October 05, 2006

8% RULE ...

In an interview earlier this week, I was asked the question of what financial pitfalls most befall college students. I’ve come to the conclusion that I am much more concerned about pride (why students don't come to seek financial assistance than why they do come). Aside from pride, the biggest financial problem I’ve witnessed is student loans. There are a lot of potential factors here: overspending, no budget, borrowing more than can afford to be repaid, having a ‘head in the sand’ approach and not really having a clue about what they owe or anything else about their financial situation, and increasing educational costs, just to name a few.

I want to share a couple of free resources designed to help people evaluate their student loan situation. One uses a needs-based approach, and one uses a rule of thumb to gauge your financial situation.

Financial Path to Graduation.
The Path, developed at Brigham Young University nearly ten years ago, takes a needs-based approach to asking questions to evaluate your situation. Where will my current course of action take me? Will I be able to afford this situation? This process requires a student to evaluate their individual path to determine if it will lead them to firm footing at graduation, as opposed to an all-too-common scenario of owing more than can be afforded. After witnessing the benefits of the program for students, BYU began requiring that students complete The Path prior to being given new loans – the results have been impressive: lower default rate, fewer borrowers, lesser loan amounts … not bad in the current environment of more borrowers and more borrowing.
Read more about early results of their Path program.

SLOPE Calculator (8% Rule).
I think when reviewing ones student loan situation that a rule of thumb can also offer insight into the “path” that one is on. A generally accepted rule of thumb in the student loan arena is that one can afford a payment that is 8% or less of your gross income (if you don’t have an idea of what starting salaries are in your field of study, The Path can help). Obviously 8% is a guideline only, 8% for one person may create a hardship (picture someone with a large car payment, credit card debts, etc.) vs. someone with similar student loan debt but no other debts. That is the exact reason I prefer a needs-based approach. The advantage of the 8% rule is it allows me at any stage of my education to take stock in where I am. A really nice tool to help in this process was developed by the Colorado Student Loan Program. The Illinois “Mentor” program uses this tool and provides detailed information about what it is and how it works. It is well worth the few minutes it would require to examine your current student loan borrowing.

- Schedule a financial counseling/planning session
- Walk-in sessions available Mondays/Wednesdays (3-5pm) at the Student Success Center

The Financial Tip of the Week is a service of ...

University of Missouri-Columbia
Personal Financial Planning Department
Office for Financial Success
Dr. Mark Oleson - OFS Director