Student Loan Considerations
Student loans are becoming a more common planning topic that our clients want (and need) to address. This time of year seems to bring education back into focus. No one article can cover it all, but we’ve put together a few ideas that can help frame your decisions and options.
More Americans are attending college than ever before. According to the Georgetown Center on Education and the Workforce, 65% of jobs in America will require education beyond a high school diploma by 2020. But along with the increase in college graduates comes an increase in student loan debt. Student debt in America is almost $1.5 trillion which is greater than all outstanding revolving credit card debt. Over 44 million Americans hold this collective debt, which means about 1 in 4 adults are paying off student loans with the average borrower owing $37,172 with an average monthly payment of $351. Most would agree that a college education is still a good investment because of the earning potential over the course of a lifetime compared to the earning potential of someone without a degree or other certificate. However, the financial burden can be overwhelming and must be confronted head on.
So do we just not go to college? Well, it's not for everyone, and there is growing demand for trade and technical skills. Take time to evaluate all the available options for gaining skills, education, and experience!
If we do take the college route, do we just assume we (or our kids) will be stuck with this debt forever? No! There is life after student loans, and ways to minimize the burden.
Here are three recommendations concerning student loan debt.
1. Avoid and/or limit debt on the front end as much as possible. In May of this year, the College Board reported the average cost of a public college at $25,290/year and $50,900/year for private college. Students and parents should research the costs of college including tuition, housing, meal plans, transportation, and books. Then, before applying for loans, exhaust every grant and scholarship that you could possibly qualify for. It takes a lot of time to research and apply to all the various ones that are available, but it is well worth the effort.
Students can apply for merit-based scholarships (awarded for achievement) and need-based scholarships (for students who need financial assistance). There are also numerous ones you can find through the financial aid office of the college, the U.S. Department of Labor’s Free scholarship search tool, and online that are geared towards particular groups of people, occupations, background, etc. In addition, you must fill out the Free Application for Federal Student Aid (or FAFSA) to apply for any federal aid. This is required by nearly all higher education institutions and must be updated yearly. Some schools may require the College Board’s CSS Profile. Please pay close attention to how the calculations differ! They don’t look at things quite the same way (parental support in a divorce situation, for example).
After finding all sources of income through scholarships, grants, 529 plans, and working and saving towards college, then and only then consider loans. Student loans are a combination of Federal and private loan programs. There are federal subsidized loans for undergraduate students, federal unsubsidized loans for undergraduate and graduate students, and PLUS loans for graduate/professional students and for parents of dependent undergraduate students. A subsidized loan is needs-based, and the federal government pays the interest while the student is in college. For unsubsidized loans, interest begins accruing as soon as the loan is taken out. If you do not qualify for a subsidized loan, your next option is to choose between a federal unsubsidized and a private loan. Sometimes private loans can be cheaper depending on credit and individual circumstances, so look in to both options.
2. While in college, live frugally and if possible, begin to pay down the interest on student loans. College is a great time to learn to budget money. What better time to learn than when you are making possibly the lowest income you will ever earn? As a student, take advantage of free campus activities and free meals, using your student id for events and discounts from local providers. Think cost-effective when you consider housing choices, meal plans, entertainment and transportation.
And try to pay down your school loan. Often the interest that accrues on your loans while you are in college is capitalized once you graduate; therefore, the interest is added to your loan principal and interest is accruing on interest. So at least try to pay down the interest while you are in school or during the 6-9-month grace period after graduation before repayment begins. It will save you money in the long run!
A part-time job can go along way towards reducing what you will owe when you have completed school. Save automatically through employer withdrawals from your paycheck and take advantage of new mobile apps that will round up purchases and save the difference. You will have peace of mind, and the freedom to choose the job you want instead of choosing the one necessary to pay down debt.
3. After graduation, commit to paying off student loans systematically and not incurring additional debt. There are three scenarios you might want to compare to pay off the debt: prepayment, changing repayment plans, and loan consolidation. Loan consolidation can be a good strategy but not always. If you refinance Federal student loans into private loans, they can lose the advantages offered by the Federal Direct Consolidation Loan program which can include flexible payment plans and potential for forgiving the loans. This program combines multiple Federal student loans into one that is recalculated as the weighted average interest rate of all the student loans being consolidated, so it doesn’t really change the interest rate, but can change the repayment period. Through this program, a student loan borrower can qualify to use income-based repayment, pay as you earn, revised pay as you earn, and public student loan forgiveness, all of which have requirements. So even though you may be able to get a better rate through a private loan, you will permanently lose the availability of these programs.
Review your Federal loans to see if it would be wise to consolidate. The National Student Loan Data System shows the details of loans that are part of Federal programs. Review your private loans to see if it would be wise to refinance. Another good resource is StudentLoans.gov and you can find repayment estimator tools through the Department of Education.
If you have additional debt, start applying more towards the short-term, high-interest debts, such as credit cards, because these debts grow much more quickly than student loans with reasonable interest rates. Be diligent not to take on any more debt until all is paid off. Live for a while longer on a more frugal budget and it will pay dividends when you are debt free!
Seventy percent of graduates in 2016 carried student debt. You are not alone. You may want the help of a financial advisor to show you how to navigate all your options when it comes to balancing student debt, saving for a home, saving for retirement, and looking at a comprehensive plan to get you on track for your future!