Helping ease pain of college debt

Nearly one of five U.S. families has outstanding college debt, with the average amount at $27,000 in 2010, up 14% over the previous three years, according to a new Pew Research Center report.

For some, the debt load is even higher.

About 10% of those with student debt owe more than $61,894, and 4% owe more than $100,000, said Richard Fry, senior economist at Pew and author of the new analysis.

Deborah Fox, founder of Fox College Funding LLC, had one woman in her mid-20s come to her who had $236,000 of undergraduate and graduate school debt.

Her payments totaled $4,100 a month and exceeded her gross income of $3,000 a month as a performing artist.

With the U.S. college debt load now at about $1 trillion, it is a nationwide problem.

“Total volumes of student debt are still rising,” Mr. Fry said, as more people head to college and seek loans, taking on a greater student debt load than in the past.

Financial advisers recommend several strategies to help students and their parents ease the pain of college debt. Paying for a student’s debt at the expense of a parent’s retirement savings, however, isn’t one of them.

“There aren’t scholarships for retirement,” said Brock Jolly, a financial adviser with Capitol Financial Partners.

One approach is to examine the menu of repayment terms available with many student loans. Of course, arrangements to pay smaller amounts will cost more in the long run.

Working with their federal loan servicers, monthly payments often can be lowered for students entering jobs with low salaries or for parents who may still be paying tuition bills for other siblings.

Federal student loans with a 6.8% rate typically are set to be repaid after 10 years.

For example, a student who borrows $27,000 in federal loans will owe $33,000 by the time of graduation because of interest and be expected to start paying $380 a month beginning six months after leaving school. That debt ends up totaling $45,572 in interest and principal.

Extending that loan to its maximum 25-year period would lower payments to $229 a month but increase total cost to $68,712, Ms. Fox calculated.

Going back to the 10-year term but choosing a graduated repayment plan that begins with a lower amount due each month and increases generally every two years, students could bring down the initial payment to $260 a month. After 10 years, the student will have paid $48,033 in interest and principal.

Another possibility is to choose the repayment option that expects the student to pay based on his or her income, which automatically allows the government to spread out the loan repayment for up to 25 years. A student with $33,000 in debt and a salary of $35,000 would pay about $280 a month for almost 15 years, at a total cost of $53,008.

In cases where students don’t have any income or are experiencing other hardships, they can talk to their loan servicer about deferment or forbearance. Bankruptcy generally is not an option for student loans, and students who default on their loans can face an extra 20% collection fee, and their wages can be garnisheed and tax refunds seized.

“There isn’t a one-size-fits-all solution,” Mr. Jolly said. “We encourage our families to evaluate all their options.”

Another strategy would be for parents to pay off student debt by refinancing their home or a home equity line of credit. A $33,000 home equity loan at today’s typical rate of 4.5% would take 8.8 years to pay down at a rate of $380 a month.

However, with a 25% mortgage interest tax deduction, it would equate to about 8.3 years, Ms. Fox calculated.

Her concern, however, is that because interest rates on home equity lines of credit are variable, the monthly payments could rise in coming years, making this option unattractive.

Financial aid officers at the nation’s colleges and universities are replete with extreme examples of families’ taking on too much student loan debt.

Ryan Law, director of the University of Missouri’s Office for Financial Success, said that he witnessed one student who graduated with a doctorate in history after about 10 years of switching majors.

The student was facing $170,000 in student debt and initial job opportunities that weren’t likely to top out at more than about $35,000.

“The burden of walking out of school with essentially a mortgage on their backs can be challenging,” Mr. Law said. “It’s important that students plan out all aspects of their financial plans and look at the degree they’re getting and career prospects.”

[email protected] Twitter: @skinnerliz

Related Topics: Financial Planning