Does Student Loan Debt Make You Smart?

It used to be that garden-variety wisdom behooved you to go to college to make something of yourself. These days, with around $1 trillion in outstanding student loan balances nationwide ($150 billion in private student loan debt), many are questioning that wisdom.

 

According to finaid.org, the average college student’s debt is more than $18,000, but many carry loans well over $50,000. The biggest shame of it all is that in this economic environment, young adults are coming out of college and having to work the same sort of temporary or transitional jobs they’ve worked for years – food and beverage, retail, lifeguarding, valets, etc. They’re lucky if they can find an unpaid internship to gain “real world” work experience while paying the bills by bussing tables. Many have little opportunity to make a dent in student loan debt, and each year the competition for jobs grows denser.

 

[CLICK HERE to read the blog post, “College Loans: A Punitive System?” at Boston College, Center for Retirement Research, June 5, 2012.]

[CLICK HERE to read a report from the Consumer Financial Protection Bureau and the US Department of Education titled, “Private Student
Loans,”at ConsumerFinance.gov, July 20, 2012.

[CLICK HERE to read the article, “Private student loan debt reaches $150 billion,” at Yahoo Finance, July 20, 2012.]

 

Subprime Student Loans

Much like the American dream of owning your own home, the student loan industry relaxed qualifying criteria and actively marketed and approved loans to people who did not have a credit history for paying back loans. Exploiting parental claims that you can’t get a good job without an education, lenders used Asset-Backed Securities (ABS) to finance student loans because they were more profitable, giving them incentive to increase loan volumes regardless of creditworthiness.

[CLICK HERE to read the article, “How the Student Private Loan Industry Resembles the Subprime Mortgage Market,” at ThinkProgress.com, July 20, 2012.]

Government Intervention

Similar to the subprime crisis, where private lenders may have faltered, the federal government has taken measures to try to provide relief. In recent years, the government has launched the income-based repayment program to allow debt-laden graduates to repay federal student loans based on their level of income. After a certain time period, any remaining balance would be forgiven (note that forgiven balances may be considered income on which taxes are owed).

 

Furthermore, Congress recently extended the current 3.4% interest rate on federally subsidized student loans just prior to the July 1 expiration date, when the rate was scheduled to double. The extension is only for one year, however, so this issue is likely to rear its ugly head in the first two quarters of 2013. 

[CLICK HERE to read the article, “Uncle Sam’s Income-Based Student Loan Repayment Plan,” at Nightly Business Report, July 19, 2012.

[CLICK HERE to read the article, “Congress extends low student loan rates,” at CNNMoney.com, June 29, 2012.

Not a Generational Issue

If you think student loan debt is a problem just for the young, think again. Nearly one-third of the total student loan debt is carried by people over age 40 – still paying down loans from their college years. On top of that statistic, loans to parents to fund their kids’ education is among the fastest-growing of the government’s education loan programs. Imagine – paying your child’s college student loans while still paying down your own.

 

Many middle-aged adults went back to school after losing their jobs during the latest economic crisis in an effort to beef up their resumes in light of ageism and the other challenges that come with seeking a new job mid-career. Taking on more student loan debt while unemployed (or under-employed) and losing value in your home equity is equally daunting.

[CLICK HERE to read the article, “Student Debt Hits The Middle-Aged,” at The Wall Street Journal, July 17, 2012.]

 

The best way to tackle student loan debt is to plan early and save/invest regularly. But even if you’ve waited late to start a plan for financial health, you may have assets that can be positioned to help pay for college. Don’t hesitate to call us to review your situation and discuss strategies.

 

   

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