True Price of Heavy College Loans Is Higher Than You Think

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For those of you trying to calculate whether or not you -- or your children or grandchildren -- should attend college, the answer is becoming increasingly clear: You don't have much of a choice if future earning power is a major part of your equation.

According to a survey by the Pew Research Center and released in February, the cost of skipping college is too high to ignore. Among millennials ages 25 to 32, those with a bachelor's degree or more earned a median of $45,500 in 2012 if they worked full-time. By comparison, members of the same age group with only a high school diploma earned a median of $28,000. Furthermore, high school graduates were more than three times more likely to be unemployed or living in poverty than four-year-college graduates.

Data from the National Center for Education Statistics shows that enrollment in postsecondary institutions grew from a modest 11 percent increase between 1991 and 2001 to a hefty 32 percent increase over the following decade. With a college education practically becoming a prerequisite for decent pay and the possibility of corporate advancement, we've witnessed a dramatic shift in Americans' approach to education over an arguably short time period.

But this push for higher education has also come at a steep price.

A Textbook Conundrum

A recent Gallup survey examined the correlation between student debt and overall graduate well-being among more than 11,000 former college students who graduated between 1990 and 2014, through a five-element well-being analysis called the Gallup-Purdue Index. The survey measured the quality of college graduates' lives in five elements -- purpose, social, financial, community and physical -- and allowed researchers to study what role student loans played on graduates' overall well-being. The findings were surprising.

With the exception of the "social" element, which measured graduates' ability to have "supportive relationships and love" in their life, those students who graduated with no student debt were considered to be "thriving" in the four remaining categories in a much higher percentage than those graduates who took on $50,000 or more in student debt.

The largest differences that Gallup noted were in the "financial" and "physical" elements, which examined graduates' ability to manage their economic life (i.e., pay their bills and reduce stress) and stay healthy and energetic. Of graduates who had taken on no student debt, 40 percent were considered to be "thriving" financially, with an additional 34 percent thriving physically. Comparatively, just 25 percent of graduates who'd taken on $50,000 or more in student loans were found to be thriving financially, while a mere 24 percent of highly indebted grads were considered to be thriving physically.

Starting a Family Can Be Delayed, Too

A survey conducted by American Student Assistance in 2013 came to a similar conclusion, that "student loans were created to be an engine for social mobility, but they are, in fact, limiting young people's ability to achieve financial success." The nonprofit notes that a majority of respondents in its study delayed saving for retirement, buying a car or buying a home because of their student loans, while 43 percent delayed starting a family because of it.

In other words, a college education may be practically a prerequisite for success, but going too deeply into debt while obtaining your education might make you miserable over the long run. This presents quite the conundrum.

But as Gallup also reminds us in its study, other factors can influence these results, including socioeconomic status, the type of school attended, the chosen field of study and a family's household income, for example.

All Hope Is Not Lost

Thankfully, there's a middle ground that could keep student loan debt down and still give graduates an excellent chance to find a prosperous career.

Based on research by the National Bureau of Economic Research that spanned more than two decades and covered nearly 30,000 students, the long-term earnings benefits of going to a well-renowned four-year university compared to a four-year state college wound up being negligible. Put another way, it often doesn't matter where you go to college, just as long as you do go to college. (Although, keep in mind there were caveats to the nonprofit's research, including the fact that its study only factored in 27 universities, which is hardly representative of the nation.)

To illustrate this point, let's examine two same-state, broad-curriculum colleges: the private University of Richmond and the public University of Virginia. Student could obtain a four-year undergraduate degree at either institution -- with a marked difference in the cost.

A four-year degree at the University of Richmond is going to run an undergraduate an estimated $217,600. By comparison, an in-state four-year degree at the University of Virginia would be approximately $94,300. That's why, according to PayScale's 2014 College Return on Investment Report, which ranked institutions based on the total cost to obtain an undergraduate degree and alumni's net earnings over a 20-year period, University of Virginia graduates saw a better net return on investment than alumni from Richmond.

Your Skills and Your Major

The truth is that while the college you go to may get you an interview, it's the job skills you can bring to a company and not your past academic performance that seemingly matters more to employers today.

A final point worth mentioning is that what you major in can be equally important when it comes to paying off student loans quickly. PayScale's analysis of 130 majors in its 2013-2014 College Salary Report lists 12 majors that average $99,300 by mid-career. Conversely, 20 majors will earn $55,500 or less by mid-career, which could make it difficult for this group to pay back substantial student loan debt.

You can follow Motley Fool contributor Sean Williams on Twitter @TMFUltraLong.

10 Financial Rules You Should Break
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True Price of Heavy College Loans Is Higher Than You Think

This is the granddaddy of them all. Start to type "emergency" into Google (GOOG), and the first suggestion is "emergency fund." The rule is to make sure you have six month's of living expenses tucked away in cash in case you losefyour job or suffer a financial setback. Of course it's important to have a financial safety net, but when you earn virtually nothing on your cash, this rule can cost you. For example, if six months of living expenses for you is $25,000, you'd be sacrificing close to $1,000 of income a year by keeping this money in a checking or money market account.

For years, I've broken the mold on this financial rule by telling clients they shouldn't have their emergency fund in cash. Instead, choose a short-term bond fund that pays 3 percent or higher for your safety net. If you need the money quickly, you can easily sell the fund and get access to the cash. If you don't need the cash –- and these emergency fund accounts are rarely used –- you can still make money on the assets.

