The Perils of Student Loan Debt

If all goes as planned, Jenna Frye of Royal Oak will have paid off her undergraduate student loan debt by May 2020 – a full 11 years after graduating from Central Michigan University. When that day comes, she intends to celebrate big. “I will throw a party, because there was a time I didn’t think I would ever pay off my loans,” Frye says.

Before the party begins though, Frye still has to pay off $11,000 more in student loan debt. As she has for the past few years, she intends to throw the tax return she receives at it while also paying approximately $1,500 a month toward her balance.

A Common Scenario

While Frye graduated with $27,000 in student loan debt, she watched it approach $36,000 during the years she couldn’t afford to pay even the interest on it. “I had so much anxiety,” she recalls. “I didn’t deal with it for a while. If I knew when I was first applying for financial aid what I know now, I would have borrowed less.”

Frye’s is far from an uncommon story. According to the Federal Reserve, 44 million Americans collectively carry $1.5 trillion in student debt. For the class of 2018, the average debt balance was $29,800, Student Loan Hero reports. In 2017, the reserve adds, 20% of those with education debt were behind on their payments – and those who didn’t complete their degree or attended a for-profit institution were more likely to struggle.

Experts fault the dramatic increase in the price of postsecondary education, which has grown at a disproportionate rate to that of American wages. While college is not the path for everyone, the Georgetown Center on Education and the Workforce anticipates that, by 2020, 65% of all U.S. jobs will require some postsecondary education.

The College Board reports that, in 2018-19, one year of college tuition cost an average of $36,890 for a private college and $10,230 for a public one. It’s no surprise then that a USA Today poll revealed most parents worry about expenses more than any other aspect of their child going away to college.

Planning Ahead for Debt

Val Meyers is an associate director in the office of financial aid at Michigan State University. She wishes that she could talk to parents about planning for college when their children were still in kindergarten. “There are essentially three ways to pay for college: before your kids start through saving or purchasing a 529 plan, while they’re in school or after they’re out of school,” she says. “Usually, when parents are reaching out to me, their child is a year or less out from beginning college. At that point, the conversation is focused on paying for college while the student is in school or after he or she is out.”

Meyers counsels parents and students to, if possible, pay as much as they can while the student is in school. “I urge parents that if they can even pay a little bit each month, their student will have to borrow that much less,” she notes. It’s advice that she extends to the students themselves. “Students can pay for some of their education while they go to school simply by working,” she says. “If they’re not taking classes in the summer, they can work even more.”

Scholarships and Financial Aid

An often-overlooked avenue for assistance with college funding? Scholarships. “I advise students to do scholarship searches – and not just once,” Meyers says. “Every summer and every break, sit down and complete five to 10 scholarship applications. You have to submit a lot to get anything, but if you’re persistent, you can actually help avoid borrowing by applying for and receiving merit scholarships.”

Meyers says most schools have information on their website linking to vetted options. She cites FastWeb and the The College Board as two credible resources for beginning the scholarship search. “There are thousands and thousands of opportunities,” she says. “Students create a profile indicating their interests, accomplishments, community service, etc.” The online programs then match teens with scholarships they might be eligible for.

Cindy Hermsen, director of financial aid at Oakland University, encourages all students to fill out the Free Application for Federal Student Aid, or FAFSA. “In many cases, students say they’re not going to fill out the FAFSA because they think they won’t qualify for anything,” Hermsen says.

“We don’t feel that is the case. While a student may not qualify for a Federal Pell Grant, which is for the lowest income brackets, there are still cases where there are other need-based financial aid programs available geared toward middle-income families.” Students should fill out the FAFSA early and accurately, she adds, to understand what they’re eligible for. Then, they must discern what they really need.

Setting a Student Mentality

“We tell students to live like a student now, so they won’t have to later,” Meyers says. “College is not necessarily the time to buy a new car or join the most expensive gym. Lots of the things you need and want are already on campus.” Hermsen also regularly talks with students about needs versus wants. “I advise them to minimize their discretionary spending. You don’t need to go to Starbucks every day.”

Meyers puts it this way: “You need to be really thoughtful about what you need. Yes, you need to pay your rent. Yes, you need to eat something. It’s the difference between what you need to get by and what enables you to do the things you are here for, which is to learn.”

Different Types of Loans

Typically, Hermsen says, parents or students can set up payment plans to spread out tuition payments during the year rather than taking a loan from the get-go. When students doneed to apply for a loan, Hermsen advises them to look at federal loans before private ones. “Federal loans have better terms when it comes to repayment and better interest rates,” she says. There may, however, be times when supplementing federal loans with a private loan makes sense.

“Costs for college are going up,” Meyers says. “There are limits to what you can borrow from the federal government on both an annual and a lifetime basis. If students get to the point where they have borrowed everything they can from the federal government, what do they fill the gap with?”

One option is a parent PLUS loan – where the parent can borrow on his or her student’s behalf from the federal government. Those loans are not capped. “Families need to consider, though, that aging parents are looking at their own retirement – and taking on a loan for their child’s education may not make the most financial sense,” she says. “That’s when you may want to look into a private student loan and do some market research.”

Considering the Costs and the Career

Weighing the costs of college versus future career potential is something Meyers encourages all families to do. “I passionately believe in education, but I realize my school is not for everybody,” she says. “We do think finances are critical as part of your decision.”

For example, she points to MSU’s renowned packaging program. “If you’re really passionate about packaging, maybe it’s worth coming to MSU because we have this great program,” she says. “If you want to be a history major though, there may be a number of schools that might suit you. We certainly would never want people to make a decision based just on money. We are trying to enable folks to pick the right place for their students, and then hopefully we can help them pay for it.”

Hermsen also encourages students to consider future career plans early on. “Any time you change your degree program, you could add another year of school,” she says. “And every time you add another year, that’s going to be another year of tuition and living expenses during a time period when you could be in your career making money.”

Getting Connected

Hermsen recommends students reach out to their school’s career advising office early in their first year. “Start connecting with career advising staff so you can explore your interests early,” she says. “Students need to try and have a plan to graduate in four years. That means attending full time in the fall and the winter and even picking up classes in the summer.”

Some students earn early credit taking college level courses in high school. “I’ve met students who come to us almost as sophomores,” says Meyers. “Any time you can cut back on the number of years you need to be in college, you’re cutting back on your debt.” 

Community college and online classes are additional, often more affordable, ways to pursue credits toward a four-year degree. “I encourage students to first sit down with their adviser during their first or second year to make sure any community college classes they’re considering will transfer back,” Meyers says.

Visit your school’s financial aid office early and often for guidance on minimizing student loan debt, too, and to discuss repayment options as you near graduation. “The worst thing is to ignore your debt and go into default,” Meyers says. “That hits everything – your credit history, your ability to buy a car or rent an apartment. You don’t want to be in that situation. If you have questions about repayment, come to us. That’s what we’re here for.”