The Biggest New Financial Trap Out There For Women Is Student Debt

Graduating is great. Debt is not.

If you’re a parent, you already know how much college can cost. And if you’re a graduate, you undoubtedly know how much it did cost, because you’re probably still paying the bills!

We’re all concerned about the ever-growing mountain of student debt, over $1.5 trillion at last count.

For a devastating new look at the problem, check out Abigail Hess’ article for CNBC’s MakeIt on how student debt is having a dramatic and negative impact on women. Research from the American Association of University Women (AAUW) shows that women now hold roughly two-thirds of all student debt in the nation.

Why are women bearing the brunt of student debt more than men? The analysis is disturbing.

How women are getting buried in student debt

• Women take on more debt because girls are less likely to get a helping hand from their parents than boys. On average, parents save less for college when they have girls. “Boy-only households were also more willing to take on debt, more likely to send their sons to expensive colleges and more likely to cover the entire cost of college,” say researchers at investment firm T. Rowe Price.

I have a friend who talks about how her old-school parents scrimped and saved to send her younger brother to college. For her, they suggested a secretarial career. This all happened decades ago, but it still stings. Antiquated gender attitudes can make it harder for some girls to get the support they need to reach their academic potential.

More women are going to college now than men. That drives up the total amount of female borrowing. Women may opt for graduate degrees as well as a way to increase their lifetime earnings and even out the pay gap. More degrees equals more debt. Is having more women pursuing higher education a good thing? Yes. But it does place more of the debt burden on women.

Women with college debt have a harder time paying it off than men because they make less and take more time out of the workforce for child and family care. It’s a vicious circle. The longer you drag out repayment, the more the interest piles up, and the more you pay.

What parents and students can do to minimize the damage

As Certified Financial Planners, we work with parents on saving for college and grads on paying down the debt.

If you’re a parent saving for college, start as early as possible, save regularly, and use a smart savings vehicle like a 529 plan. Your financial advisor should be able to point you in the right direction. Give your child clear guidance on what you can, and cannot pay. Strongly urge them to minimize debt by using low-cost community or in-state options. Rule of thumb? Don’t let debt exceed one year’s expected salary after graduation. Students expecting to go into high-value but low-salary careers need to be especially vigilant about taking on debt they can never pay back without severely compromising their quality of life.

And parents, need I tell you this? Don’t compromise your own retirement by overpaying for your kids’ college unless you want to be an unwanted and unwelcome burden on them when you’re older.

If you’re a student, remember that higher education is an investment in yourself. Like any investment, you should not put money in unless you have a solid plan for getting it out in the future along with a bonus for all the time and trouble. If it’s not resulting in a lifetime of higher earnings, either don’t do it, or do it at the lowest possible cost. If you don’t understand the financial relationship between college debt and lifetime earnings, you’re going to get yourself in trouble.

Is college debt just another symptom of today’s financial illiteracy crisis?

This is where the CNBC article offers some disturbing insights into how today’s college debt crisis might just be another offshoot of today’s financial illiteracy crisis.

It suggests that women have more student debt because they “are less likely to understand how student debt works” and are much more likely than their male peers to apply to college without completely comprehending their financing options.

If that’s true, the burden falls on parents, school counselors, and students to educate themselves, ask questions, and calculate – before they borrow – what likely repayment costs will be.

As a parent, I was taken aback by how small amounts of student debt can generate big monthly payments. My daughter graduated from college with what I thought was a pretty manageable amount of debt (certainly below average amounts, and definitely less than an inexpensive car loan).

But here’s the kicker. Student debt is normally amortized, or paid off, over 10 years (unlike a mortgage, which is typically paid off over a full thirty years). Even small amounts of debt result in fairly large monthly payments when you have to pay them off in 10 years. And new grads don’t make a lot of money, so even small monthly payments can be an impossible stretch.

My point? Before you or your student takes out a loan, calculate what the monthly payment will be. Once you’ve caught your breath, and picked yourself up off the floor, you might just find that your educational plans have suffered an adjustment or two.

Higher education can be the road to greater financial independence for young women. So don’t turn it into a high-stakes trap that takes that financial independence away.

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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