By NORM B. FINLINSON
Russian Chess Master Garry Kasparov recently described his experience matching skills with one of the most sophisticated competitors in the world.
Deep Blue, am IBM computer that plays chess, is capable of evaluating more than 100 million chess positions per second. Kasparov was forced to concede defeat in their first meeting, but reevaluated his approach before the second match. He prepared himself by employing a more comprehensive goal-oriented strategy. His plan for winning required that he be willing to make all the required sacrifices for the success of the overall game. He was not influenced by individual moves, but rather focused on the completion of the game. The computer was not programmed to respond to an overall strategy, and the result was ultimate victory for Kasparov.
The lesson was simple and powerful. By pursuing a deliberate, predetermined strategy, he was able to achieve his goals. Our students can have the same success by developing long-range economic goals.
Students begin the college experience with varying degrees of financial acumen. Many approach the enterprise with very little idea of how it is ultimately to be underwritten. These students, without the benefit of a long-term perspective, are left to their own reactionary devices to resolve immediate personal and financial challenges that could imperil future life choices. An oppressive student loan debt burden represents one of the possible consequences of using superficial and uninformed judgement.
Mixing Work and Study
Many students support themselves through work, but this is often difficult. According to the recent data from the National Center for Education Statistics, students at four-year private higher education institutions would have to work 91 hours per week, 50 weeks of the year, to finance an education exclusively from student employment.
A study of freshman by Gary Curtis and Carole Nimmer at Central Missouri State University published in the Fall 1991 “Journal of Student Financial Aid” found that part-time work (less than 20 hours per week) has no adverse impact on students’ grades. Additional research suggests that working more than 20 hours per week negatively and significantly influences grades. This dilemma is exacerbated when a student is trying to remedy the effects of a temporary social, psychological or medical setback, or is attempting to comply with minimum criteria for scholarship retention.
Financial Aid Office Roles
As the institutional custodian of student loan programs, the Financial Aid Office has a moral responsibility to increase awareness of financial planning techniques. Ethics aside, the benefit to the university informed borrowers can be chronicled by a growing pool of potential alumni donors who are not encumbered financially with excessive student loan commitments.
The academic community is energized by a constant infusion of enlightened constituents who have greater freedom to select vocations based more on personal desire to provide service, interests and talents rather than ability to amortize debt. The individual student also acquires life skills that will help with the management of personal finances.
All of the evidence suggests that a larger, more timely and more comprehensive effort is required to educated individuals about strategic planning. The focus of such an initiative should be on familiarizing students with financial planning tools, with an emphasis on how to plan for an entire academic experience.
This program must connect with both students and parents and should send a message that underscores the great value of a familial commitment to individual educational objectives. It must also teach, through formal intervention, the value of critical personal analysis. Those interventions will not only help students control their long-term debt, but should also teach students how to develop and manage personal financial strategies.
Brigham Young University has recognized the need for such an effort on our campus. To help our students avoid excessive and unnecessary debt, we have combined a number of existing resources to create an intervention program. Our purpose is to teach basic financial planning to those who incur student loan debt. The underlying objective is to give students the tools to create and carry out comprehensive strategies as they struggle with the ominous task of paying for higher education.
Preparations were initiated when five financial aid counselors studied and became certified as financial planners. That action has added a dimension to the counseling program that is already beneficial. While our counseling efforts had been confined to helping students secure as much financial aid as possible, we now have the ability to counsel our students to help them develop a comprehensive plan to finance education. Our focus has changed to assume a more proactive role of working with students to implement long-term financial strategies. These strategies should be consistent with academic goals. Also, self-imposed debt limits should not be exceeded without adequate review and professional consultation.
Our Intervention Program
Intervention begins when the student decides to incur student loan debt. Traditional entrance counseling has been expanded to include a discussion of six principles that a student must consider when developing a personal financial plan. We introduce the principles through a live presentation. To supplement the discussion, students receive a workbook that includes examples of how to develop the critical thinking necessary to complete the plan. In the extended format, topics include:
1. Developing an academic plan to graduate. Students are required to create an academic road map. This educational blueprint details an individual path that a student plans to follow to complete graduation or certification criteria. The design of the plan accommodates the flexibility of the student’s academic life. Rather than listing specifics for future class registrations, the plan should be expressed as a matrix of total credit hours for each anticipated enrollment period. The student is encouraged to consult all academic resources in developing the plan. The final academic plan will help determine the student’s total education cost.
2. Estimating the total cost of attending school. Helping students understand the magnitude of their investment in higher education is the greatest benefit of estimating overall costs. Results can also be used to help define a student’s potential for debt.
