Students Pay

Some students pay for their own college education while working at the same as going to college. Others work ahead of time to save enough money leading up to the four years of college to earn a degree. Either way, students that pay for their own tuition tend to pay better attention to their academics because they have a vested interest in doing well—their hard earned money.

Not only do students that pay their own tuition and college fees tend to work harder on academic achievement, but they are also more likely to take it the distance to earn a degree.

Unfortunately, working to pay for a college education can also inhibit some students. For some students, it takes a toll on their time because they have to work full-time, go to school full-time and find time to do homework study and take care of their personal lives. The students who pay their own way also may be less likely to participate in college life activities because they are short on time.

Parents Foot the Bill

When parents pay for college, it can go one of two ways. Students may appreciate how hard their parents have worked to cover this expense, which is especially true in minority families, such as Hispanic and African-American families. This gives the child incentive to do well in school so as not to waste their parents’ money.

College experts say that no matter the income level of the parents, the parents and the child should have a payment agreement that correlates with academic success. For example, the parent may agree to pay for the child’s entire college education as long as they maintain a GPA of 3.0 or higher.

Other parents may pay upfront, but require the child to make a certain grade in each class. For example, the parent will pay 100 percent of the class if the child gets an A in the class. For a B, the parent may only pay 90 percent of the course, so the student owes their parents 10 percent of the cost of that class.

Again, this gives the child an incentive to do well in the class even though Mom and Dad are footing the bill.

Scholarships

Students that are attending college on a scholarship have a built-in incentive to do well. All scholarships have built-in requirements that students must meet to continue to receive their scholarship money. Typically, the requirement is to maintain a specific GPA and to stay out of academic or legal trouble while in college. As long as the students do this, they typically keep receiving their scholarship money. Kids going to college on scholarships tend to do what they have to do to keep their scholarship money coming in.

This is especially true of kids that would not be able to afford to go to college without the scholarship. Again, this tends to be low-income families that do not have other ways to pay for their child off to earn a college degree.

Financial Aid

College students that receive financial aid are also on an income-needs basis. This means that without the financial aid, it may prevent the student from going to college at all, or would require them to start at a local community college rather than head off to a four-year college or university.

Academic success and financial aid may propel students to do well because students know they have to pay the money pack after they graduate. If they don’t do well, then it is a waste of their own money because even though the students didn’t have to come up with the money upfront, it is their money that they have to pay back on the backend—after graduation.

Some financial aid is based on performance as well. This means that if the student receives financial aid one semester but fails, then they may not receive financial aid the following semester.

Other students mistake financial aid as “free money.” They do not fully understand that they have to pay this money back so that it is worth their effort to do good academically so that they do not waste the money.

Does the students’ academic success depend on who pays for their college? According to some studies there is a correlation between college success and the payment source, especially when the student has a vested interest—either paying for their own college, holding on to a scholarship or parents that will only pay when certain criteria are met.

Unfortunately, the cost of a four-year college degree has risen 600 percent since 1980, which has lead to a staggering result: Currently two-thirds of all college graduates have student loan debt when they receive their degrees—roughly to the tune of $24,000 (on average).

This begs the question, is the cost of a college degree worth it in this economy? To answer that you have to ascertain what a college degree will get you over the long haul. Consider that even though the overall unemployment rate in America is just under 10 percent, it’s only 4.3 percent for college graduates. And over a lifetime college graduates make considerably more than those who never obtained a college degree at all. That alone seems like a good reason to go to college.

But what about all that debt? On average it now takes a recent college grad at least year to find a career-oriented job that pays a reasonable wage. But if a person is forced to take out loans to pay for college, how will they make the loan payments if they can’t find a job right away? With college debt now over $800 billion and growing, it surpasses credit card debt as the largest financial sinkhole in America.

According to the website The Project on Student Debt (which is an initiative of The Institute for College Access and Success) taking out student loans to pay for college is not a bad idea IF you engage in the right kind of loans. Federal student loans are legitimate forms of financial aid; private (bank) loans are not.

Not All Student Loans Are Created Equal

Turns out private loans are the biggest credit risks to students and should be avoided at all costs. If the only way you can go to college right now is to take out private loans, then you should probably put college on hold and work for a while to save up. A private college loan with a bank is no different than a credit card, which means they (the banks) solely dictate your interest rate, your payments, and payment schedule. Typically these loans are uncapped and cannot be erased by bankruptcy. This debt will follow you around FOREVER, wreaking havoc with your credit score, which can prevent you from starting a business, buying (or renting) property, or even getting a job (many HR departments use applicants’ personal credit scores in the vetting process). Is a college degree worth all that stress? Not likely.

