Congratulations, college graduates and soon-to-be graduates! Along with your peers who attended college but did not graduate, you have accumulated $1.44 trillion in outstanding student loan debt according to the Federal Reserve. That is the largest category of non-mortgage household debt, surpassing auto loan and credit card debt.
Consider the information provided by Adam Carroll, Founder and Chief Education Officer of National Financial Educators: "[Student loan debt] went from $200 billion in 2004 to $1.2 trillion in 2014…a 511% increase in 10 years." The New York Fed's report suggests that without a reversal, we could reach $2 trillion in student loan debt sometime in the 2020s.
The Fed report contains further sobering information. Borrowers currently leave school owing an average near $34,000, an increase of 70% over a decade. Around 5% of student loan holders owe over $100,000. Student loan delinquency hit 11.2% in the last quarter of 2016, topping delinquency rates for all other types of household debt.
As if that isn't bad enough, interest rates on new federal loans issued for the 2017-2018 college year will increase from the current 3.76% to 4.45%. The standard rate on direct unsubsidized graduate loans will also increase from 5.31% to 6% for the new school year. Parents can expect to pay 7% interest on direct PLUS loans for graduate and undergraduate students, an increase from the current rate of 6.31%.
The crushing debt load is having a ripple effect on the economy, affecting home ownership and other household financial obligations.
If you're already burdened by student loans, you must budget appropriately and review your options — but don't give up on payment and sink into default. The effects are long lasting. Millennials were hit particularly hard by the combination of recession and college costs, but in the words of Millennial Money Expert Stefanie O'Connell, "The thing Millennials really need to understand about student loan debt is that ... paying it back is not a passive practice ... I think most people disengage and the consequences of that can be pretty critical."
By being proactive with a tighter budget, investigating refinancing options, and negotiating lower minimum payment options with your creditors, you can gradually cut down your student loan debt. Don't forget the income side — if you can enhance your income with side gigs or parlay your experience into a better-paying job, you can chop down your debt even faster.
Of course, a proactive approach to student loan debt is even more effective when you haven't started college yet. Parents can set up 529 or Coverdell savings programs when children are young, and build up a 401(k)-style nest egg while often gaining tax advantages.
If college is imminent and savings are limited, your best strategy is to turn toward scholarships. If you don't qualify for standard academic or athletic scholarships, focus on winning local, less-well-known scholarships. They can add up quickly.
Carroll calls scholarship acquisition "the single highest paying part-time job that a student can have. A student applies for a $500 scholarship through the Lions Club or Kiwanis or Rotary. They win $500. It took them one hour to complete. They just made $500 an hour."
Make sure that you fill out the Free Application for Federal Student Aid (FAFSA) as soon as possible, as it is the key to virtually all varieties of student aid. The FAFSA website can guide you through the process, and many other guidance resources are available online. The IRS Data Retrieval tool that usually enables applicants to easily enter tax-related information on the FAFSA has been shut down due to security concerns, slowing down the application process and increasing the urgency for you to get started on your application before time runs out.
As you choose your future college, investigate the school-based options for work-study programs and internships. You may also contact nearby businesses in your chosen field, and see if any internships are available that allow you to balance work and school. Consider public service options that allow you to partially work off your loan and/or forgive debts — you may even decide to take advantage of the military academies.
As a student, you probably could borrow more than your credit score would allow, but that doesn't mean you should. Parents with poor credit may struggle to qualify for private student loans, so filing a FAFSA would be your best bet. The federal government will assess your credit score and financial situation to calculate your need for assistance. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
Try to limit your student loans to an amount that you can reasonably pay back. Carroll notes that you can borrow the same general amount regardless of the salaries in your chosen field (and therefore your payback potential). His proposal: "We need to make borrowing commensurate with what starting salaries are in that major."
Until that day happens, you'll have to determine your own limits. Can you get the same education and the same future job through a degree at a less-expensive school? Do you have in-state discounts or other opportunities available? You may end up at a place other than your dream school, but at least you can avoid the nightmare of unmanageable levels of debt.
Find out quickly at what rate you can refinance your student loan.
To learn how defaulting on your student loans could cause you to lose your house, read the previous article in our five-part Student Loan Crisis series.