Student Loans: top things to know before you (or your kids) go into debt
Debt is a reality for the majority of college graduates. Approximately 70% of college graduates today carry an average of $37k+ in student loan debt.¹ Americans collectively owe approximately $1.5 trillion in student loans. With interest rates expected to rise in 2018, it has eclipsed credit card debt by a whopping 150%, and continues to climb.²
And it is not just affecting young people starting out, according to the Federal Reserve, Americans 60-years and older with student loans quadrupled from 700,000 in 2005 to 2.8 million people by 2015, respectively. Many parents are footing the bill for their kids, making retirement out of reach for some.³
Although most people can agree that education is important, it is wise to understand your options before taking out any loans and then make a plan to help you balance your finances. Here are some tips to help:
Know before you go – choose wisely
To avoid unnecessary debt, parents need to have a conversation with their children before choosing a school or getting any loans.¹ Start with this one question: What do you hope to get out of college? This question helps focus on the purpose of the education rather than the prestige or location. Prestigious schools do not always translate into making more money in life.
In addition think about the course of study, if they are undecided on a major consider community college to start. This allows core class completion for less tuition and gives the child a chance to decide their direction while they build their confidence. You can have them finish out at a more prestigious school if it makes sense for their future.
Do the math
It is essential to understand what you as parents can contribute and how much debt you are willing to absorb. Approximately 70% of older adults are taking loans for children/grandchildren that they will need to repay and this can affect your retirement. Further, studies have shown that people with student loans often do not save enough and even retire later. Many will also find that once in retirement their reduced, limited income makes it challenging to repay student debt, which inevitability affects their quality of life.³ Older Americans heading into retirement and applying for Social Security, unable to pay their government loan debt balance take note, the U.S. Government can garnish your retirement benefits to cover the defaulted loan amount.
If you are unable to save for your kids’ college, to reduce liability in later years, consider having your kids take ownership. Students can also contribute by taking on a small percentage of loans as needed for any loan debt you incur on their behalf. They can also work part-time or over the summer to save money as well. Students who have some skin in the game often have more accountability and value their time in school, giving them more incentive.
Decision made, now what?
Like anything, research and planning is vital to making a wise choice. Check out the financial aid process and then sit down with a professional in the college admissions office to map out your various options. There are three types of financial aid, each with its own guidelines and requirements: scholarships, grants and loans.
Types of financing and other considerations
When thinking about financing there are numerous private loans, federal loans, military benefits, scholarships and grants from which to choose. Here is a snapshot of each:
- Stafford and Perkins are federal loans given directly to the student with low-interest rates and favorable repayment options. It does not require a credit check or collateral. Both can be consolidated upon graduation and that is an important factor when it comes time for repayment.
- PLUS loans, originally called Parent Loans for Undergraduate Students, was created for parents to help fund their children’s educations. Now, graduate students may use Grad PLUS loans. This type of loan can offer amounts larger than is healthy financially for parents or graduate students to accept.4
- Subsidized vs. Unsubsidized Loans -f your loan is subsidized, you will not be responsible for making any payments until after you graduate. If you have an unsubsidized loan, you are responsible for paying off all the interest. All students are eligible for this type of loan.4
- Scholarships and Grants - You can go online to find scholarships that are right for you. Most financial aid professionals can also guide you to applicable scholarships and grants available and how best to apply. Grants are often need-based, such as a Pell Grant for low-income families, while scholarships are usually merit-based, such as academic or athletic centered. The benefit: these forms of financial aid do not require repayment; however, students will often need to meet specific criteria, such as maintaining a certain GPA, to retain the aid.
Creative ways to repay
Unlike some private loans, federal loans have no statute of limitations. The student debt will follow you for life. Having a plan to repay any loan is essential, especially as you near retirement, so here are a few ways to repay.
- Pay and play? It takes balance, we know. When you are young and starting out there never seems to be enough money to go around. Although you may be able to utilize a temporary deferment or forbearance option while not working, when you do start earning a paycheck learn to balance debt while having fun, it is possible.
- Loan Forgiveness - Depending on what type of loan you need to repay, there may be some instances you may be eligible to receive partial or complete loan forgiveness. If you enter one of these professions with an outstanding Perkins loan for example; Peace Corps, military, teaching in a low-income area, practicing medicine in an underserved area or legal work that serves the public, you can start fresh financially.
- Loan consolidation - By the time a student graduates, he/she could have 10 different loans. There are times it can make sense to consolidate; however, understanding the benefits and consequences will help you make a decision. For example, if you consolidate a government loan you may lose some of the benefits offered by the original loan, such as eligibility for loan forgiveness programs and interest rate discounts.
Whichever direction you choose, getting an education is an investment in yourself or in your kids' future. Thinking about the financial choices you make for college today and its long-term impact on your financial future will help you become healthier, wealthier and wise.
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¹Forbes.com, article, Student Loan Debt in 2017: A $13 Trillion Crisis, February 2017, Zack Friedman, https://www.forbes.com/sites/zackfriedman/2017/02/21/student-loan-debt-s...
2PBS News Hour article, Analysis: Student loan debt and an astonishing number no one is talking about, Making Sen$e, May 21, 2018
3PBS News Hour Video, accessed June 06, 2018, https://www.pbs.org/video/older-americans-struggle-with-student-debt-150...
4Debt.org, Cecillia Barr, Perkins Loans, accessed June 6, 2018, https://www.debt.org/students/types-of-loans/perkins/
5New York Times, It’s a good Time to Trade your Student Debt for Home Debt, Ann Carrns, April 28, 17, https://www.nytimes.com/2017/04/28/your-money/its-a-good-time-to-trade-y...®ion=Footer
6Forbes, Student Loan Repayment: The Hottest Employee Benefit of 2017, Zack Friedman, December 26, 2016, https://www.forbes.com/sites/zackfriedman/2016/12/19/student-loan-repaym...