September 2020 Blog -Freeing Yourself from College Debt.

By September 4, 2020 September 25th, 2020 Budgeting, Cash Management, Debt Management, Goal Setting

Freeing Yourself from College Debt

I[/nectar_dropcap].  have had the pleasure to speak to numerous high school seniors before they graduate. The topic I speak to them about is a common one we hear a lot today, “Adulting”. I so enjoy having the opportunity to give them tips on how to start thinking financially as they embark into Adulthood. Given the lack of personal finance education in our school systems, I cover topics such as budgeting, cash management and debt management. I am thrilled when I get asked that very important question, “How do you avoid getting into a debt crisis?”. My response time and time again is try to finish your college career with little to no college debt. We hear a lot about college or student loan debt in the media today. Statistically, we know that on average a recent college graduate will finish school with roughly $35,000 in loans and that is just for undergraduate education. Yet, very seldom are we told the even uglier truth about college debt.

 The Ugly Truth 

While the student loan crisis is worrisome, it only encompasses a small part of the college debt problem. Recent, data has shown that the majority of college debt is held by people 45-60+ years old. We have seen spikes in Social Security garnishment due to default of educational loans. There is a growing trend in foreclosures in zip codes where many households send kids to college. Why? Parents are selling the farm to help their children afford hefty college tuitions. Once upon a time owning your home free and clear was an attainable goal. Now, homeowners are pulling equity lines to help their kids afford going to college. Many times, part of retirement planning includes being on a budget that is mortgage free or funding retirement needs with proceeds from the sale of their home. This coupled with the fact that most Americans have grossly underfunded their retirement accounts is leading to a perfect storm..

Danger, Trap Ahead!

The best way to avoid being part of the college debt crisis is to not fall into that trap. Here is a little secret, college prices are just sticker prices. Any college search needs to be a family project with both parents and teen having a frank and honest conversation about available financial help. I oftentimes encourage parents to look at things beyond ranking when selecting schools like.
-Graduation rates and timeframes
-% of merit scholarship given
-% of need met by aid
-Avg. salary for preferred major

These factors will give you an idea of how much money the school may provide to help defer the cost of schooling and what your ability to payback debt would be after graduation.

Understand What the Rules

In some cases, having some portion of your college education financed by loans is unavoidable and that is OK.  Student and Parent Loans are what some may refer to as “Good Debt” since you are using the borrowed funds to build something greater. What I strongly suggest is that you look at all lending options, understand how interest will be calculated and what your repayment options will be. Having a clear idea of interest and repayment will help you budget after graduation so that you can pay back this money as quickly as possible. Lastly, it is imperative that you avoid dipping into retirement accounts and other lending sources. The cost of losing retirement funds and the high interest associated with certain other lending sources can have long term repercussions.

Breaking Free   

Like I said, at times having to incur some debt is understandable, but if you have done your due diligence and understand your debt you are on your way to breaking free. First, upon graduation, you will have a grace period before repayment starts on Student Loans. This will give you time seek employment if needed and create a budget that includes repayment. You will also decide on a repayment plan, if your lender provides multiple options. I favor the income repayment option, if that is offered to you, but it’s important that you look and analyze all the options. If needed, take time to discuss this with a debt counselor. Budgeting is key to being debt free. You need to account for loan payments the same way you would your rent. Once you have built up your emergency fund, take any surplus in your budget and make additional payments to pay down loans.

Freeing yourself of college debt is imperative to setting yourself on the path of financial independence. The Covid-19 crisis has moved the federal government to suspend loan payments and interest accruals on student loans. If possible, this is a great time for to make payment toward the principal of that debt. Either way, the goal is to understand that you college debt doesn’t have to be overwhelming and that you can through hard work and determination, free yourself.