A federal student loan, however, is designed to be manageable (and the application is easy). They’re backed by the Federal Government and controlled by Congress (not a bank’s board of directors). Therefore, the purveyors of these loans make every effort to work with you on repayment. For example, federal student loans are unemployment deferred (meaning you don’t make payments unless you have a job), the size and frequency of your payment is based on your household income, and if you become disabled, die, or the school you’re attending ceases to exist, then the loan is cancelled. Plus, they can be forgiven in exchange for certain types of community service. And if you’ve consistently paid on the loan, the remaining balance will be forgiven after 25 years.

What Can Colleges Do to Help Students Avoid Bad Debt?

According to The Project on Student Debt, colleges and universities are taking a more proactive role in counseling students on the riskier aspects of private college loans. Financial aid offices already talk up the benefits of federal student loans, however, they seldom mention anything about the pitfalls of private loans. Some schools have even gone so far as to require financial aid counseling for any student who does not pay cash for their education. And many colleges’ financial aid offices are coordinating with other colleges to employ common debt-avoidance practices, which includes monitoring cashier and bursar offices to track incoming private loan tuition payments so that the financial aid office may counsel students on managing debt before it gets out of control.

Plus, as of October, 2011, the federal government will require all U.S. colleges and universities to provide online “net price calculators” to help students and their families figure out how they’re going to pay for college, taking into consideration exactly how much long-term college debt they can handle.

The sad truth is not many people can afford to pay for college now, which means they either have to get scholarships or take out loans. But with fewer scholarships being handed out, loans have become the go-to solution for most co-eds. This is okay, as long as you borrow wisely and from the right lending institutions. With a little bit of effort you can avoid graduating with that dreaded debt monkey on your back.

Colleges understand that they can no longer assume students and their families will pick up the slack and pay the higher tuition. There comes a point where the financial pain threshold is just too great, especially in this economy. Therefore, colleges are doing what they can to ease the financial burden on students by offering creative financial solutions that still adhere to their bottom line. But are those options always as beneficial to the student as the colleges might have you believe?

Sneaky Payments

Because college tuition is now almost as expensive as buying a second home, many colleges realize that most families cannot afford to pay tuition in one lump sum. So many colleges have devised their own interest-free payment plans that allow students to pay their tuition over the course of the semester (usually in monthly payments). Sounds great, right?

But make sure you read the fine print. Even though they’re meant to save you money these sneaky plans can actually end up costing you more. How so? Because most colleges outsource their payment plan billing to third party vendors, who then tack on some sort of service fee. Which means even though the college doesn’t charge you interest, the third party vendor does (or at least a flat fee). Add to that if you pay your monthly payment with a credit card, then you’ve got your credit card interest on top of that. So what was supposed to be an economical way for you to manage your college tuition ends up costing you anywhere from three to 15 percent more, depending on the third party service fees and your credit card interest.

Before you commit to any college tuition payment plan, be sure to ask if the college manages their own billing or if they outsource it. If you have no choice but to make payments either way, at least you’ll know what you’re getting yourself into in terms of fees.

Alternatives

If you’re going to have to borrow money anyway to pay for college, trying going to relatives for money before turning to banks, credit cards, or student loans. Grandparents, for example, can give up to $10,000 (with no strings attached) without the student recipient having to pay a gift tax. If they contribute the money directly to a 529 college plan, then they can contribute up to $13,000, with a max of $65,000 amortized over five years. Little known fact: $65,000 (or less) can be donated (to the 529 plan) in one lump sum without incurring a gift tax, as long as the total donation averages out to be $13,000 over five years. So, for example, if Grandma donates $45,000 in year one, she can donate an additional $20,000 between now and year five.

However, 529 plans don’t do you much good if you’re staring down college tuition today. In that case, setting up a private loan with someone who can afford it is a better option than incurring student loans. The trick is convincing a private party you’re a good risk. The best way to go about this is to create a comprehensive loan package in the form of a business plan, and then present your plan just as if you were going to a bank to finance your business (in this case, your college education IS your business). Be sure to include interest rates, payment schedule, when repayment starts and ends, and repercussions for late or missed payments (even though you promise there won’t be any). Also state why you’re a good risk. For example, are you majoring in a field with a high employment rate (such as information systems or biomedical engineering)? If so then your chances of being able to pay back your privately held college loan are good. Bottom line: Be as professional as possible about asking for a loan. No one is going to loan money to someone who looks like a sloppy slacker looking for a free ride.

Sometimes there’s no choice but to embark upon a student loan to get through college. However, be very careful to read the fine print first and try not to finance your entire college tuition via loans. Use loans in combination with savings plans, monetary gifts, and money you earn from part time jobs during college. The last thing you want to do is graduate from college so deep in debt you’ll be digging your way out of that hole until you retire. No college degree is worth that.