College Planning – Part IV – Loans For Education
This last posting discusses a challenge that many students will encounter—managing and servicing loans for education. Student loan debt in the United States in 2020 totals about $1.56 trillion and it is owed by 45 million people. In January 2019, the Federal Reserve stated that aggregate student loan debt has more than doubled in the last decade. The Fed also reports that 69% of students from the Class of 2019 had taken student loans with an average debt balance of $29,900. Six percent of borrowers owe more than $100,000 with this same six percent owing about one-third of the total outstanding debt. Clearly, this is not a situation to take lightly!
With well over half of the student body needing loans to fund their education, it’s prudent to ask, “How much student loan debt is reasonable?” Mark Kantrowitz, a renowned expert on college funding feels that total student loan debt at graduation should be less than expected annual starting salary for one’s chosen profession. He notes that keeping student loan debt within these parameters will allow the student to repay the loans within ten years. Exceeding these guidelines usually leads to problems in retiring the loans and extended payment plans increase the total cost of the loans. In many cases, that student might still be in debt when their children are enrolling in college.
Sourcing those loans is also an important decision for students and their parents. Federal Stafford loans should be the first source because they are more available and have better repayment terms than private sources. Further, Stafford loan interest rates will be lower than private loans at the time of origination. Nearly all private loans require a creditworthy co-signer and they lack some of the repayment options and features of federal Stafford loans. Stafford loans have fixed interest rates and offer deferment terms and forebearances that are longer than what would be available, if at all, from a private lender. Lastly, private loans will not provide for the possibility of an income-driven repayment plan, nor will there be any opportunity for public service loan forgiveness.
Interest rates do change over time, however, and it can make sense to re-finance an existing loan. Presently, interest rates are at an all-time low and loans originated years ago are clearly more expensive than what is currently available. Careful consideration must be given, however, to what might be lost when re-financing from a Stafford loan to a private loan. The attractive rate being advertised by the private lender will nearly always result in more stringent re-payment terms and will cause the loss of some of the repayment features and options mentioned in the previous paragraph. Some private student loans do not offer death and disability discharges. It is never as straightforward as simply comparing two interest rates when making a refinancing decision.