Monday, November 29, 2010

Student Loan Debt - the next financial crisis?

Now that Black Friday has passed, holiday shopping is in full swing. The media is making regular references to consumers “shopping on a budget” and “credit card use is down this year.” As federal regulations changed over the past few years, credit card use has changed also. Lower credit card limits, increased minimum payments, and a collective uncertainty about the economy have changed consumer spending habits. The slowing pace of credit card debt reached a little known nexus this past June when total student loan debt in this country actually outpaced total credit card debt. I’m not kidding. When I heard about this it was hard to believe and after a little research it’s quite possible that student loan debt is a likely future chapter yet to be written in the troubling and complex economic storyline in this country.

The industry website www.finaid.org has a revolving clock (similar to the national debt) that displays the current estimate of current student loan debt, including both federal and private loans – it increases at a rate of about $2,853.88 per second and totals more than $870 billion. The reasons for escalating student loan debt are many and include the fact that rising tuition costs at colleges (particularly, but not exclusively, private colleges) have outpaced need-based grants; unemployment has increased and remains stagnant; the housing market drop has limited home equity loan possibilities; and perhaps the biggest factor of all is the inability to resist the temptation to accept student loans simply because they are accepted without a thorough plan to repay the excessive debt.

The average cost of college can vary greatly depending on the college or colleges of choice www.collegeboard.com/student/pay/add-it-up/4494.html. More than fifty percent of all college freshman in New York (and nationwide) attend a community college where tuition ranges between $2,900 to more than $4,000 in New York (MVCC is $3,400 for a full-time student). Four-year schools have even greater variance in tuition from as low as about $6,000 at some public institutions to more than $50,000 at some selective private four-year schools. Advice and best practice suggestions for limiting student loan debt abound on the Internet and in financial aid offices at colleges around the country, including MVCC. Although paying for college for my own children is still a few years away, I’ve reviewed many of these suggestions and developed my own list to keep in mind.

  • Assess all your options and choose a college that is the right fit for the student in terms of education, degree, environment, AND finances.
  • Borrow as little as possible – just because the funds are there doesn’t require that they be accepted.
  • Look ahead to the career cluster (even if you don’t have a specific job in mind) to see what type of job and income level might be possible after graduation and factor in repaying the student loans along with rent/mortgage payments and other living expenses.
  • Know that student loan debt will be factored in to overall credit scores and could haunt the student for years to come and limit possibilities with future loans for a car and/or a house.
  • Do your research and understand loan terms like unsubsidized loans and the various governmental programs.
  • Don’t get lured into a fee for service financial aid consultant – the process is confusing, but you don’t need to extend even more dollars to figure out how much debt you’ll acquire along with a college education.
  • Upon graduation, don’t defer repayment of student loans if at all possible. At the very least, make interest-only payments so that the payment doesn’t include interest on top of the original loan interest.

Hopefully, with more of us following an advice list like this we’ll see student loan debt decline rather than continue to escalate toward a national crisis – the magnitude of which is rarely mentioned in the media. If you have any thoughts on this post, please contact me at presblog@mvcc.edu.  (My thanks go to our financial aid office for raising this topic and helping me understand the magnitude of the issues.)