By Anh Tran, Modern Wealth Advisors, Inc.
How to keep student loan debt in realistic range
High cost of education.
High cost of education.
Just as soon as the college acceptance letter came in, you were waving goodbye to your new undergrad as he or she embarked on their next journey in life. As proud as many parents are in watching their child take the high road in higher education, the journey often comes with a financial burden for parents who can’t afford to pay the costly price of college or for graduates to repay their student loans. CNN reports nothing in American life has risen in price as quickly as the cost of attending college, up 500 percent since 1985. And pricey it is. According to the College Board’s recent survey of college pricing, a “moderate” college budget for an in-state public college for the 2012–2013 academic year averaged $22,261, while a private college’s moderate budget averaged $43,289.
While the cost of attending college may seem crippling, it is still a necessary step to getting a job in a competitive labor market. Yet, the easy money available to students to fund their college education is also driving up demand and creating what experts call a “tuition bubble.” It’s a simple supply-and-demand equation. The demand for a college education in order to get ahead in America is rising, but we have a fixed amount of supply – in this case colleges and universities. So, when demand goes up so does the price of higher education. Currently two-thirds of college grads have student loan debt that averages $26,600, according to the Project on Student Debt. This spiraling debt can affect a graduate’s potential to get future loans (e.g., car loan, mortgage, etc.) or the job they choose to go after.
Government gets involved
Earlier this summer, concern was mounting over the skyrocketing interest rates on government-subsidized student loans unless Congress took action. In early July, the interest rates on subsidized Stafford loans doubled from 3.4 percent and were threatening to stay doubled unless Congress made good on its pledge to restore lower rates when it returns from the Fourth of July holiday.
In late July, Congress eventually agreed that for new undergraduate loans, the rate would be tied to the government’s borrowing costs – about two percentage points higher than the rate on the 10-year Treasury note – to make the process fiscally sensible and less political. To protect borrowers, the rate would be capped at 8.25 percent for undergraduates; an increase that would occur should market rates on the 10-year Treasury note rise.
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While the agreement assuaged college borrowers, there were still fundamental issues with student loans. One deceiving variable of receiving government financial aid is the more students borrow, the higher the costs soar for college tuition, therefore, causing the student to borrow more often without understanding the consequences of their actions.
One of the more famous college loan recipients, President Obama, is calling to enact a plan that will help lower the hefty price of higher education in America. The plan he laid out would rate colleges so that parents and college-bound teens can find the best value for their buck. As a result of this proposed rating system, more federal aid would be granted to schools that lower their costs for students, and schools that fail to halt tuition increases would face cuts in the federal aid they receive. Today, it is critical for families to budget appropriately for college and run the numbers to identify how much it will cost to pay off student loans. One way is to assess your child’s expected salary upon graduation and limit your borrowing to no more than their projected income. To get to this number, visit the financial aid website www.finaid.org to find a loan repayment calculator based on average starting salaries in various professions.
One of our financial professionals is available to speak with you and your college student about these and other money-saving strategies to prepare for the high costs of college and repayment of financial aid.