The following article is a guest post from Paul Combe, President and CEO of Boston-based American Student Assistance.
According to recent Experian research, student loans were the only type of consumer debt to increase during the recession, growing 84 percent from 2008 to 2014. Today, 40 million Americans carry college loans. The average borrower has nearly four different student loans for a total of $29,000.
Keeping track of multiple loan payments and high debt can mean a rough financial start for newly minted college graduates. Evidence is mounting that student debt could be getting in the way of our economic recovery, as growing numbers of millennials delay forming their own households under the weight of their student debt burden.
But amid all the student loan doom and gloom is this stark reality: higher education remains the key to unlocking the American Dream. It remains the surest path to individual prosperity and economic mobility. College graduates still enjoy far greater earnings and far less unemployment than those with no college degree. In fact, Experian’s data show 18- to 34-year-olds with student loans make an average annual income of $42,000, vs. $34,000 for all credit active consumers in the same age group.
A college-educated workforce also contributes more in income tax, relies less on government-provided services, and overall helps the United States retain global competitiveness.
In short, how do we reconcile these two things – the national need for a qualified, educated workforce on one hand, and on the other the need of the workforce to take on substantial amounts of debt to achieve that education?
One answer is to teach students how to make the debt manageable. Sensational media coverage aside, student debt actually is controllable when students and graduates have the financial know-how, tools, and advice to cope with it. According to Experian, consumers aged 18-34 with at least one open student loan have credit scores 20 points higher than those without student loans, indicating that student loans can help build and establish credit for young adults. High scores also suggest that responsible student loan borrowing will potentially increase their scores and the ability to get credit in the future.
At the nonprofit American Student Assistance®, we run a free-to-the-user educational resource called “SALT™” that provides students the money knowledge for college and beyond that they need to pay for and pay back college costs. SALT teaches three principles that all student loan borrowers, past and present, should live by:
Borrow less. What’s the best way to manage debt? Not have it in the first place. That doesn’t mean you have to downsize your college plans or always go for the cheapest education possible. What it does mean is that you should exhaust all “free” financial aid, like grants and scholarships, before you turn to loans. Always fill out the Free Application for Federal Student Aid (FAFSA), even if you don’t think you’re eligible for any federal aid. And if you’re borrowing to cover costs of living in addition to tuition, fees and books, remember the old adage to live like a student now so you don’t have to after graduation.
Borrow smarter. Not all student loans are created equal. Federal student loans offer very flexible repayment terms that allow you to suspend or lower your monthly payment in times of unemployment or economic strain. Private student loans generally don’t offer the same repayment rights. Be mindful of the type of loan you’re borrowing and ask upfront about the repayment arrangements. A general rule of thumb is to always take out federal loans first and turn to private loans as a last resort.
Repay well. Your student loan choices don’t end at the application process. Federal student loans come with a plethora of repayment plans that you need to thoroughly research and investigate, from spreading out payments over the standard 10 years, to extending the payment term, to paying interest-only for the first few years, to basing payment on your income. Evaluate all your options before you begin repayment, and then be sure to evolve your payment strategy as your economic circumstances change over the years.
Bottom line: Policy debates about college costs and the value of education will rage on for years, but we can improve our nation’s student loan situation right now by teaching student borrowers how to make smarter decisions along every step of the student loan process.
Paul Combe is President and CEO of Boston-based American Student Assistance, the nonprofit creator of the free educational resource SALT™ that provides students with money knowledge for college and beyond.