The coming student loan crisis

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By DENNIS TWENGE, CFP

The Department of Education recently reported student loan debt has exceeded $1 trillion.  This figure does not include private student loans, and parent debt.  The college loan default rate has hit an 18 year high of 14.7 percent as reported by the Department of Education.  Two thirds of college graduates leave school with an average of $26,000 in college loans.  This debt burden affects graduates ability to buy homes, cars, etc.  Unfortunately, current bankruptcy laws rarely allow student debt to be discharged.

What are the options available if a student is faced with potential delinquency or default?

Deferment:  this option is only available while attending college, or for six months after, and only on certain loans.

Forbearance:  this option allows the student to make no payments, or reduced payments for up to one year.  Interest will accrue and added to the loan balance.

Income Based Repayment (IBR):  If you qualify, your maximum monthly payments will be based on 15 percent of “discretionary income” as determined using a specific Department of Education formula.  Payments can be substantially lower, but total cost can be higher because the debt payment is spread out over more years.

Pay as you earn (PAYE):  This option is available to recent borrowers; the cap is 10 percent of discretionary income.  Payments can be as low as zero if the student is unemployed.    Balances will be forgiven after 10, 20, or 25 years depending on the program and whether the student works in a qualified public service job.

Income contingent repayment (ICR):  Monthly payments will be linked to income, family size, and the amount owed.  ICR is generally for older loans only.

All of these programs are largely unavailable to parents who took out Parent Plus loans, and private loans.

College graduates can have up to sixteen separate loans.  Keeping tabs on every loan can be tricky.  Consolidation can make it easier to repay student loans by replacing multiple loans with a single payment.  The interest rate will be based on the average of all loans.  Careful analysis should be done to make sure consolidation will result in long term savings.

As with many things in life an ounce of prevention is worth a pound of cure.  In other words, having a plan to minimize student and parent debt prior to entering college is best.  Here are a few basic strategies:

• Start saving for college early.

• Find as much “free money” (grants, merit-based aid) as possible.

• Don’t use student loans to buy pizza and beer.

• Graduate in four years.  The average time to graduate at state colleges is five and half years.  The graduating rate is less than 50 percent, though, and the highest defaults come from those students that don’t get a degree.

(Dennis Twenge is a certified financial planner. He can be reached at dtwenge@collegefinanicalplanning.net.)

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