Saturday, June 08, 2002

Personal Finance

Good debt: loans for students

        With all the noise about young Americans swimming in debt, many parents have forgotten the difference between good debt and bad debt.

        Credit cards are bad debt. Interest rates are high, and the payments are not tax-deductible. And usually the cards are used to pay for things with no lasting worth: meals, vacations, clothes. Enjoyable at the time, but nothing durable.

        But student loans are good debt. Really, it's OK to let your children go in hock to get a good education. This investment will last a lifetime and return dividends aplenty in the form of higher paychecks.

        And student loans are getting better. Already-low interest rates are going lower, and interest payments are becoming more deductible.

Mom and Pop pay

        Still, even though loans will also build a solid credit history, fewer than one in four parents expect their children to use student loans for college.

        That's from a recent survey from Collegiate Funding Services, a Virginia-based loan servicer specializing in consolidation loans.

        The Collegiate Funding Services survey on planning and paying for higher education showed that about twice as many parents said they planned to pay for some or all of their children's college from savings, investments or loans taken in their own names.

        That's not surprising when the same survey showed that an equal number of parents, almost half the respondents, thought that they were largely or solely responsible for paying for their children's college. Mothers were more likely than fathers — and Southerners more likely than Northerners — to feel that higher sense of financial responsibility.

        But again, just because parents feel obligated to cash in their savings or to second-mortgage the house to pay for college doesn't mean they should.

Paying later

        Student loans are more attractive than ever. Just last week, Sallie Mae announced that federal Stafford loans issued on or after July 1, 1998, will automatically be reset to an interest rate of 4.06 percent, down from 5.99 percent.

        And tax law changes enacted last year make that interest income-tax-deductible for the life of the loan instead of for just five years.

        Granted, that might not help a 20-something living on an entry-level paycheck make monthly payments — now averaging $182 — much easier.

        So consider this strategy: Take that high level of responsibility, and put it aside for now. Tell the kid to get a loan.

        Be there financially, but instead of paying for tuition and books outright, help pay off a student loan after graduation. That will give you an extra four years (at least) to keep saving. It also offers a little more time for investments already earmarked as a college fund to recover from this bear market.

        All the investments would have to do is return better than 3 percent — the effective after-tax rate on the student loan — and everyone comes out ahead.

        Contact Amy Higgins at 768-8373;; or 312 Elm St., Cincinnati, 45202. She cannot reply to all individual questions.


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