Recently, I was speaking with a group of young people — all in their 20s — and noticed that the topic of debt was a recurring theme in our conversation. In fact, I would go further and say that debt seemed to be a truly overwhelming theme for them. One described an oppressive, seven-year car loan. Others mentioned abusive credit card interest rates. But if there was one common denominator among them all, it was student loans. In each case, student loans dwarfed their other debts.
Their experience is not unique. Today, student loan debt stands at an incredible $1.4 trillion — greater than both car loans ($1.1 trillion) and credit card debt ($1.0 trillion). And it has only been getting worse. Twenty-five years ago, fewer than half of new college graduates carried any student loan debt at all. Today that figure stands at more than 70 percent.
This is a gigantic problem both for new graduates and for their parents. For new graduates, debt of this magnitude can distort their choice of career and limit opportunities in other ways. And, for parents, I worry about the drag on their ability to retire when tens or even hundreds of thousands of dollars are diverted to pay tuition.
Unfortunately, the problem is systemic and won’t be solved overnight. There are, however, steps you can take within the current system to safeguard your own family’s finances. If you or a relative have student loans, these three recommendations could save you some time, money and stress:
Don’t blindly accept lenders’ recommendations: Your loan statements likely provide a repayment schedule — generally spanning ten years — but there is no need to accept that standard schedule. You do have options. To change your repayment schedule, you don’t need to be an expert on student loan math, but you do need to be strategic. I am happy to discuss this with you and to refer you to helpful online resources.
Avoid consolidating Federal loans with a private lender: If you turn on the radio these days, you will hear banks advertising various options for refinancing student loans. On the surface, they sound enticing, with interest rates much lower than Federally-back student loans. But be careful! While your Federal loans may carry higher rates, they also provide significant borrower protections in the event that you hit a financial setback. These can include forbearance or deferment options that would be invaluable if you ever hit a rough patch and needed flexibility with your payments.
Consider your options: Depending upon your income and profession, Federal loans offer borrowers a handful of programs that can reduce their monthly payments and/or eliminate their debt entirely. In brief, these two programs are: Income-Driven Repayment, which limits monthly payments to a fixed, manageable percentage of one’s income, and Public Service Loan Forgiveness, which offers outright loan forgiveness to graduates who work for ten years in government, certain non-profits and certain other professions.
College financing is a big area, and this is just an introduction. I will return to this topic frequently, so I invite your comments and will look to address your questions in future installments.