5 Ways to Minimize Student Loan Debt
Rising tuition prices create a real challenge for many students and families attempting to finance a college education. During the 1990s, tuition and fees increased by 92%. This may sound substantial until you compare it to the 1404% increase from 1979 to 2018. For early baby boomers, funding college was similar to buying a new car. For millennials, the investment in education has become more akin to buying a house. Sadly, high costs associated with student loans have become the norm for students, with little evidence of change in the near future. The sacrifice for these graduates is immense as they prioritize digging themselves out of debt in lieu of buying new vehicles, purchasing homes, and getting married.
When we look at the trajectory of college costs, particularly over the past thirty years, we see that tuition is now over three times as high in inflation adjusted dollars as the costs were in 1987. According to research, if annual college costs had increased at the rate of inflation, a year of college should only be approximately $3200. However, by 2017, the true cost had grown to $9970, or over a 300% increase in real costs!
In a 2009 article written to University of Washington Alumni, the school’s Dean pointed out that college costs have not increased significantly, only student tuition has. He went on to state, “The impacts of the (state) budget reduction, were offset partly by a 14 percent increase in tuition, continuing a 20-year trend of relying more and more on student tuition to fund the UW while the state has shrunk its share of funding. For the first time in our history, total revenue from tuition is larger than revenue from state tax dollars…”
Note the graph below and the trend of tuition increases over a 20-year period in contrast to the persistent reduction in state funding.
In addition to the increase in college tuition and a decrease in state funding, the issue was exacerbated by lower wage growth over the past 30 years. In 2016, the median household income for income earners between 45-57 years of age was $90,000. In 1987, that same family was earning $67,000. That is a 34% increase in income over the last 30 years, while college costs have increased approximately 300% during that same period. It’s clear that sending your child to college is putting more financial burden on families. Parents now have to decide between giving their children a better future and having a future of their own—hardly a fair situation.
With the culmination of this perfect storm—higher college costs, less government funding, and relatively fewer personal resources to cover those costs—many individuals have inadvertently stepped into the financial trap of excessive debt. Parents are finding themselves wooed by easy money through financial aid programs, with much of the aid coming in the form of loans. Here are some of the staggering numbers:
- $1.3 trillion in US student loans, which represents 11% of the total US household debt. (Second only to mortgages.)
- 44.2 million Americans with student loan debt. (Surpassed credit card and auto loan debt.)
- Average debt at graduation: student $39,400; parent $32,600.
- U.S. student loan delinquency rate of 11.2%.
- 15-20% of a new graduate’s income is allocated to debt reduction for the initial 5-10 years after graduation.
- 62% of student borrowers haven’t paid off their loans 20 years after starting college.
- In Washington State, there are 800,000 residents with student debt. That is a 35% increase over the past decade, and an average debt level of almost $25,000.
At this point you may be pondering the value of a college education, and whether it is still a reasonable investment. Although the costs and sacrifices are higher, economically, the data still illustrates a benefit with average annual earnings approximately 78% higher for college graduates than high school graduates.
In summary, the long-term economic benefits still support the pursuit of a college education. The following are strategies to help you avoid some of the painful pitfalls recent students and parents have experienced:
- Understand the true costs of college and start saving early. Parents and grandparents of pre-college age children should keep utilizing college savings programs to help the kids get through college debt free. (Gone are the days where the typical kid can work all summer to pay for their tuition.)
- Just say “no” to loans. Although most financial aid packages include loans, students do not have to accept them. By refusing those “easy” payment plans that entice them toward expensive schools, students should instead become smart shoppers and seek out colleges that offer quality education at an affordable price.
- Start the scholarship search early. Freshmen year of high school is not too early to start thinking about which scholarships a student might win. This is the time to start developing a child’s strengths, whether its academics, athletics, or the arts. Knowing which scholarships are out there and what the requirements are can help motivate the child to excel while also providing direction in the learning process. Fast Web (http://www.fastweb.com) is a good source for local, national, and college specific scholarships. Be sure to visit the site early and often. The College Board also offers valuable tips on finding and applying for scholarships.
- Shop for an affordable school. Several of the college lists now include rankings for “best value.” Kiplinger (http://www.kiplinger.com/tools/colleges) or the US Department of Education (https://collegescorecard.ed.gov/) evaluate schools based on a combination of quality and cost. Quality measures include admission rates, student-faculty ratios, the percentage of faculty with the highest degrees in their field, four- and six-year graduation rates, graduate hire rates etc. Total costs are also measured on an absolute basis (tuition, mandatory fees, room, board, and estimated expenses for books and supplies.)
- Don’t forget costs for your own personal situation: in-state and out-of-state tuition. Consider airfares between home and college, then multiply that by the number of trips your child (and you) might take over four or five years.
- Kids must also understand the true costs of college as well! Engage your kids early so they understand the limitations of the budget, and help them set reasonable expectations. If four years of college at a private school is not practical because your oldest child has three siblings who are also college bound, talk about the limitations early on. Again, freshmen year of high school is not too early to start the discussion.
- In addition to building savings, getting scholarships, and shopping for affordable colleges, cost conscious students can find ways to shave hundreds to thousands of dollars off the cost of their education. Here are some other ways:
- Get free college credits. Students can save thousands of dollars by taking advanced placement classes in high school and then applying for college credit. In the Tri-Cities, high school students can utilize the Running Start Program to earn their two-year degree while satisfying their high school graduation requirements at the same time.
- Start at a community college. Community colleges represent one of the best values in higher education, especially if students are willing to live at home. Many excellent four year universities have agreements with nearby community colleges that make it easy for a student to transfer in his or her junior year and apply lower-division coursework toward a bachelor’s degree.
- Pursue an accelerated program. By taking extra classes each quarter or semester, going year-round etc., it’s possible to earn a bachelor’s degree in three years instead of four. Some schools even combine master’s and bachelor’s degree programs in ways that save both time and money.
- Join the Military. All branches of the military offer various scholarships, tuition reimbursements, and loan repayment programs.
- Be on the lookout for unique scholarships. As the cost of education continues to rise, more benefactors are stepping up to the plate with unique offers for free education. For example, a $100 million donation to the Yale School of Music has made advanced music education free. There are opportunities out there.
In the face of the overwhelming evidence that college costs have increased dramatically, the awareness of a relatively lower level of resources (both government and personal,) and understanding the consequences of the free flow of student loans, a debt free college education should be the goal for all families. As Your Financial Partner for Life, we never see your financial decisions independently. Our goal is to balance them with all other areas of your life that are important to you, including what is in the best interest of your future generations. Come see your advisor to talk about ways to make certain the next generation receives a true head start by completing their college education, without the ball and chain of student debt!
Bob Lagonegro, CFP®