Student debt is accumulating at an alarming rate for a large number of people. According to a recent study by The Federal Reserve Bank of New York, student debt is approaching $1 trillion, making student debt the second largest after mortgage debt. The study estimates that 43% of 25-year-olds had student debt in 2012. We are meeting young clients with loans in excess of $200,000.
This immense level of debt is creating a drag on the economy. With such a large burden, a recent graduate is less likely to start a business, buy a house, or even start a family.
What has led to these high levels of student debt? Contributing factors include: increasing tuition rates, income levels that do not line up with the amount of debt, states funding cutbacks and the notion that all Americans need a college education. Tuition rates have increased to astounding levels; it’s not uncommon for a graduate school’s tuition to exceed $40,000. Yet, the Center for College Affordability and Productivity reported that around 48% of college graduates are in jobs that do not require a four-year college degree. The amount of a recent graduate’s loan can play a major role in the career decision that person makes when considering monthly repayments.
Many recent graduates are spending between 10 -25% of their income in student loan repayment. There are three new repayment programs that adjust the monthly payments to reflect the borrower’s adjusted gross income and ability to pay. They also provide a forgiveness of any unpaid principal at the end of the loan repayment period. However, these programs are only available to recent borrowers with federal loans and borrowers must meet a number of criteria to qualify for these programs. Additionally, unless the borrower works for the government or non-profit companies, the forgiven balance will be included as taxable income.
When the cost of attending school and the high interest rates for federal loans (6.8%) are combined, the remaining balance can be the same or larger than the original loan amount, even after 25 years of payments. This means that the borrower paid more interest than the original loan was for, and will now have tax consequences on the remaining balance. Also, unless the borrower can prove he or she is physically unable to work and there’s no chance he or she will be able to earn money, student loans will not be discharged in bankruptcy.
DWM is here to help plan a successful financial future for clients of all ages; even those with a seemingly unmanageable amount of student loan debt. Taking advantage of the repayment programs available to a client is just a part of the plan. Make sure you know all the rules for repaying the loans and follow those rules to the letter. Continue to invest in your retirement plan and don’t be afraid to have that Tuesday latté. With strategic financial planning from DWM, that student loan burden can be paid off and out of your life for good.