The tough facts about Student Loan Debt

Peter A. ScilovatiSeptember 27, 2019

College Planning

At HFA, we are charged everyday with assisting our clients with retirement planning, investment management, and tax planning. Another planning topic that continues to create more and more anxiety for our clientele is their children’s education. In this blog, we like to highlight some of the research that has been attributed to this daunting challenge.

Let’s start with some facts….

For the first time in U.S. history, total student loan debt has exceeded credit card debt – by over $1.6 trillion. There are currently 44 million-plus student loan borrowers in the U.S.

Sadly, we’re seeing an average over $37,000 in student loan debt per student at the time of graduation.  Additionally, 65% of college seniors who graduated from nonprofit colleges in 2017 had student loan debt. The latest tally also shows that at least 3.4 million parents have taken out federal loans (in their name) on behalf of their children for a total of nearly $90 billion. This doesn’t include borrowing through home equity loans, credit cards, or other sources of credit.

Previous debt crises have taught us it is better to address the risk sooner rather than later. As Americans search for answers, crippling student debt could double by 2025, ballooning to $3 trillion, reducing economic life choices and further highlighting the sad financial fact that students accumulate much more than just knowledge, friends and diplomas when attending college.

Over the past decade alone, college enrollment of high-school graduates has reached 67% and student-loan debt has more than doubled. To meet this demand, federal government and private lenders have ramped-up lending.  Each quarter, students (and cosigners) add $30 billion in new debt at interest rates as high as 13%.

According to Bloomberg, tuition, room, board and fees have increased by more than 1,200% over the past 35 years. A little more than a decade ago, there were a couple dozen colleges whose total costs had eclipsed $40,000 per year. Today, those same schools – and dozens of others – have now crossed the $70,000 per year mark –that’s more than $280,000 to educate one child! Tuition, along with room and board, was approximately $11,000 per year at most private schools back in the mid-1980s. That same school now charges more than $55,000 per year. Even public institutions now exceed $100,000 over four years in California, New York and many other states. Long gone are the days when a student can work during college and, upon graduation, emerge with no debt.

Unfortunately, tuition costs have climbed while wage growth has not kept pace. Since the 1980s, the average cost of college has increased almost eight times as fast as wages, leaving a widening financial burden to meet. Subsequently, student loan debt has seen almost 157% growth since the Great Recession, representing the fastest-growing portion of the total household debt in the U.S.

As of 2018, roughly 1 out of 10 people with student loans were late or completely missed their payments. That’s the highest 90-plus day delinquency rate of all household debt—outranking auto loans, credit card debt and mortgages.

Overall student-loan default rates, even in this relatively strong economy, are now 10.8%. A decade ago, it was half that.  A recent Brookings Institution study forecasts default rates could be as high as four out of every 10 students by 2024. Should the economy slip into recession, defaults will spike further threatening the prospects of aspiring graduates. With government grants and support for post-secondary education having failed to keep pace with increases in college costs we see why the burden has deepened for American families.

We find that although more Americans are saving for college than ever before, many are doing so without a realistic goal in mind. According to Fidelity’s College Savings IQ survey, 72% of parents said they were currently saving for college, but 45% admitted that they aren’t sure how much they should be putting away. Yet, according to the Fidelity survey, when parents of high schoolers were asked what they thought the sticker price of college for their children would be, they were off by an average of $70,000.

Most of the clients with whom we work have saved a healthy amount in their 401(k), IRA or other qualified retirement plans. Some teachers and/or public employees have pensions. Rather than save the maximum of $19,000 per year (or $25,000 for people over 50) in their qualified retirement plan, we find some of our clients diverting a portion of those dollars into a college savings vehicle. In fact, more than 30 states, including New York, Pennsylvania and Illinois, offer a state tax deduction or credit for contributions to their 529 college savings plans. While the retirement tax math still favors full 401(k) contributions, the amount of college loans parents and students need will be significantly reduced.

Moreover, because parent assets are counted at a maximum of only 5.64% of their value in the financial aid formulas, saving more will have only a minimal effect on a family’s expected family contribution.

We ask our clients and their friends to continue to reach out to us as we can help evaluate options for education savings and implement a strategy to maximize tax benefits and help you support your children’s education.


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