Stu­dents, par­ents: Lend ear to loan facts

The Times-Tribune - - OP-ED - BY MICHAEL A. MACDOW­ELL GUEST COLUM­NIST MACDOW­ELL

Say­ing that the to­tal amount of out­stand­ing stu­dent loans in the U.S. is $1.5 tril­lion means lit­tle to most peo­ple. How­ever, know­ing that the av­er­age monthly pay­ment on a stu­dent loan is $351 means a lot more, es­pe­cially if you or a mem­ber of your fam­ily is one of the 44 mil­lion who are still pay­ing off your loan.

This can be a healthy por­tion of the dis­pos­able in­come of a young per­son. Stu­dent loan re­pay­ments have be­come such a large por­tion of young fam­i­lies’ fi­nan­cial com­mit­ments that many sug­gest they have led to a de­cline in house and auto sales.

So how do stu­dents and par­ents cope with col­lege costs and stu­dent loans? Most im­por­tant, think of a col­lege ed­u­ca­tion as an in­vest­ment. You are in­vest­ing in your­self. The av­er­age col­lege grad­u­ate makes $800,000 to $1 mil­lion more over a life­time than does an in­di­vid­ual with­out a col­lege ed­u­ca­tion.

Of course, those fig­ures are av­er­ages across all grad­u­ates, all jobs and all lo­ca­tions. Those who pur­sue a de­gree in ed­u­ca­tion can ex­pect to see an ini­tial salary like grad­u­ates with de­grees in ac­count­ing, but soon the salary of those with most busi­ness de­grees will out­pace that of teach­ers. That salary dif­fer­ence ac­cel­er­ates over the years. It would make sense for a fu­ture teacher to be more con­cerned about the amount she must bor­row than it would for a stu­dent pur­su­ing a de­gree in ac­count­ing.

Also keep in mind av­er­ages can be mis­lead­ing; 40 per­cent of the $1.5 tril­lion in stu­dent loan debt was bor­rowed to cover the cost of grad­u­ate/ pro­fes­sional de­grees. It stands to rea­son that those with ad­vanced de­grees earn more money and hence the loan re­pay­ment is eas­ier for them than for those with an un­der­grad­u­ate de­gree.

It cer­tainly pays to look at the type of loan a stu­dent is pur­su­ing. Sub­si­dized Stafford loans and all Perkins loans are awarded based on fam­ily in­come; how­ever, any­one is el­i­gi­ble for a non-sub­si­dized Stafford loan. But in­ter­est on sub­si­dized Stafford and Perkins loans is paid by the govern­ment while a stu­dent is in school. In­ter­est on a non-sub­si­dized Stafford loan be­gins to ac­crue im­me­di­ately.

All fed­eral loans re­quire a stu­dent and his fam­ily to file a Free Ap­pli­ca­tion for Fed­eral Stu­dent Aid form. A new app was just made avail­able, ef­fec­tive Oct. 1. It fa­cil­i­tates this process sig­nif­i­cantly.

Ob­vi­ously, the best way to avoid sub­stan­tial col­lege loan debt is not to bor­row. The es­tab­lish­ment of 529 sav­ings plans by the IRS in 1996 pro­vides that op­por­tu­nity to a par­ent or oth­ers, to place money in a state spon­sored sav­ings plan where it earns tax-free in­ter­est un­til it’s used for ed­u­ca­tional pur­poses. This is a great way to help stu­dents pay for col­lege up­front and forgo col­lege loans.

One point to keep in mind. The amount of fi­nan­cial aid that col­leges give to stu­dents is par­tially de­pen­dent on the fam­ily’s wealth. The more as­sets a fam­ily has the less fi­nan­cial aid a stu­dent re­ceives. Even 529 sav­ings count as an as­set. How­ever, a par­ent-owned 529 is el­i­gi­ble for the As­set Pro­tec­tion Al­lowance that re­duces its neg­a­tive im­pact on fi­nan­cial aid awards. To take ad­van­tage of this, 529 ac­counts owned by some­one other than a par­ent should be trans­ferred to a par­ent prior to its use.

Re­cently some col­leges have in­tro­duced an al­ter­na­tive to fi­nance a stu­dent’s ed­u­ca­tion called an In­come Share Agree­ment. Un­like tra­di­tional loans, in which stu­dents pay down prin­ci­pal and in­ter­est un­til the loan is sat­is­fied, In­come Share Agree­ments en­cum­ber a per­cent­age of a stu­dent’s fu­ture in­come for a set pe­riod. This risk-shar­ing tech­nique gives col­leges and grad­u­ates the in­cen­tive to find well-pay­ing jobs.

Above all, to avoid high col­lege loan pay­ments se­lect a school that has a good track record of on-time grad­u­a­tion. Tak­ing ex­tra semesters to grad­u­ate adds to your to­tal loan obli­ga­tions and takes away the in­come you would re­ceive if you were work­ing full-time rather than at­tend­ing class for an ex­tra se­mes­ter or two.

Michael A. Macdow­ell is pres­i­dent emer­i­tus of Mis­eri­cor­dia and manag­ing direc­tor of the Caltin K. Kan­zan­jian Eco­nom­ics Foun­da­tion.

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