namely that you’re in debt, trying earnestly to get out of your financial bind, and that paying double what you’re accustomed to for your daughter’s schooling would be a financial hardship that would derail your efforts to become debt-free. I applaud you, of course, for wanting the best possible education for your child. As parents, we all want that. But sometimes you have to make tough choices because it’s in the entire family’s long-term best interest. It sounds like you’re grappling essentially with the decision to sacrifice an awful lot of money by sending your child to private school versus sending her to public school. Obviously, I can’t make that decision for you. But I can share with you my own story, because I’ve dealt with this very issue.

To make a long story short, I had my two older children in private school – at a time when I was in debt, as you are – at a cost of about $20,000 per year. This was when my kids were only 3 and 5 years old, mind you. Ultimately, I made the choice to take them out of that school. They transferred into a different private school that was about 1/3rd of the cost. They continued to do outstanding in school. And now, for the past couple of years, they’ve been in public school. My kids remain pretty much straight-A students and they are thriving in public school — doing far better than I’d imagined they would through these two transitions. Thank God that everything actually went very smoothly.

I say all this because so often as parents we worry about all the “what if” scenarios and think that we might be “harming” our children by “not giving them the very best.” In my case, I ultimately came to the conclusion that I had to “get real” about my finances, and that the “best” that I could offer my kids was to be honest about what our family could realistically afford. Also, by not spending so much money on private school now, our family is able to better save for my kids’ college education, which we all know will be outrageously expensive. My older two children are now 12 and 10 and again, they’re doing very well. I also have a four-year-old who will start public school in the fall.

So generally speaking, I’d recommend that you not over-extend yourself by sending your daughter to a new private school when you know that financially, you simply can’t afford it at this time. There’s no shame in that. And that decision certainly wouldn’t preclude you from letting your child do extra curricular activities, having academic tutors, etc., if you felt it was necessary. But again, the decision is best left to you and your family after you carefully consider all your options, as well as the short and long-term impact that private or public school would have on everyone involved. Good luck!

It’s great that you are thinking of your daughter’s financial future. That shows that you are a conscientious and loving mom – two traits I’m sure your child will appreciate (if not now, then certainly down the road). Why not use that gift money wisely by putting it into a college savings account to help pay for future educational expenses? Open a 529 Plan in order to reduce the amount of cash you’ll have to pay later toward tuition, room and board and other college costs. A 529 Plan is a state-sponsored college savings program. It’s a great ways to save for college because the money is put into mutual funds that grow over time. What’s more, you can get tax deductions for contributing to a 529 Plan in some states. That money your daughter gets for her birthdays and holidays will also help reduce the need to take out college loans.  Learn everything you need to know about 529 Plans at www.SavingforCollege.com.

Consolidating your loans likely will be your best short-term option — at least once you start out working, because your initial student loan repayments are going to be gigantic. I’ll tell you exactly how much in just a moment. But you have an enormous amount of student loan debt, and unfortunately it sounds like you’ll have to borrow more (or are contemplating doing so) while you complete your residency. Although you will likely earn a good salary once you are done with your residency, I would caution you against getting even more indebted. The reason is simple: You are already facing massive student loan repayments. I ran some numbers for you, using the calculators at www.finaid.org. Based on the information you gave me, I took an average of your interest rates and plugged in a 7% rate for all your loans. Here’s what I found:

* The 10-Year Standard Loan Repayment Program
If you stick to this program, you will be required to repayment $3,483.25 a month for 120 months, or 10 years. You will pay an additional $117,990.76 in interest charges for a cumulative total of $417,990.76 in student loan payments. According to FinAid’s estimates, you will need an annual salary of at least $417,990 to be able to repay this loan. This corresponds to a debt-to-income ratio of 0.7. Also, this estimate assumes that 10% of your gross monthly income will be devoted to repayment of your college debts. Using 15% of your gross monthly income to repay your student loans means you will need an annual salary of $278,660; that works out to a debt to income ratio of 1.1.

* The Extended Loan Repayment Program
If you consolidate your loans and stretch them out over 30 years, you will have to pay $1,995.91 a month for 360 months, or 30 years. While the monthly cash outlay is less in the extended repayment option, recognize that you will pay far more money overall. Under this program, your total interest paid will be $418,524.53, according to FinAid, bringing your total amount of loan repayments to a whopping $718,524.53. FinAid’s calculators also stated that you need a yearly salary of at least $239,509.20 to afford to repay this loan using 10% of your gross sslary, with a debt to income ratio of 1.3. If you use 15% of your gross monthly pay, you’ll need a salary of $159,672.80, which corresponds to a debt to income ratio of 1.9.

As you can see, unless you’re completely rolling in the dough as soon as you begin working full-time, you will likely have no option but to stretch out your payments, just so that they will be remotely affordable. One other benefit of consolidation is that you will likely be able to get a lower rate than you are currently carrying on your loans. Therefore, to refinance and get the advantage of a lower rate via loan consolidation, visit the Department of Education. Visit the department at: loanconsolidation.ed.gov.

Lastly, there are a few other things you can do to make your student loans more affordable or to eliminate them more quickly. You can pay extra payments on consolidated loans. That will decrease the interest charges you pay over time. You can live modestly, so that you have more money to put toward your college debt. You can see if a potential or future employer might be willing to pay off some of your student loans. And you can investigate various student loan forgiveness programs that are offered to people in the medical or healthcare fields.

I give more tips on all these strategies in my book, Zero Debt for College Grads: From Student Loans to Financial Freedom.

Without a job, and with poor credit and a host of outstanding educational fees remaining, your options for paying for this last class are indeed limited. Obviously you can’t get a bank loan, and it’s clear that you lack the income to pay for the final class you hope to take. Here are three options to consider:
•    borrow money from family and friends
•    sell stuff you don’t want or need in order to raise the money
•    try using a peer to peer lending site, such as Prosper.com., where people loan money to others

As a alternative, instead of worrying yourself crazy over this “one last class,” I think you would be better served at this time focusing on trying to secure paid employment. Yes, I know that jobs market is tough and that jobs are more plentiful to those with college degrees. And I’m sure that’s one of the reasons you want to get that college diploma. But don’t let be the single thing that determines your success or failure in the job market – or in life. Plenty of successful people (think Bill Gates) didn’t graduate from college. If you find a job, your employer may be willing to pay your tuition. Plus you’ll have income of your own to repay the overdue educational costs.

Congratulations for wanting to improve not only your own financial circumstances, but also that of your two daughters. You did not state how large a tax refund you expect to receive, but I do know that the IRS says the average tax refund doled out in 2010 will be about $2,800. Here are three suggestions on how to manage your refund check wisely. First, set aside 25% of your refund for savings. Put the money into an emergency fund that you don’t touch. Keep that money as a cash cushion, and slowly add money to it, little by little each month. Next, use 25% of the money to pay off credit card debt or any consumer debt you may owe. Lastly, use the final 50% of your refund check to save for your daughters’ future college education. Take the money and open a 529 plan for each child. A 529 plan is a state-sponsored college savings plan with great tax benefits. You can learn more about these college savings plans at www.savingforcollege.com. If you take these steps, you’ll be empowering yourself and your family, and you’ll know beyond a doubt that you managed that income tax return wisely.