At this stage, participants have the option of using an average cost of attendance established by the institution or selecting an alternative that requires constructing a unique budget. The budget is compiled using a standard enrollment period.
At my institution, for example, the student budget covers one semester. Therefore, student budgets are developed for a four-month block. The tuition estimate is based on credit hours per registration. The budget estimate is then added to the academic matrix, which includes all courses necessary to satisfy graduation requirements. The budget figures are adjusted in the matrix by an annual inflation factor. Then, an approximation of the cost of education is calculated by aggregating the student’s budgets by anticipated enrollment periods. The results estimate the total investment required to complete school.
3. Identifying resources to finance an education. Next, students are expected to catalog all potential sources of financial assistance, except loans. To identify the amount of potential debt, total resources must be measured against overall costs. Because resources vary from one period to the next, they are inventoried in increments of one year. Students are encouraged to confer with family members, private scholarship sources, and individuals knowledgeable about institutional and federal grant-in-aid and employment programs.
4. Closing the gap between expenses and resources. If resources meet or exceed expenses, the student should carry out the most economical financial plan. Periodic review of the academic plan assures that unanticipated variations are addressed. If expenses exceed resources, the student is encouraged to reevaluate the data to make any adjustments in the overall plan. The challenge is to reduce the discrepancy between expenses and resources.
One example of the kind of deliberation that might affect the student’s loan liability is a reassessment of academic strategy. If credit hour loads could be increased, the time in school could be reduced. Shorter school time generally means reduced education costs. Students might also consider developing additional financial resources or doing a more thorough analysis of personal budgeting. Parents, one’s spouse, or other acquaintances could serve as additional sources of financial assistance because they may be affected by changes in money management routines. At the conclusion of this exercise, students should have a clear understanding of the debt required to fund their programs.
5. Evaluating the option of student debt. Now that the student understands the level of loan debt that is possible under the current financing strategy, there must be an assessment of its suitability.
In this stage the student will determine if the anticipated level of student debt is compatible with post-graduation realities. The student should be able to make adjustments to the overall funding strategy before time and significant resources are committed.
Anticipated starting salary after graduation is the single most critical figure needed to complete the calculation. The school’s career advisement office, or in many cases the student’s academic college or department, can furnish salary data. in the absence of school data, national career data is also available. This starting salary establishes a benchmark that represents the maximum amount of indebtedness the student can afford at the end of the academic program.
If the amount of student loan debt would not exceed the maximum debt limit that the student could reasonably assume, the plan is validated. If the anticipated loan debt would surpass this figure, the student should adjust the academic strategy. The final benchmark is now used to monitor the level of indebtedness of the individual student. When borrowing approximates that benchmark amount, the student is required to consult with a financial planner prior to finalization of the loan application.
This step is to help students become more aware of the hidden expenses associated with borrowing. As the student considers incurring educational debt, there must be the understanding that borrowing has a consequence. To help students grasp this concept, we teach students about:
Interest. The notion that interest is a price one pays for borrowing money is explained and emphasized. Given current rates and maximum amortization schedules for student loans, the total interest required to amortize the outstanding loan amount is about one half times the original principal balance.
Net Income. The student must understand that taxes, insurance, and other common deductions reduce the amount of a pay check.
Opportunity Cost. When discretionary funds are being committed to repay student loans, there may not be enough money to pay for some high priority needs.
6. Committing to the financial path to graduation. The student should determine the most efficient way to complete graduation or certification requirements, expressed as a matrix or enrollment hours. The student should estimate the aggregate cost of completing school and evaluate the resources necessary to offset the cost. Any discrepancy between expenses and resources should be reconciled to the maximum amount of affordable debt. That is determined by the anticipated post graduation salary. The last and most important step is to have each student make a personal commitment to live within the parameters of the plan, understanding that periodic revision may be necessary.
Attendance at entrance counseling qualifies a student to collect the first loan disbursement. Before the second and final disbursement is made, the financial graduation plan must be submitted to the financial aid office via the Internet. A World Wide Web page has been created to help students collect information that will allow the financial aid office to track the student’s financial progress.
As part of the financial plan, the student must do a personal debt assessment. Reasonable debt load is calculated using pro-forma data unique to the student. Individual components that should be part of the calculation to determine a student’s realistic debt capacity include existing debt, anticipated post-graduation earning potential, future debt plans, and cost-of-living presumptions. The results serve as a benchmark to which loan requests will be compared. Those individual indicators should act as future triggers to identify students who would benefit from personal financial counseling. Subsequent loan requests should require an individual counseling session with the student’s financial planner before processing is complete.
Brigham Young University believes that this strategy will eventually make all loan recipients complete a predetermined path to graduation. The ultimate objective of this intervention program is to prevent students from exceeding reasonable debt levels.
