If the social part of college—meeting people and developing—is gone, then so is some of the value. But that’s not to say that college is not worth it, she adds.
If families looked at the true interest rates on direct student loans, Walker says, “it’s 2.75% for $5,500, $6,500, $7,500. … for $27,000 in an undergraduate career. That is pretty low-cost financing, and parents should be entertaining it.”
The point is that parents and students now have to see what they are getting out of their education.
“I don’t think parents in America have been good consumers of higher education to begin with,” Walker says. “So there’s a huge opportunity to be smarter about paying for college across the board.” And that also means asking the students why they want to go to college. “They don’t even know what they want to accomplish. There’s no sense of purpose.” And getting an overly expensive education for its own sake is not worthwhile. “These are people who said I’m in the mood to buy a Mercedes and I’m going to go buy one and finance it. And I don’t even have a job to make the payments.”
SIDEBAR: The Puzzle Advisors And Clients Face
The problems have given financial advisors a big puzzle to work out. Jack Furlong, a 25-year-old advisor with Ameriprise in Hibbing, Minn., says that for parents saving for college, cash flow is a problem, especially if they’ve been furloughed or had their hours reduced.
Both he and Beth Walker suggest that it’s a misplaced priority to suck out your own retirement money for your kid’s education. There are no such things as loans, scholarships and grants to fund retirement, Walker says.
“The mantra I’m constantly promoting with my families,” says Walker, “is finance their future, meaning the students, and fund yours, meaning the parents’ retirement.”
“In most situations,” says Furlong, “sending their children to college takes a back seat to what my clients have planned for retirement, and that’s OK.”
He shows his clients what they would have to sacrifice: They would have to work longer and spend less on travel or scrap plans to move into a dream home. “It’s important to remind them that they aren’t being selfish by focusing on their retirement. They can’t work forever, and there are still quite a few options on the table for their children, such as grants, scholarships, and student loans.”
For those out of college, Furlong says that the current pause on loan payments until December will give borrowers some advantages.
“The question that I’ve been asked the most has been, ‘What should I do with the money that I don’t have to pay on my student loans?’ My answer has been, almost exclusively, to double down on the debt (as long as their emergency fund has been adequately stocked up, but that goes without saying).”
Furlong has been encouraging his clients “to go after their federal student loans with both hands, with everything they’ve got, for six months. I’ve even gone so far as to encourage them to live like the frugal college student they once were.” After all, those dollars repaid will go to principal and not interest. “This is a gift unlike anything we’ve seen before in student loan repayment, and to not take full advantage would be a shame.”