Student Loans for Life?

by John Brummitt

I have been asked time and time again to write an article on student loans. After some research, I decided to write an article on how to survive student loans rather than acquire student loans.

According to the New York Federal Reserve, more than seven million people over age 50 are still paying for student loans. Americans have cut back on consumer debt since borrowing reached its peak in 2008 before the market crash, the one exception is student loans, which have increased by 56%. Student loans now eclipse both auto loans and credit cards, making student loan debt the largest form of consumer debt outside of home mortgages. In the first quarter of 2012, outstanding student loan debt reached $902 billion, up from $323 billion in 2008.

While student loans have increased, payback of these loans has slowed. According to the Federal Reserve Bank of New York, the delinquency rate on student loans is 27%, $244 billion for those doing the math. That means 27% of student loans are increasing rather than decreasing. The average student loan balance in the United States is $24,301, requires an average monthly payment of approximately $280, and costs $9,257 in interest fees based on a 6.8% interest rate.

So, what can be done to help students avoid this ever-increasing debt of student loans? Most people have no regrets about pursuing an education, but many have regrets about taking out unwise loans when pursuing their education. College tuition and expenses continue to grow, and loans become more and more necessary. Most students do not have enough money set aside for college, and they simply cannot earn enough to cover the complete cost of their secondary education.

While many parents help children with college bills, often they have not saved enough or do not earn enough to cover the cost. Loans are necessary in order for students complete their degrees.

Many times students take out loans without doing the proper amount of research on the loan itself or how the payback works. Most students simply need money for school, and they take a loan and spend the funds without considering the consequences. This is a serious mistake. Students need to consider several things carefully before seeking a loan:

Find the money somewhere else. Is there another way to receive funds for school (grants, scholarships, savings, etc.)? If you can avoid a loan—even if it takes more work on your part up front—do it! It will be worth it when you graduate, because payment on student loans is required whether you have a job or not. Exhaust all options before considering a loan.

If a loan is your only option, take time to research before you sign the dotted line. Consider several loan options before settling on one. Yes, research requires more work, but it is better to do a little work now rather than continue paying off student loans until your children begin college (and you start over again). If you acquire $6,500 per year in student loan debt (about half of the yearly costs at a state school), you will leave college with a school debt of $26,000 after four years.

Take a hard look at your career path. Before taking out a large loan, consider the pay scale. If your career of choice pays an average rate of $26,000 per year, you should avoid school loans so large you cannot make the minimum monthly payments. This does not mean you should choose only a high-paying career, but you should use wisdom when acquiring student loans. You don’t want to finish your education, owe $60,000 in student loans, and face a career path with an average annual salary of $26,000. The longer you struggle to pay off student loans, the longer it will take to build other important financial investments such as an emergency fund, retirement savings, and a home mortgage.

Start saving early. Parents have options to help their children avoid student loans. Start saving for college early; the IRS has established funds called 529 Plans with distinct tax advantages. These plans allow you to set aside funds for secondary education for your children over a longer time period to help reduce the financial impact.

Like retirement, starting early with college savings is the easiest way to accumulate assets, even with a small monthly deposit. Time is your friend. Keep in mind: while you may not be able to set funds aside every month for your children’s education, it doesn’t hurt your credit score if you miss a deposit in your 529 Plan. But missing a student loan payment certainly damages your credit.

Student loans are a helpful tool to help you or your children receive higher education. Use wisdom, however, before seeking a loan, and borrow only a minimal amount. Student loan debt is the one area where you want to finish college ranked well below the national average. College is a great experience. Don’t let your student loans ruin your memories or your financial future.

About the Writer: John Brummitt graduated in 2011 with an MBA from Tennessee Tech University. A 2004 graduate of Welch College, he has been with the Board of Retirement since the spring of 2006.