At first blush, it seems like a positive development — the amount of money owed by students at graduation appears to be plateauing, according to a recent report from SavingForCollege.com analyzing federal student loan data.
However, warns the report’s author, education policy expert Mark Kantrowitz, the change is less about college affordability and more about the fact that parents are increasingly borrowing to cover college costs for their children.
Here’s what you need to know about this trend — and how to keep from getting in over your head with education debt.
Federal student loan limits aren’t always adequate
After digging into the data, Kantrowitz discovered that total student debt for a bachelor’s degree has barely increased since the 2011-2012 school year, after trending upward during the previous two decades.
“Schools aren’t getting more affordable and there isn’t less education debt,” Kantrowitz said. “Instead, students are running up against their annual federal loan limits and their parents are borrowing to pay extra.”
For most students, borrowing student loans is a necessity; college costs continue to rise and government student aid at both the state and federal levels haven’t kept up.
“If you look at the costs related to running a university campus, they’ve gone up, and tuition continues to outpace inflation,” Kantrowitz said. “At the same time, state appropriations have decreased and tepid increases in federal aid to low-income students, like the Pell Grant, don’t come close matching the costs of attending college.”
Because federal student loan limits haven’t been increased for more than 10 years, Kantrowitz pointed out, they are quickly becoming outstripped, especially when it comes to four-year private nonprofit institutions. Students hit the funding wall, and their parents step in to close the funding gap with Parent PLUS loans or by cosigning on private student loans.
Parents are putting their futures at risk
Unfortunately, Kantrowitz pointed out, many parents are putting their own retirement prospects at risk.
“Student borrowers are putting off life milestones like getting married and buying houses,” he said. “At the same time, many parents are now going to have to put off retirement because of their own student debt.”
For years, Kantrowitz has encouraged students to limit their own total debt to no more than their expected first year’s salary upon graduation. Today, Kantrowitz warns parents to limit their education borrowing on behalf of their children to one year’s salary total for all kids and years of college.
“Unfortunately, like student borrowers who over-borrow, many parents are over-borrowing,” Kantrowitz said. “It could mean they have to put off retirement since it’s best to be debt-free before you retire.”
It’s possible to still retire if you have Parent PLUS loans, Kantrowitz said, but you might have to do a little finagling. For example, he explained that, without a regular income, retirees could consolidate their PLUS loans and get on income-driven repayment to better manage cash flow.
That path basically acknowledges that you’re never going to pay off the debt, though. “You could even potentially get your payments down near zero,” Kantrowitz said. “But that means that you’re admitting that you’ll just keep the loans and wait for them to be discharged upon your death.”
But if you don’t want to delay your retirement on behalf of your kids’ education debt, it’s a strategy that could at least allow you adequate cash flow.
How the government could ease this issue
Because it’s been so long since the limit on federal student loan amounts has been raised, Kantrowitz thinks that now is the time to rectify that situation so students can borrow more without resorting to private loans — and so their parents could borrow less.
However, Kantrowitz also believes that a better solution might be to come up with a formula that bases federal loan limits on your major and the salary you’re likely to have when you finish school.
“It’s something that has challenges, but it’s implementable,” he said. “Besides, it might also really make students think twice about the schools they attend and the majors they choose.”
4 steps parents and students can take to reduce education debt
Rather than get in over their heads in student debt, Kantrowitz suggests a few steps parents and students can take to reduce overall education debt:
1. Attend less expensive schools
In his report, Kantrowitz points out that enrollment is shifting toward public schools and two-year schools. He’s concerned that, in some cases, the shift toward two-year and one-programs could indicate that some students — who might otherwise get a bachelor’s degree — are selling themselves short because they can’t afford a four-year program.
However, in general, Kantrowitz said that parents and students should look at less expensive schools, especially if the debt load at a “dream” school will be excessive.
“Instead of focusing on one school, think in terms of three dream schools,” suggested Kantrowitz. “Encourage students to consider a less expensive school in the top three. You don’t want only one expensive school to be your list.”
2. Save up for college
When possible, Kantrowitz said saving up for school is one of the best ways to reduce the need for student loan debt. He suggested a 529 plan as a good vehicle to build up a college fund.
“Middle- and lower-income parents are more likely to have to borrow because they haven’t been saving as aggressively for college in many cases,” said Kantrowitz. “With long-term saving, even small monthly amounts, it could change the need for large loans.”
3. Get as much non-loan aid as possible
While it’s true that you can make up a federal student loan college funding gap with private student loans and Parent PLUS loans, Kantrowitz pointed out it’s better not to borrow if you can help it.
“Start by filling out the FAFSA and seeing if you qualify for grants and work-study programs,” Kantrowitz said. “You can also apply for different scholarships online and from local sources.”
4. Have the money talk as early — and often — as possible
One of the biggest issues, said Kantrowitz, is the fact that parents don’t sit down and talk to their children about college funding expectations.
However, it’s vital that parents carefully think about what they can pay for, and communicate that to their kids.
“You don’t have to reveal your income or your own debt levels when you have this talk,” said Kantrowitz. “But you should be candid about how much you can contribute toward your child’s education.”
Have this discussion more than once, so your kids are clear about what you can do and what their own contributions will have to be.
“Parents don’t like to tell their kids no when it comes to education, but it’s important to be honest and upfront,” Kantrowitz said. “Most kids, when you sit down with the numbers, are willing to make a reasonable college choice that won’t endanger your financial future.”
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|1 Important Disclosures for CollegeAve.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or Nationwide Bank, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
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2 Important Disclosures for Discover.
3 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
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5 Important Disclosures for PNC.
PNC Bank is one of the nation’s largest education loan providers. For over 40 years, PNC has been committed to helping students and their families make possible the adventure of college.
6 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
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Additional terms and conditions apply. For more details see LendKey
8 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
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Citizens Bank Disclosures
|3.94% – 12.78%1||Undergraduate, Graduate, and Parents|
|4.04% – 13.04%3||Undergraduate and Graduate|
|4.34% – 12.99%2||Undergraduate and Graduate|
|4.25% – 11.10%*,4||Undergraduate and Graduate|
|5.03% – 11.23%5||Undergraduate and Graduate|
|4.12% – 13.13%6||Undergraduate and Graduate|
|4.92% – 10.01%7||Undergraduate and Graduate|
|3.72% – 9.68%8||Undergraduate, Graduate, and Parents|
|4.26% – 12.13%9||Undergraduate, Graduate, and Parents|