Loans, Loans, Loans, and More Loans

There has been much talk lately in the media about the staggering amount of outstanding student loan debt.  The statistics are alarming:

  • At the end of 2018, almost 45 million Americans had outstanding student loans totaling $1.57 trillion.
  • Student loan debt is second only to mortgage obligations, passing credit card debt in 2010 and auto loans in 2011.[1]
  • 4% of student loans were 90 days delinquent or in full default in Q4 of 2018, according to the New York Federal Reserve.[2]

These numbers have led to a lot of political posturing about eliminating debt or aiding those individuals with student loan debt.

Sen. Bernie Sanders (I-VT) has long advocated for free college.

Sen. Elizabeth Warren (D-MA) has proposed an ambitious student loan forgiveness plan that could cancel some student loan debt for over 95% of borrowers and would entirely eliminate debt for 75% of borrowers.[3]

The American Enterprise Institute recommends that higher learning institutions be required to share the burden of defaulted loans, therefore giving them more motivation to prepare students for financial success.[4]

Whether or not the government, lenders, or higher education institutions make any changes to give borrowers relief is too soon to tell.  In the meantime, the best way to avoid overwhelming student loan debt is to create a sound plan for financing college early in your child’s life.

Creating a Plan Early to Avoid Crippling Debt

There are several ways to pay for college expenses.  In general, they can be categorized as income, savings, scholarships, and borrowing.   Rarely is any one category sufficient to meet the sum of all college expenses; and with the cost of higher education growing at such a rapid rate, it’s hard for many families to avoid using loans as at least part of their funding plan.

The most effective college funding plans use a combination of these categories to cover the costs.  Starting early is key. The longer you procrastinate, the fewer sources there are available as part of your family’s plan. Worst of all, the longer you wait, the more likely you are to rely on loans to fill a larger portion of the overall cost of attendance.

Even small contributions to a college savings plan can greatly reduce the amount needed to borrow.  The same is true for those small or partial scholarships which your student can apply for with relative ease.

That being said, student loans are a great tool and have helped millions of Americans earn degrees when they otherwise couldn’t have afforded it.  However, using loans to pay for most or all of your college expenses will certainly put you in a financial bind for many years after graduation.

Using Student Loans Responsibly

Here are two ways to be successful when using student loans.

First, create a college funding plan early and use student loans (if needed) as a supplement or to fill in the gaps from all other sources.

Secondly, students and parents should do comprehensive research regarding the many student loan options and the mechanics behind the loan they ultimately choose.  This includes the timing and method of repayment.  Doing this will ensure that your student loan debt is both manageable and predictable.  You can then cultivate a more effective plan for paying off this debt in the future.

Student loans are a valuable tool for dealing with the rising cost of college education.  Don’t let the current media coverage scare you away from using them if needed.  On the flip side, don’t count on having your loans wiped away by political promises.

The one way to stay clear of the student loan crisis is to create a plan early that uses a limited amount of debt to supplement other funding means.

 

Shane Duhe

[1] https://www.savingforcollege.com/article/is-there-a-student-loan-bubble

[2] https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/hhdc_2018q4.pdf

[3] https://www.forbes.com/sites/zackfriedman/2019/04/22/student-loan-forgiveness-elizabeth-warren/#7b7c41296025

[4] https://www.savingforcollege.com/article/is-there-a-student-loan-bubble

 

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