Saying that the total amount of outstanding student loans in the U.S. is $1.5 trillion dollars means little to most people. However, knowing that the average monthly payment on a student loan is $351 means a lot more, especially if you or a member of your family is one of the 44 million who are still paying off your loan.
This can be a healthy portion of the disposable personal income of a young person just starting out. In fact, student loan repayments have become such a large portion of young families’ financial commitments that many suggest they have led to a decline in house and auto sales.
So how do students and parents cope with college costs and student loans? Most important, think of a college education as an investment. You are spending money and time investing in yourself. Financing that investment makes sense especially since the average college graduate makes $800,000 to $1 million dollars more over their life time than does an individual without a college education.
Of course, those figures are averages across all graduates, all jobs and all locations. For example, those who pursue a degree in education can expect to see an initial salary like graduates with the degrees in accounting, but soon the salary of those with most business degrees will outpace that of teachers. That salary difference accelerates over the years. It would make sense for a future teacher to be more concerned about the amount they must borrow than it would for a student pursuing a degree in accounting.
Also keep in mind averages can be misleading. Forty percent of the $1.5 trillion in student loan debt was borrowed to cover the cost of graduate/professional degrees. It stands to reason that those with advanced degrees earn more money and hence the loan repayment is easier for them than for those with an undergraduate degree.
It certainly pays to look at the type of loan a student is pursuing. Subsidized Stafford loans and all Perkins loans are awarded based on family income; however, anyone is eligible for a non-subsidized Stafford Loan. But interest on subsidized Stafford and Perkins loans is paid by the government while a student is in school. Interest on a non-subsidized Stafford loan begins to accrue immediately.
All federal loans require a student and her/his family to file a Free Application for Federal Student Aid, (FASA) form. A new app, designed by the Office of Student Aid of the Department of Education was just made available, effective Oct. 1. It facilitates this process significantly.
Obviously, the best way to avoid substantial college loan debt is not to borrow. The establishment of 529 savings plans by the IRS in 1996 provides that opportunity to a parent or others, to place money in a state sponsored savings plan where it earns tax free interest until it’s used for educational purposes. This is a great way to help students pay for college up-front and forgo college loans.
One point to keep in mind. The amount of financial aid that colleges give to students is partially dependent on the family’s wealth. The more assets a family has the less financial aid a student receives. Even 529 savings count as an asset. However, a parent-owned 529 is eligible for the Asset Protection Allowance that reduces its negative impact on financial aid awards. To take advantage of this, 529 accounts owned by someone other than a parent should be transferred to a parent prior to its use.
Recently some colleges have introduced an alternative to finance a student’s education called an Income Share Agreement. Unlike traditional loans, in which students pay down principal and interest until the loan is satisfied, Income Share Agreements encumbers a percentage of a student’s future income for a set period. This risk sharing technique gives both colleges and graduates the incentive to find well-paying jobs.
Above all, to avoid high college loan payments select a school that has a good track record of on-time graduation. Taking extra semesters to graduate adds to your total loan obligations and takes away the income you would receive if you were working full time rather than attending class for an extra semester or two.
Michael A. MacDowell is president emeritus of Misericordia University and the managing director of the Calvin K. Kazanjian Economics Foundation.