Back-to-school time is here and many consumers are busy sourcing books, supplies, uniforms and other items for their children or for their own schooling. During this period, there is usually an increase in advertisements promoting educational assistance loans.

The reality is that many people have to borrow money to pay for these school expenses. While the ability to access financing for school purposes may seem like a blessing when your budget is tight, is it always a financially smart move?

Borrowing as a way of life

Borrowing to acquire something that will bring a future benefit can sometimes be justifiable. Buying your home with a mortgage could allow you to own an asset that will grow in value over the years.

Similarly, getting a loan that will enable you to go to university or pay for your children’s tuition fees could help you and your family to achieve important educational goals.

In today’s credit-crazy society, I believe that there is too much dependence on debt. Borrowing has become a default option to get all the things that we need and want.

If you require extra money to balance your budget, then you get a payroll loan; if you feel like upgrading to a big-screen TV, you obtain a hire purchase loan; if you wish to pay for your school fees, you opt for a student loan.

The problem is that most people don’t consider whether they can really manage the debt payments along with all their other monthly expenses. Therefore, they get caught in a continuous cycle of borrowing to exist on a day-to-day basis. It’s not uncommon to see persons with five or more loans running concurrently, with no hope in sight of becoming debt-free.

Many serial borrowers are eventually unable to access any more credit and become practically bankrupt. In my experience as a money coach, I have seen many people burdened with debt because they took out education loans, albeit with the best of intentions. In these times, is it possible to pay for your current and future school costs without getting into debt?

Dealing with current costs

With the new school year about to start, if you’re low on cash you may be forced to get a loan to deal with the immediate bills. However, you can start preparing right now to give yourself debt-free options for next school year. Whether you’re planning for yourself or for your children, you need to consider both the current and longer-term school expenses.

First, you need to create a current spending plan for the entire school year. Download a school expenses calculator in the financial tools section at www.financiallysmart.org and record the costs for tuition, supplies, transportation, lunch, and extra school activities. This spreadsheet will help you to work out the cash outflow required to pay the annual, term and monthly expenses.

Once you have ascertained the total budget for the whole school year, add about ten per cent to your existing figures to project for price increases next year. Then divide this amount by twelve to get a monthly average cost. Your objective is to try to save this sum every month in an interest-bearing account that should only be used to pay for school-related expenses.

Finding enough money to save for next year’s bills may be difficult unless you start looking for ways to cut back on other expenses or generate extra income. You may need to make sacrifices on entertainment costs and other discretionary spending. Think of any of your hobbies or talents that can be used for profit such as sewing, floral arranging, cooking or singing.

Planning for future costs

With time on your side, you can plan more effectively for your long-term educational needs. When looking at college tuition, you need to factor inflation into the mix as this will drastically increase the future costs. A three-year undergraduate degree that might now cost J$750,000 will, in 15 years–with a conservative five per cent inflation rate, be over J$1.5 million.

While these costs may be daunting, they can be more affordable if you start saving very early. With as little as J$5,000 put aside monthly, you could be able to attain your target or put a significant dent in your children’s college education budget. However, the longer you wait to start saving, the more likely you are to need debt financing to meet this goal.

It’s advisable to seek professional guidance when planning for an event so far into the future. There are several education plans available in Jamaica such as Scotiamint, NCB Omni Educator and Heritage International; as well as various financial institutions which can provide expert assistance to help you make the right decisions.

Even if you project that your long-term savings plans would be inadequate to meet your needs, you can still look to other debt-free financing options. Encourage your children to prepare themselves to apply for scholarships. They would need to maintain good academic records and take part in various extra-curricular activities to meet the funding requirements.

So before you decide to borrow for educational purposes, think carefully if there are any other ways in which you can achieve your objectives.

Copyright © 2012 Cherryl Hanson Simpson. No reproduction without written consent.

Originally published in The Daily Observer, August 23, 2012

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Cherryl is a money coach and business mentor, and founder of Financially S.M.A.R.T. Services. See more of her work at www.entrepreneursinjamaica.com and www.financiallysmart.org. Contact Cherryl