David Lerner Associates : The College Debt Dilemma - Avoid Debt In the First Place
Many families depend on student loans in order to send their children to college. But it’s important to remember that student loans are just this: loans that must be repaid by your child, with interest, after he or she graduates.
According to the Pew Research Center, nearly one in five families in the U.S. today has outstanding student loan debt averaging $27,000. However, about 10 percent of families that have debt owe more than $61,000—and four percent owe more than $100,000. Total college debt in the U.S. is now approaching $1 trillion.
David Lerner Associates Branch Manager Rande Aaronson points out that with the job market for recent college graduates still challenging, “these heavy debt loads could burden young people for many years and hinder their ability to save and invest for their own future retirement.”
As a hypothetical example, consider Mary, who borrowed $27,000 in federal student loans but graduated college last spring owing $33,000, including interest. Her monthly student loan payment is $380, based on an interest rate of 6.8 percent and a repayment period of 10 years, at which time she will end up repaying a total of $45,572, including interest.
Mary was fortunate enough to land a job in the fall at a starting salary of $25,000. But after paying her rent, utilities, groceries, health insurance and other fixed expenses, she barely has enough left to make her student loan payment—much less contribute anything to her company’s 401(k) plan.
Mary could talk to federal loan servicers about lowering her monthly payment by extending the repayment term. If she extended the term to the maximum 25 years, this would lower the monthly payment to $229, but increase the total amount paid to $68,712—or more than twice the original amount borrowed. So while extending the loan term may offer some temporary relief in the form of lower monthly student loan payments, the tradeoff of more interest paid over the term of the loan can be expensive.
Aaronson believes that a better option for many students and families is to try to avoid student loan debt in the first place. He suggests the following strategies:
1. Start saving for college early.“It’s really never too early to start saving for your children’s college educations,” says Aaronson. Fortunately, there are several tax-advantaged options available to families, including Section 529 plans, Coverdell Education Savings Accounts (ESAs), zero coupon municipal bonds and Roth Individual Retirement Accounts (IRAs).
2. Apply for grants and scholarships.Unlike college loans, grants do not have to be repaid. There is a wide variety of different types of grants and scholarships available to students and their families today, many of which aren’t well-publicized. “If your child is in high school, speak with the school’s guidance counseling department and/or financial aid department to find out more,” suggests Aaronson.
3. Send your child to a local or community college.These tend to be less expensive than four-year colleges and may offer virtually the same core classes that are required for a degree during the first two years. “And by staying local, your child may be able to live at home, which could save significant money on room and board,” says Aaronson. Be sure to find out whether credits earned at a community college will transfer to the four-year university your child plans to attend next.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considering in connection with the purchase or sale of securities.
Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Teaneck and Princeton, NJ; and White Plains, NY. For more information contact David Lerner Associates 1 877 367 5960 http://www.davidlerner.com
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