Got money? Save some of it for college

“If you can save for college, you probably should.”

That’s the mantra I’ve chanted in columns, speeches and interviews over the years. An article in today’s Wall Street Journal shows a lot of upper middle income parents aren’t listening, gauging by the amount of student loan debt they’re taking on. What the Journal found:

  • Among households with annual incomes of $94,535 to $205,335 (80th to 95th percentile of all households), 25.6% had student-loan debt in 2010, compared to  19.5% in 2007. Among all households, 19.1% had education debt in 2010 compared to 15.2% three years earlier.
  • The amount borrowed by upper middle income households rose to $32,869 from $26,639, after adjusting for inflation.
  • Fat student loan bills are no longer an anomaly. More than three million households have a student loan balance of $50,000 or more. That compares to about 794,000 in 2001 and less than than 300,000 in 1989, after adjusting for inflation.

The Journal threw in another statistic: More than one in three households with incomes of $95,000 to $125,000 who had a child entering college in 2011 didn’t save or invest for that child’s education, according to a survey by Human Capital Research.

Here’s the deal: A child’s financial aid package will be based in large part on what the parents earn. If they have a six-figure income, or close to it, the kid won’t get much help. Colleges expect that if you have that much income, you should have been saving some of it for education–whether or not you actually did.

Even families with lesser means could find they’re getting a lot less help than they expected, with much of it coming in the form of loans rather than grants.

Either way, that means the parents, the kid or both could be taking on a lot of debt.

The Journal suggested that this burgeoning debt may lead more families to more carefully consider cost and value when considering colleges, something that “could make it difficult for all but the most selective schools to keep pushing through large tuition increases.”

We’ll see about that. In the meantime, if you’re lucky enough to have a decent income, consider putting at least some of it aside for your kids’ educations. Do it even if you won’t be able to pay for everything, or you want your kid to be mostly responsible for the cost. Every dollar you save is a dollar your child–or you–won’t have to borrow later.

 

How to make headway on student loans

Dear Liz:I owe $75,000 in student loans. It took me seven years to graduate from college due to a car accident that happened during my second year. I am now 30 and doing all I can, working 12 to 14 hours a day, but I’m not making any headway. Most if not all of my loans have gone to collections. I get the phone calls, sometimes up to 30 a day. I need some advice on how to handle all of this. It is so overwhelming. Is it possible to consolidate all of this? Make one monthly payment to one entity?

Answer: You can consolidate your federal student debt into one loan and stretch out the repayment term, which could make the debt easier to pay. You may also qualify for the income-based repayment option. Most borrowers in the income-based plan have payments that are less than 10% of their gross incomes, said Mark Kantrowitz, editor of FinAid.org and author of “Secrets to Winning a Scholarship.” After 25 years of payments, you would qualify for forgiveness of any remaining balance. The payment period is shortened to 10 years if you’re in a public service job.

Private student debt isn’t nearly as flexible. You typically can’t consolidate private student loans, and lenders offer fewer repayment options — and no forgiveness.

If you have both types of debt, you may be able to make some progress on repayment by consolidating your federal loans and paying the minimum possible on those so that you can throw every available dollar at your private loans.

If you have only private debt, you’ll need to negotiate directly with your lenders to see what options are available for more affordable repayment plans. It’s important to do this as soon as possible, since if your delinquency drags on for nine months your loans will be considered in default. That can have serious consequences for your credit history and your finances.

The National Consumer Law Center’s Student Loan Borrower Assistance Project has a lot of information and resources for student borrowers, including information about loan rehabilitation and negotiating with lenders. You can also talk to the Default Resolution Group at the U.S. Department of Education by calling (800) 621-3115.