Another Financial Aid Horror Story – 100% True
This is about the worst case scenario that I’ve heard of when it comes to paying for college, and it’s completely true (except for the names). I know this family personally (and, no, they weren’t my clients. If they had been, they wouldn’t be in this mess right now!)
When it was time for Edward to start thinking about which college to attend, he didn’t give it a lot of thought. Many of the kids from his private catholic high school attended a particular local private catholic college, so that was what he decided to do. His parents hadn’t attended college, and Edward was their oldest child, so they fell squarely into the “clueless” category. All three of their children had attended private school K-12, and they had managed to pay with working overtime and taking second jobs. How different could it be for private college?
Edward was a decent student, but not strong enough to qualify for any merit-based scholarships. The school he attended didn’t offer much in the way of need-based grants, and with both parents working like crazy to pay for schooling for 3 kids, he probably wouldn’t have qualified for much free money anyway. So they took the student loan route. But did you know that Federal student loans have a maximum amount that students can borrow each year? When Edward started college, he was only able to borrow $2625 * his first year. That doesn’t go very far at a private college when you’re not getting any other free money, so he and his family also looked into private loans to cover the remainder of his charges. As an 18-year-old with no credit, he had to have a co-signor in order to qualify, so his father co-signed for his private loan.
Now multiply that scenario by 4 years of college. Oh, and Edward decided to move onto campus for his final two years, so his private loans went way up to cover those charges. When Edward graduated, he had over $17,000 in Federal student loans (not too bad), but almost $80,000 in private loans.
After graduation, Edward was lucky to secure a job in his field. It wasn’t quite full-time, so he got a second job to help with his bills. But his loan payments, combined with other normal living expenses (rent, food, utilities, car expenses, etc.) began to overwhelm him. He found that he couldn’t pay for his living expenses and still keep up with his student loan payments. He made sure to keep up with his Federal loans, but his private loans (from two different banks, which meant two different monthly payments) began to slide into delinquency. Edward’s father knew that one of his son’s private loans was in trouble, and helped by making payments on it, and counseling his son on financial matters. Edward did not share with his father that he had completely ceased making payments on the other, much larger private student loan.
Edward’s father had no idea that his credit was plunging into the depths until he applied for a mortgage and was denied. He was shocked! He had perfect credit (or so he thought) and 29 years on the same job. It was then that Edward confessed and told his father that:
- Edward had stopped making payments on his second set of private loans,
- The lender was preparing legal action against both Edward and his father (remember, the father had co-signed, so he was legally responsible to pay),
- And that the only way for the father to avoid having a lien placed on his home (and have the lien on his credit for 7-10 years) was to pay the full amount owed on the loans - $57,000.
Surprise! Bankruptcy wasn’t an option. Even if Edward filed, his father would still be left holding the bag. The father didn’t have enough equity in his house to cover the bill, and he probably would have been denied an equity loan because of his ruined credit. His only choice was to pull the $57,000 out of his retirement account, complete with penalties and taxes. So much for retiring in 6 years.
How could this have been handled differently?
- First and foremost, Edward should have shopped for schools that he and his family could have afforded. That doesn’t mean just cheap schools. Families are consistently surprised when they find out how much free money some colleges give their own students. After the college’s institutional gift aid (free money, grants, scholarships, etc.) are taken into consideration, some prestigious private schools are even more affordable than public universities. That’s exactly why I created CollegeMoneyMatch.com.
- If Edward was already borrowing private loans for his first two years while he was living at home, he should have remained there rather than moving onto campus and increasing his expenses and debt.
- Edward’s father moved from his home and didn’t notify the second lender of his change of address. He relied on Edward to keep him up-to-date on the loans.
- Edward should have been up-front with his father about his financial predicament.
It’s too late to fix Edward’s problem. His relationship with his father has been seriously damaged, and his father’s plans of retirement have been delayed significantly. My hope in sharing their story is that you learn from it. Let Edward’s devastating story inspire you to make better choices when it comes to fundingyour college education.
To read about other costly financial aid mistakes to avoid, check out www.DeadlyFinancialAidMistakes.com.
* Congress can change this, and as of this writing, first-year dependent undergrads can currently borrow $3,500 combined subsidized and/or unsubsidized plus $2,000 additional unsubsidized for their first year.
