Did you know that how much student debt a person is likely to have varies greatly depending upon which state you live in? According to the Institute for College Access and Success, the highest level is in Connecticut, where the average student debt is $38,669. The lowest is Utah, at $19,728. Florida is among the lowest states for student debt, at $24,428. Nationally, in 2017, 65% of graduates had debt with an average amount of $29,200. The state with the highest percentage of students with debt is New Hampshire, where 76% of graduates owe money. This does not count the numerous students who have debt and no degree. *
There is a tremendous need for planning, so first, the basics. College planning should be part of both financial and estate planning. How to plan will depend upon the financial condition of individuals and their families. Many grandparents may wish to gift money out of their estates, and many are familiar with the $15,000 annual gift-tax exclusion which allows for tax-free transfers to as many people as they like. What many people do not know is that they can front-load five years of gifts, in other words, $75,000, when made to a qualifying 529 plan. Couples can contribute twice that amount, or $150,000. These plans grow tax-free when used for qualifying educational expenses. These plans are very flexible and I shall discuss them further in later financial tips, since the rules are complicated.
For those who do not have grandparents with either the need or desire to front-load college plans, we should begin saving for college upon the birth of our children. Again, this will depend upon our own financial condition and should be part of the plan. When considering savings, we should be realistic about costs and whether we want or need private versus public educations. This is where your state of residence is important. Many of the states with low average student-debt levels also have great university systems and programs. Florida and California come to mind, so we need to familiarize ourselves with these options.
When we are ready to apply for college, we should determine our eligibility for student aid by submitting the Free Application for Federal Student Aid (FAFSA). A tremendous amount of free information is available at https://studentaid.ed.gov/sa/fafsa. You can also get myStudentAid as a mobile application.
Should loans be necessary, we strongly recommend that clients make themselves aware of the difference between public and private loans. Federal student loans are the least risky and the most flexible and can provide:
- Grace periods
- Deferments
- Forbearances
- Consolidation
- Cancelation or discharge
- Extended payment plans
- Income-driven repayment plan
- Forgiveness for public service.
Finally, should you choose to take out a private loan, be aware that the terms are based upon the credit worthiness of the borrower, there are few protections, and rates may have no caps. Since these are credit-based contracts, parents and grandparents are often pressed to cosign. Be careful, cosigners are on the hook for the entire balance, put their own credit-worthiness at risk, and can reduce their own availability to credit should they need it.
* Veronica Gonzalez, Lindsay Ahlman, and Ana Fung. (p. 11)“Student Debt and the class of 2018” The Institute for College Access & Success. https://ticas.org/wp-content/uploads/2019/09/classof2018.pdf.This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-nd/3.0/ or send a letter to Creative Commons, PO Box 1866, Mountain View, CA 94042, USA.