Money Management
Money at 30: The Student Debt Crisis and What Can Be Done
Whether you’re a Millennial, Gen Xer, or a Baby Boomer there’s a good chance you’ve heard a lot about student loans and debt as of late. Due to numerous factors ranging from the rising cost of tuition to a soft job market for graduates during and following the great recession, student debt has become a full-on crisis in America. As a result politicians are discussing future solutions, post-graduates are struggling with their options, and those who have yet to reach college age are planning ahead to prevent similar results. So what’s the deal with this student debt crisis and what can be done about it?
What our Presidential candidates are saying
The talk of student debt first became a hot topic during the presidential primaries as Senator Bernie Sanders called for tuition-free public colleges and universities during many of his stump speeches. Some have even suggested that this stance was a major force in getting young people behind his campaign and catapulting him into what became a fairly competitive race with former Senator and Secretary of State Hillary Clinton. Although Sanders lost the Democratic nomination to Clinton in the end, the conversation he helped start has continued with Clinton’s platform.
According to Secretary Clinton’s site, she intends to make all community colleges free while also suggesting a plan to allow students to graduate from public colleges and universities in their state without ending up in debt. Additionally Clinton has proposed cutting the interest rates on future student loans and allowing past borrowers to refinance. Meanwhile, on the other side of Sanders’ plan, Green Party candidate Jill Stein’s platform not only includes free education from pre-Kindergarten through university but also calls for the cancellation of all existing student debt.
Republican presidential nominee Donald Trump hasn’t been as vocal about student debt or college tuition during this campaign however he has mentioned giving past students the option to refinance their loans. This past July to told The Hill, “That’s probably one of the only things the government shouldn’t make money off — I think it’s terrible that one of the only profit centers we have is student loans.” He’s also alluded to other plans to help fix the student debt crisis but hasn’t offered specifics just yet.
Former New Mexico Governor Gary Johnson — who is running on the Libertarian Presidential ticket along with former Massachusetts governor Bill Weld — has also spoken about student debt and the reasons behind the crisis. While Johnson told Politico he’d consider lowering the rates for student loans he also suggests that it’s actually the availability of guaranteed government student loans that have caused tuition rates to inflate dramatically over time. Additionally, although the governor has made an appeal to Sanders supporters citing his liberal social policies, he has also made it clear that his fiscal conservatism would prevent any sort of plan for free college were he to be elected.
Even with all four of these candidates on the record about student loans and higher education, the topic continues to be a major factor especially among younger voters. As a result there is sure to be plenty more debate on the subject leading into November and potentially beyond once our new Commander in Chief takes office. So what are people to do in the meantime?
Managing your student debt
While free college education may be part of a solution for future students, what about the past graduates? After all, MarketWatch pegs student debt in the United States at over $1.3 trillion dollars, surpassing both credit card and auto loan debt. As a result millions of Americans are struggling with how to prioritize their student debt while making ends meets. Here a few things to consider when weighing your options.
Retirement or debt repayment?
One of the hardest questions facing graduates is whether they should sacrifice saving for retirement in order to pay down their student loans sooner. In the short term some may feel that lifting their burden of debt should take precedent over something like retirement that may be decades away. However that might actually be a financial fallacy.
There are two words graduates should keep in mind when considering their options: compounding interest. If a graduate were to put $100 a month towards retirement in an account that gained an annual return of 7% from the time they were 22 until they were 32, that would result in $174,217 by their retirement. However delaying those $100 contributions until age 33 would mean a total of only $155,307. In other words putting extra towards student loans instead of saving for retirement could actually cost you far more in the long run. As long as you’re making your regular payments and are able to meet your other financial needs, it’s probably better to let your student debt take its course while you save for the future.
Employers are getting involved
With more and more Millennials graduating college with massive debt, some employers are beginning to offer assistance as a way to attract top candidates. In fact MarketWatch recently speculated that such perks could be become as popular as 401(k)s. At the moment student loan repayment programs are in their infancy but, should they be as successful as many believe, it won’t be long until more employers begin offering these types of perks. It does seem like a logical next step since many companies already offer tuition reimbursement to help ease the financial burden college debts can put on those entering the workforce.
Budgeting and cost of living
Regardless of what you may read elsewhere, there really is no trick to getting out of your student loans or making them simply vanish. What it comes down to is learning about personal finance and how to properly allocate your money. The first step in doing this is to create a budget.
When you first draw up your budget be sure to include all of your essentials, such as your rent and utilities as well as any debts such as a car payment or, of course, your student loans. Once that’s done you can calculate how much you can spend in variety of other categories (entertainment, food, gas, etc.) while also ideally saving 20%, setting aside money for retirement, and building an emergency fund. Admittedly this can be pretty overwhelming at first so it may be best to monitor your spending for a couple of months first so you can then go back and see where cuts can be made.
Unfortunately, when all is said and done, you may find that you’re still struggling to keep up or get to a point of financial stability. This can be especially true if you live in an expensive urban area. If that’s the case you may want to consider relocating to somewhere cheaper that will allow you to get your financial bearings. At the end of the day it’s better to set yourself up for a successful future (including a potential move back to the big city) than it is to jeopardize your finances by living somewhere that’s out of your price range.
Avoiding student debt before it happens
If you could go back in time before you went to college, what would you do differently? As Millennials begin to have children of their own many are now asking themselves that question in order to prevent the same mistakes from happening twice. Just in case those political promises don’t come through, here are a few ways to help avoid student debt.
Save early
This may be easier said than done but it’s also the most important. Setting aside what you can, even if it’s only a small amount each week/month/year, can add up to a significant sum by the time high school graduation hits. As your child grows up you can also teach them to contribute as well especially once they get a part-time job.
Consider a less expensive school
A good education is an important thing to have, but are some universities really worth the cost? For example tuition at an in-state school could be significantly less expensive than shipping your child off to a “dream school” in another state. Furthermore the option of community college shouldn’t be overlooked. Often times these schools can prove a much cheaper option for students to complete their general education course before transferring to a university to pursue their major. Just be sure to know what credits are transferable ahead of time.
Scholarships
Scholarships can be great if you can get them. Luckily there are far more opportunities for free money than most prospective students and parents probably realize. In fact apps like Scholly have popped up to help students find scholarships that they qualify for, potentially saving them hundreds if not thousands of dollars.
Conclusion
As the 2016 presidential election approaches there’s a lot of hope that something will be done to fix the student debt crisis that so many find themselves a part of. Still there’s no guarantee that politics will really be able to fix anything. Instead what’s important is working to manage your student debt and/or help prevent the need for student loans in the first place. Only through hard work and financial sense will we the American people work our way out of this crisis once and for all.
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