Understanding College Financing and Student Loan Debt
May 13, 2015 : Robert Farrington – Guest Contributor
Ed note: If you (or your child) are headed off to college in the fall, you may be working furiously to determine how it will be financed. There are tons of options: scholarships, grants, many different loans and more. How can you decide what amount to borrow? Here are some helpful tips.
You’ve likely heard the statistics by now – in the United States we have more than $1 trillion in outstanding student loan debt, seven in 10 college graduates have student loans and the average student loan balance is almost $30,000.
But education is important – graduates with a bachelor’s degree earn an average salary of $46,900 according to the National Center For Education Statistics, versus just $30,000 for those with only a high school diploma.
So even though student loans seem like a poor alternative, they may boost earnings after graduation. Here’s what you need to know about college financing and student loans.
Take Out Only What You Need, and Look For Alternatives
The first facet of college financing to consider is taking on only as much debt as you need. Students and parents should do a Return on Investment (ROI) calculation to determine what makes sense to spend on college, versus what isn’t necessary.
For example, if a student wants to study history, college spending should be kept to a minimum since post-graduation salaries for history majors are low. However, families should feel comfortable spending a little more for business, engineering and pre-med majors, since post-graduation incomes will be higher.
Families should also look for alternatives, such as grants, scholarships and even working through school. Many universities have work-study programs, where students can pay down part of their tuition by working an on-campus job while attending school. Any income that can offset the cost of tuition is beneficial.
Limit Private Student Loans
Families should also avoid private student loans, if possible. Students should fill out the Free Application for Federal Student Aid (FAFSA) each year to qualify for as many federal student loans as possible.
Federal student loans have many advantages over private student loans, such as income-based repayment plans (which adjust your payment to your current income), forgiveness programs (such as Public Service Loan Forgiveness) and more.
Private student loans, on the other hand, work much like any other kind of financial loan – like for a car or a house. You need to have a very clear understanding of issues like interest rates and repayment schedules if a private loan is necessary.
Understand What Happens After Graduation
Finally, students need to understand that after graduation all student loans must be repaid. There is no escaping student loan debt – they can rarely be discharged in bankruptcy.
Students and families need to understand the collateral for student loans is the student’s future earnings. As long as there is any potential for earnings (such as tax returns and Social Security), the loans won’t be discharged. Rather, the government or lender will simply garnish the student’s wages or offset their tax returns to pay the debt.
As such, students need to be vigilant about paying their loan debt. After the grace period (typically six months), repayment is required. All federal loans default into the Standard Repayment Plan, which is 120 equal payments to pay back the loan. If that amount is difficult to afford, borrowers can contact their lender and change to an income-based plan.
For private loans, students should be aware of the interest rate and payments. After four years of school, today’s interest rates may be lower than when the loan originated and refinancing could bring savings and lower payments.
Education Is Valuable, But Don’t Compromise The Future
Education is important, but in the search for higher education, students and families shouldn’t compromise their financial future.
A greater good can turn into a personal nightmare when students take on too much debt and struggle post-graduation to make ends meet. Make the right choices for college financing up front, and education can add value for a lifetime.