Sunday, August 19, 2018

Should I Borrow for Junior's College Education?

Given what I’ve written in this space about the growing problem of student loan debt (see the most recent post by clicking here), is it any surprise that the fastest growing age-demographic to be affected by the crisis is…people over age 60?
You read that correctly.  The Consumer Financial Protection Bureau (CFPB) reported that statistic recently.  Even more disconcerting: nearly 40% of student loan borrowers over age 65 are in default on those loans.
This is most often not a matter of grandparents going back to college in their golden years to fulfill a life dream, although about one-third of indebted seniors fit that profile.  No, it is more often seniors co-signing for student loans or taking out loans in their own name (e.g. PLUS loans) for children or grandchildren and getting blindsided when the balances creep up, they don’t read the fine print, or the child/grandchild fails to pay his share or assist at all in paying back the money, and the seniors are left with tens of thousands of dollars to pay back just when their income is likely to be falling due to retirement.
What parent/grandparent worthy of the name doesn’t want to help his offspring?  I endorse and applaud that natural human tendency to support our own.  But should we as seniors assume an unsustainable financial burden in the process?  Sacrifice is commendable; but it should not mean foregoing basic necessities or plunging oneself into poverty-level living to fund a loved one’s education.  The average student loan debt balance for older Americans is $40,096.  If they default on it, their Social Security benefits—so often the only reliable income a retiree has—can be garnished, further deepening the financial pit. 
So what can a loving parent/grandparent do when confronted with a request to loan money or co-sign a student’s loan?  Let me offer these suggestions.
  • Plan and know your financial situation in retirement.  This means making an honest assessment of your likely income and expenses in your golden years.  Don’t make a wild guess; run some numbers; think through what expenses will increase and which will decrease, and what new expenses will pop up; get an estimate from the Social Security Administration as to what you may expect in benefits; enlist the aid of a financial planner to see what annual income your retirement savings will generate, or simply take about 3% to 4% of your balance and use that as your annual income stream from that source.  Unless you know your full financial picture (as far as it can be knowable) you cannot know if you can afford to loan, give, or borrow money to a student in the family.
  • Once you know your financial picture, do not loan or borrow more than you can afford to lose.  Outwardly, treat money you loan as though you expect it to be repaid—even set up a payment plan and insist it be followed—and that if you co-sign a loan make it clear you don’t want to be making the payments in your old age.   Just assume from the start that you will not be repaid or that you will be responsible for paying the loan.  If it turns out otherwise, take a vacation with the money.
  • Sit down with the student to assess his choice of college, his financial picture, and his expectations.  And share some of the facts and ideas in the previous post I cited above.  He needs to have skin in the game.  This is also an opportunity to judge how serious he is about the whole educational endeavor.  Do not assume that an irresponsible teenager will suddenly become a responsible young adult by attending college.  Do not throw money down that pit.
  • If you are in a position to help financially, make the assistance contingent on some agreed-upon performance measures.  Good grades, holding a part-time job, getting a summer job, no extravagant spring-break trips….there’s a lot of latitude here.

I wish you and your student the best.

 Until next time,


 “It is a dangerous thing to guarantee payment for someone’s debts.  Don’t do it!” Proverbs 11:15 CEV

Monday, August 13, 2018

Bring Back the Layaway

One of the rare good—maybe even quaint—features of the last recession was the return of the layaway.  This is the practice of putting a down payment on an item and adding perhaps a $1 or $2 fee to have the store hold it while you make periodic payments until the full price is paid and you take possession of the item.  Before the explosive distribution of credit cards in the mid 1970’s onward, layaways were a popular means of purchasing goods for which you did not have the full purchase price.  Essentially, it was like making a purchase with a credit card, except with plastic the purchaser takes immediate possession of the item and pays interest to the credit card company as he stretches out the time period over which he pays for the item.

 Our parents and grandparents were quite familiar with layaway purchases.  It was a popular way in the weeks leading up to Christmas to buy holiday gifts.  My father certainly made use of it.  I did, too, in my younger years, though the practice was fading by then as the appeal of immediate gratification (for a price) via credit cards caught on.

 But alas, layaways grew rarer again as the economy improved.  And now, in another alternative to buying via credit cards, several companies (many are start-up businesses) have teamed with online retailers to offer “payment plans” for larger purchases, from fashion apparel to vacations.  It amounts to taking out a loan, with the buyer having to make periodic payments and in many instances paying fees and interest.  But like a credit card purchase, the buyer takes immediate possession of the item (or at least has it shipped right away).  That is the appeal.  And that is the shame.

 Layaways were a throwback to (in my opinion) a better time, an era when people were generally more financially responsible, were willing to defer gratification instead of going into debt.  These payment plans present a new set of dangers to consumers.

 First, consumers will purchase more since they have more options to pay for their goods.  Retailers explicitly acknowledge this is a tool to combat “abandoned shopping carts”, the phenomenon of online shoppers getting to the end of their transaction and then being scared into not actually buying when they see the final tally and wonder how they will pay for it.

 Second, for a person who shops online frequently, he may quickly find himself with multiple “loans” from several companies for which he must make bi-weekly or monthly payments.  The financial strain can sneak up on the careless. 

 Finally, the fees and sometimes even interest rates up to 30% can trap the consumer in a cycle of debt.  There is no credit card limit to restrain him, only the discretion of the lenders.  And I haven’t heard of any of these companies offering reward points or airline miles as you might get as a consolation prize when using a credit card.

 Convenience and immediate gratification often come with a hefty price tag.  Retailers are happy to accommodate your desires.  It’s their business to keep you satisfied.  But they are also in business to make money.  Don’t give them any more of yours than absolutely necessary.  Your business is to stay financially stable and secure.

 Until next time,


 “Hope deferred makes the heart sick, but a longing fulfilled is a tree of life.” Proverbs 13:12 NIV®*

 *Scripture quotations taken from the Holy Bible, New International Version® NIV®
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