The Challenge of Student Debt and Financial Planning
How we arrived here is the subject of many thoughts and opinions as to whether by extreme inflationary costs of college tuition, predatory lending practices and easy access to loans allowed by our government. Some point the finger at individuals who have not taken responsibility for their own finances. And, in other cases students were offered college or vocational educations where they borrowed under fraudulent, deceptive circumstances and did not receive the education they paid for. Pick a reason; there are many graduates and college drop outs who are saddled with too much student debt.
We now have several generations that are strapped with college debt and a more limited financial future.
To measure the depth of the problem, about 40 million Americans owe a total of $1.3 trillion in student loans. In comparison, about $1.1 trillion is owed in car loans and $712 billion is due on credit card debt. Student debt is a huge issue. It is even worse for the students who drop out of college after taking out loans. The stats show that they are three times more likely to default on their loans as a college graduate.
• Seven in ten graduating seniors have student loans;
• The national average debt for these seniors is $28,400;
• 27% of those young grads say it is difficult to buy daily necessities;
• 63% felt unable to make larger purchases such as a car;
• 73% have put off saving for retirement or other investments;
• 75% said debt was preventing them from purchasing a home.
This is not the case for every graduate. Most graduates have earned their degrees and have found jobs with suitable incomes that allow them to repay their student debts. But, for those who were not successful in their educational endeavors this blog is written for them.
Graduates must begin paying direct government sponsored student loans six months after earning their diplomas or dropping below half-time student status. Current interest rates are approximately 3.75%. Private loans have interest rates that range from 9 to 12%. If you are a member of a credit union your loan rate could be as low as 5%.
Our government offers half a dozen programs to help borrowers to repay their loans on time. However, the programs can be hard to understand and determine which one the borrower may qualify for.
According to the Government Accountability Office (GAO) about 70% of those who have defaulted on federal loans actually earn incomes low enough to allow them to qualify for an income-driven repayment plan that would have trimmed their payments.
Twenty-five percent of those who have outstanding student debt are in or near default.
It is a balancing act as to present advice whether to aggressively pay off the student debt or request a deferment if cash flow is too low. Refinancing student debt through online lenders such as CommonBond, CoFi and LendKey are also options. Consolidating and refinancing the debt can possibly lower the interest rate and shorten the loan repayment time.
There are advantages and disadvantages to consolidating the debt with a private lender. The disadvantage is you lose the federal loan benefits such as access to income-based repayment plans. This could be a detriment if a person runs into financial issues later in life.
Another helpful option is to open a credit card with student debt-focused rewards. Some credit card companies allow customers to use their reward points for repaying student loans. Also some employers offer ways to decrease the amount employees owe on their student loans: PricewaterhouseCoopers, Fidelity, and Starbucks are companies that offer such assistance to their employees.
A study determined that such employer assistance could reduce nearly three years of payments and save more than $4,000 in interest.
Students and families are borrowing more because of the increased cost of education; and, families who might not have needed to borrow in past years are finding themselves in a position where it is necessary to borrow to meet the high cost of education.
Student loans are fairly complicated and strict care should be taken when looking for alternative financing and/or acceleration of payments.
My son chose to enroll in a technical duel-credit program sponsored by his high school and a local junior college. He has since graduated from high school and in two to three semesters will have an associate’s degree in computer gaming and simulation. My daughter is considering enrolling in the duel credit program, as well, when she becomes a junior next year. She became excited when she found out that she can knock out her basics (English, Math, History and Science) with the same high school (college level) courses and save two years of her life and my money!
The bottom line for my wife and me is two years (for each child) of very low cost college. When I say low, I mean very low.
I am not writing this to attack or persuade anyone not to take on debt to enroll in college. If properly managed, the amount borrowed can and should be a great investment for your or your child’s future. The debt and the income from the profession obtained should be measured as a rate of return on investment. Divide how much do you make per year after graduation vs. the debt you took on will give you a rate of return figure to determine the value of your education.
Yet, there are researchers who are beginning to study how this will affect the debt laden student’s financial prosperity in the future. The debt problem will definitely have material effects on future households and an individual’s ability to maintain their standard of living during retirement.
Advisors such as me are faced with this dilemma and are looking for answers to assist graduates and drop outs with too much debt and a low paying job. They are our future clients and the debt does have an effect on financial planning as a whole.
Corey N. Callaway
Investment Advisor Representative