In May 2012, student loan debt in the U.S. hit the $1 trillion mark.
Let that sink in for a minute.
It was only a year ago we were shocked to learn student loan debt surpassed credit card and auto loan debt.
But at $1 trillion, our nation is the proud owner of a whole new generation of indentured workers, whose ability to support themselves, let alone buy a home and prosper, will be determined by how much extra is left in their paychecks after making their monthly student loan payments.
Interest Rate Debate
The debate over the expiring lower rate for federally subsidized Stafford Loans has distracted Americans from the much larger problem of skyrocketing tuition and increased student debt.
Although it's nice that students who qualified for subsidized loans enjoyed a break from higher rates for a few years, the actual benefit was nominal in pure dollars and cents.
At 3.4 percent for each year a student was in school, the cut in rate amounted to little more than $1,000 in interest savings over the 10-year life of the loan.
Other students, including graduate students, did not receive a rate cut and continued to pay 6.8 percent for their unsubsidized student loans. And even at 6.8 percent, this was still lower than what students would pay in the private market.
Private Student Loans
By maintaining focus on federal student loan rates, we may be losing sight of the real fox in the hen house.
With their much higher interest rates, private student loans have done more to drive up debt than their federal counterparts. These loans are designed to provide a student with access to additional lending after all federal loan options have been exhausted.
However, unlike federal loans that offer low fixed interest rates, private loans typically have higher variable rates that cost the borrower more over the life of the loan.
Lenders also perform credit checks, which could lead to denial, considerably higher interest rates, or the need for a co-signer. This can put a family member's credit at risk if payments are not made in a timely manner.
Finally, repayment and forgiveness options for private loans are far less lenient than those for federal loans.
A Decade of Repercussions
For the first time since the 1950s, more than 21 percent of adult children between the ages of 25 and 34 are living with their parents.
With the continuing rise of tuition, growing student loan debt and limited job opportunities after graduation, this trend doesn't hold promise to decrease any time soon.
Being saddled with staggering debt has caused many graduates to delay typical adult rites of passage, such as marriage, children, and home ownership.
Even the lucky few who have found employment after graduation are finding their mortgage applications denied. Underwriting guidelines limit total debt payments to 45 -50 percent of a borrower's adjusted gross income.
Assuming most mortgage and property taxes consume 35 percent of AGI, those with other debt like credit cards and car loans don't have a lot of wiggle room if shouldering a high student debt load.
To pay down debt, many potential homeowners are moving back in with their parents, delaying contributing to company 401k plans and are not putting money back into the economy through the purchase of other consumer goods.
This is how everyone, and every industry, is being negatively impacted directly or indirectly by student loan debt.
Manage Your Borrowing
The price of higher education makes it almost inevitable students will need to incur some level of student loan debt. But all good students need to do their homework and borrow responsibly. Pick a school whose price tag is in line with the potential income of the major. Amassing $120,000 in debt for an Ivy League education for a future social worker may be an unnecessarily expensive decision, for example Also, make a budget that projects what rent and living expenses should be and how much income you have left for other bills. This should help estimate how much you can afford to pay monthly in student loan payments before overextending yourself.
Before adding to our nation's $1 trillion problem, here are some steps you should take before signing on the dotted line:
- Choose Loans Carefully
Whenever possible, always opt for the federal student loans. In most cases this means the Stafford Loan. Your family's income will determine whether it will be subsidized or unsubsidized by the government.
- Always Use Loan Calculators
The student debt calculator created by the Consumer Financial Protection Bureau as part of their "Know Before You Owe" initiative is a good place to start. This calculator can be found at www.consumerfinance.gov/payingforcollege. Using a calculator is a good way to see if your projected monthly student loan payment fits in your post college budget.
- Pay Interest on All Your Loans
Whether you have an unsubsidized Stafford Loan or a private loan, interest can accumulate from the time you sign. Paying the interest on the loan monthly, quarterly or yearly can stop the loan from ballooning over time. If the family is not in the position to pay this amount, the student can take a small part time job on campus in order to keep down the amount that will need to be repaid.
- Automate Your Payments
Following graduation, automatic payments for the loan from a checking account can assist in establishing good credit history and in some cases, lower the interest rate on the loan.
Stay Out of Your Own Way
On average, college graduates earn more in their lifetime and suffer lower rates of unemployment.
But what the $1 trillion student debt load tells us is many young adults are spending their higher salaries before they earn them.
To truly take advantage of the financial benefits that a college degree provides, know what your degree will be worth before committing yourself to student loans for the next 10 years.
We have experienced the ravages of several economic bubbles over the past few years. Borrowing responsibly should keep you from the epicenter when this one finally bursts.
Cindy Diccianni is a certified long term consultant, a registered investment advisor and a registered representative with Leigh Baldwin & Company member FINRA and SIPC. She is the principal of Argus Financial Group, Inc. You can contact her at www.TheArgusFinancialGroup.com or cindy@TheArgusFinancialGroup.com. Jeanne Lawson is Client Manager with Argus Financial Group Inc.