Bad advice about paying for college

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Student loans are now the second largest source of consumer debt in the United States, making it crucial for families to know the top ways to save while paying for college.

Here are some examples of the worst advice about paying for college.

Don't go to college. 

Bill Gates (Microsoft), Mark Zuckerberg (Facebook), Steve Jobs (Apple), Michael Dell (Dell), Jack Dorsey (Twitter), Paul Allen (Microsoft) and Larry Ellison (Oracle) are the exceptions. For every self-made billionaire who dropped out of college, there are thousands of college dropouts who are financial failures. The most reliable path to financial success is to graduate from college. College graduates have much higher average incomes and much lower unemployment rates than students who only graduate from high school.

Don't save for college.

Some people erroneously believe that they will qualify for more financial aid if they don't save for college. Or, if they started late, that college savings are unlikely to grow enough to make a big dent in the ever-increasing cost of a college education. The reality is that every dollar saved is about a dollar less borrowed, so saving for college can reduce debt at graduation. Every dollar borrowed will cost about two dollars by the time the debt is repaid. Meanwhile, if you save in the parent's name, the penalty for saving is minimal. Money saved in a 529 college savings plan owned by a dependent student or a dependent student's custodial parent will be treated as though it is a parent asset on the Free Application for Federal Student Aid (FAFSA).

If you save in the student's name, financial aid formulas will reduce eligibility for need-based aid by 20 percent of the net worth of the assets. For example, each $10,000 saved in the student's name will reduce aid eligibility by $2,000. But, if you save in the parent's name, a portion of the parent net value of the assets are sheltered and the remaining reportable assets will reduce eligibility for need-based aid by at most 5.64 percent. For example, each $10,000 saved in the parent's name will reduce aid eligibility by $564. That still leaves the family with $9,436 to pay for college costs.

Don't apply for financial aid. 

Some families believe that they earn too much or worry that applying for financial aid may affect their student's chances of being admitted or reduce eligibility for other forms of financial aid. Eligibility for financial aid is based on demonstrated financial need, the difference between the cost of attendance (COA) and the expected family contribution (EFC). Financial need can increase not just because of a lower EFC, but also because of a higher COA. So, a wealthy student might qualify for need-based financial aid if he/she attends a higher-cost college. Also, the EFC depends on the number of children in college: Increasing the number of children in college from one to two is like dividing the parent income in half, significantly increasing eligibility for need-based financial aid. Additionally, there are some forms of financial aid, such as the unsubsidized Federal Stafford loan and the Federal Parent PLUS loan that do not depend on demonstrated financial need.

Very few colleges have need-blind admissions policies, so applying for financial aid may reduce the student's chances of being admitted. But colleges don't like it when a family tries to game the system, and most will not subsequently award institutional grants to a student who did not initially apply for financial aid unless there has been a significant change in the family's financial circumstances since the student first applied for admission.

It does the student no good to be admitted without the financial aid he or she needs to be able to afford to attend the college. Either the student will graduate with too much debt or the student will be forced to drop out of college for financial reasons.

Don't worry about borrowing too much.

This approach discourages students from planning how they will be able to repay their student loans, and tells the student to follow his or her passion and assumes that everything will work out OK in the end.

Education debt may be good debt because it is an investment in your future, but too much of a good thing can hurt you. Total student loan debt at graduation should be less than the borrower's expected annual starting salary. If total debt is less than annual income, the borrower will be able to repay his or her student loans in 10 years or less.

Otherwise, the student will struggle to repay his or her student loans. Students who graduate with too much debt tend to delay major life-cycle events, such as buying a car, getting married, buying a house, having children and saving for retirement. There are very few options for financial relief after college graduation. It is easier to reduce student loan debt before you incur it than afterward. Be responsible. Budget before you borrow.

Don't ever repay your student loans because loan forgiveness is imminent. 

Defaulting on your federal student loans will not only not save you money -- the truth is that not repaying loans can ruin your financial life. Student loans are almost impossible to discharge in bankruptcy and there is no statute of limitations on federal student loans. The federal government has very strong powers to compel repayment of defaulted federal student loans, including wage garnishment, offset of federal and state income tax refunds and intercepting lottery winnings. Your credit score will be ruined, making it more difficult to get a credit card, auto loan or mortgage. You won't be able to obtain FHA and VA mortgages. You may even find it difficult to rent an apartment or get a job. Some states will block renewal of professional licenses and driver's licenses. And even after you retire, the federal government will take a portion of your Social Security retirement benefit payments.

The bottom line: when considering whether or not to attend college and deciding how to pay for your education, don't follow the "don'ts."

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