How to escape the black hole of student debt
In an environment where U.S. consumer prices overall remain historically low, tuition is one of the fastest growing expenses. By extension, it means the $1.2 trillion collective mountain of education debt is likely to grow bigger.
Experts cite ballooning student debt as detrimental to everything from net worth to credit scores, and even the ability for students to get jobs to pay off their loans.
Annual tuition inflation has slowed since 2004, according to data from the Bureau of Labor Statistics, yet it still averaged 6 percent over the course of the decade. At that rate, six-figure loan debt is rapidly becoming the norm for many graduates, and students may find themselves swallowed up by a black hole of debt, unless they can find a way to achieve escape velocity.
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The bleak numbers speak for themselves: the graduating class of 2014 left the ivory tower with the most debt ever . In 2013, the 42.2 million student borrowers had an average balance of more than $25,000, according to data from the New York Federal Reserve.
Although some blame those astronomical figures on a lack of knowledge surrounding loan repayment, others say the problem runs deeper. "There's not really a student loan crisis, there may be a college tuition crisis," said Jan Miller, president of Miller Student Loan Consulting. However, she added that "there's almost always a way to make your situation work."
So how can borrowers untangle the knot of student debt?
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One option is a Private College 529 Plan . It has the same tax benefits as other 529 plans : As long as the money you contribute is used to pay tuition and mandatory fees at participating schools (which don't have to be designated until the time of enrollment), there aren't any federal tax consequences. This plan differs in that it allows parents to buy certificates, or credits, that can be cashed in for tuition at any of more than 275 participating schools at today's tuition rates. The plan added 14 new schools from the Midwest last week.
Traditional 529 college savings plans share the same tax advantages, but they differ in that account holders (or their advisors) choose how the funds will be invested and take on the investment risks. And they don't typically lock in a tuition price.
If savings plans don't provide enough to cover the full costs of tuition, loans and grants can help make up the difference.
Would-be students should complete the Free Application for Federal Student Aid, an application used by nearly all colleges and universities to determine eligibility for federal, state and college-sponsored financial aid, including grants, educational loans and work-study programs that can help defray the costs of an education.
The variety and complexity of loans can be confusing, but there's one key rule to keep in mind. "A rule of thumb in the financial aid world is to always borrow federal first," said Kathryn Randolph, a former admissions officer and a contributor at FinAid.org.
Federal loans, compared to private, generally have the lowest interest rates and more generous default terms. Moreover, federal loan consolidation allows borrowers to bundle several federal loans together.
The Department of Education also offers income-driven payment plans that feature lower payments and repayment periods of 20 to 25 years. But while these programs may offer smaller monthly installments, they can accumulate more interest over the long term. For those who choose to work in the public or non-profit sector, there are also opportunities for loan forgiveness or cancellation.