Not so fast. There are many good reasons to contribute to a 401(k), such as tax savings, tax-deferred growth and a possible employer match, but there are also good reasons not to contribute as well. Don't blindly dump money into your 401(k) if you don't have an emergency reserve of some sort and there is a chance you will be laid off. It is taking longer for most to find a job, so if you think you may be out of work, make sure you have the resources to pay rent and buy food until you land a new job. 

​Also, if your employer doesn't provide a match and you are in a low-income tax bracket, it may make more sense to pay the tax now (since you are in a low tax bracket) and invest in a Roth individual retirement account instead. Use this 401(k) vs. Roth IRA calculator to crunch the numbers.

You cannot cut your way to wealth. Too many people and financial advisers focus on trimming expenses when they should be focused on the other half of the equation -- income. I'm a proponent for living within one's means, but too often that creates an artificial barrier or ceiling. "This is what I make, so I have to cut back to save more," is often the thought process. Rather than living within your mean, work on increasing your means.

There are many ways you can make more money, including asking for a raise, boosting your skills –- your human capital –- and getting a promotion, starting a side project in the after-hours or going back to school and starting a new career. What you make today is not necessarily what you can make tomorrow. Cut unnecessary expenses and then use your energy to increase your income.

You should only save for your children's education if you can afford it. That means when you're on track to having enough assets for your retirement. Assuming you have the retirement assets and now want to save for college, most advisers will recommend a 529 college savings account.

Not so fast. These 529 accounts have some real advantages, such as tax-free growth of contributions if they are used for approved higher education expenses. This tax-free growth is a big benefit. However, if you withdraw money from this account and do not use it for approved higher education expenses, the gains will be subject to ordinary income tax and a 10 percent penalty.

The big risk is if you fully fund your child's college education but he or she decides to not go to college, drops out, finishes early or goes to a less expensive school. You have the ability change the beneficiary to another qualifying family member without penalty, but if you have just one child, there may not be anyone you can transfer the funds to. You would then have to liquidate the account and pay the tax and penalty. If you are undeterred and still want to pay for your child's college education, start with a small contribution into the 529 and fund up to a maximum of 60 percent of the cost in case one of the above scenarios occur.

The average age of cars on U.S. roads is 11.4 years. So if you're average, then it may make sense for you to buy a car -– especially a car a year or two old –- instead of leasing. However, if you do not intend on driving the same car for over a decade, a lease may be a much better option. A new study by found it was better to lease than buy based on its criteria. And under certain circumstances, you may be afforded a larger business deduction with a lease compared to a purchase.

The certified financial planner designation is the gold standard when it comes to financial planning. I wouldn't think of hiring a financial planner if they weren't a CFP practitioner. However, just because you are working with a CFP doesn't mean you shouldn't research your adviser, his or her areas of expertise and how he or she charges. The CFP tells you he or she has advanced training in areas related to tax, investing and retirement planning; has passed a comprehensive and difficult exam; and has agreed to adhere to a high code of ethics.

The onus is on you to know what you need and to make sure your CFP financial planner can deliver. Don't get lulled into thinking that just because he or she have three letters after his or her name that he or she has been screened. Ask tough questions before you trust your money to anyone -– even a CFP.

Most financial pundits will advise taxpayers to have just enough taken out of their paycheck so when April 15 comes around, they will neither owe money nor receive a refund. The rationale is if you get a refund from the Internal Revenue Service, it means you paid too much in over the year -- and the government has had use of your money without paying you any interest. Keep the money and invest it yourself is the theory.

'Again, that's the theory, but reality is much different. It all comes down to psychology. I look at paying a bit more to the IRS as a forced and automatic savings account. Sure you won't earn interest, but human nature tells us you probably won't save the money anyway. There is a greater chance you will squander $100 a paycheck then if you receive a $2,400 check from the IRS. One approach takes a plan and discipline each month to save and invest while the other doesn't. A check from the IRS isn't an interest-free loan; it is an automatic savings plan.

Nobody wants to endure an IRS audit, but too often I see honest and ethical taxpayers avoid claiming certain deductions or taking certain positions that are completely legitimate because they fear it will increase their chances of an audit. First, your chances of being audited are small –- about 1 in 104 chance. If your return doesn't include income from a business, rental real estate or farm, or employee business expense deductions, your chances are even smaller -– 1 in 250. Second, if you and your tax preparer are not crossing the line, you have little to worry about. In fact, thousands of taxpayers get a check from the IRS at the end of the audit. Don't let a small chance of an audit keep you from taking advantage of every tax strategy for which you qualify.

Do what you love, and you'll never have to work a day in your life, or so the saying goes. It sounds good and feels good, but it's not necessarily true. Sometimes –- often, actually –- doing what you love can be a great hobby but not a good career. There are a lot of things I enjoy that I'll never make a dime doing. A better approach is to find something you enjoy, are good at and that you can get paid to That is the financial trinity you should aspire to find because it ties your interests with your skills with the marketplace

Follow this rule, and I'll send you straight to detention. We know college costs are soaring, and we don't want to bury our kids in college debt, so most parents prioritize college saving over retirement saving. Big mistake. If worse comes to worst, Junior can get a loan, work while in school or go to a less expensive school. Basically, Junior has decent options, and you have tough choices. 

​If you haven't saved enough for retirement, you are stuck. There's very little you can do other than slash your expenses, work longer or both. Save for your own retirement first. That's the financial rule you should follow. If you have amassed so much wealth when your children head off to college that you can afford to help them, go for it. If you haven't, you'd be doing your kids a disservice by jeopardizing your own retirement by paying for their tuition.

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