By Susan Tompor
Detroit Free Press
WWR Article Summary (tl;dr) While some budget-friendly repayment plans make sense to help you avoid defaulting on your student loans, paying as little as you can now could dig you deeper into debt. Beware.
Detroit Free Press
Who wouldn’t want to see their college loans paid off by a billionaire benefactor? Or even take part in a TV game show to pay off all that college debt?
Nearly 400 graduates in the Class of 2019 at Morehouse College in Atlanta will receive a stunning graduation gift, all their college debt wrapped up and paid off by Robert F. Smith, who started out as a chemical engineer and later founded the technology-focused investment firm Vista Equity Partners.
And truTV’s “Paid Off with Michael Torpey” returned in May with new episodes at 10 p.m. on Tuesdays. The comedy game show puts college graduates to a trivia test. The ultimate prize: Enough cash to pay off the winner’s college debt. The highest total winner from past episodes was Jess Kim, who won $62,758. Now, TV viewers also will have a shot at winning up to $3,000 to put toward their own student debt.
The idea of paying off someone’s college debt is one worth emulating. Maybe it’s time that billionaires pay it forward by picking up the tab for a bunch of student loans, instead of writing a check for yet another monument on campus. It’s a thought.
It truly is time to let go of the notion that today’s student can carry the full cost of college by working full time in the summer, taking a part time job during school and taking on a small amount of student loans. It’s just not cutting it for many families, even those at some state universities, given the fast-rising cost of college.
More companies are starting to realize the financial stress facing student loan borrowers. And some employers have added benefits programs to help pay down student loans.
About 65% of college seniors who graduated from public and private nonprofit colleges in 2017 had student loan debt, according to the Project on Student Debt. Borrowers owed an average of $28,650, roughly 1% higher than the 2016 average. Updated figures will be released later this year.
Based on that 2017 data, the average debt for graduates from the private, historically black, all-male Morehouse College then was $31,833, with 80% of graduates carrying student loan debt.
By comparison, graduates of the private Alma College in Michigan had an average debt of $39,264. And Albion College’s average debt per borrower was $44,140, based on data from the Institute for College Access & Success and its Project on Student Debt.
The average debt per borrower was $25,712 at the University of Michigan and $32,310 at Michigan State University in 2017, according to the report.
How gifts help
The sooner the debt is paid off, of course, the less interest builds over time. So it does help when a gift, maybe from parents or even some companies that now offer to help pay off student loans, cuts into the outstanding student loan balance.
Smith’s unprecedented proclamation during his commencement address this spring is a huge break.
“Instead of devoting thousands of dollars a month to student loan payments or being in an income-driven repayment plan for decades, they will now be able to invest in themselves,” said Mark Kantrowitz, publisher and vice president of research for Savingforcollege.com.
So many doors can open up to those without college debt.
“My first thought when I heard the news is what an amazing graduation gift!” said Lynita Taylor, diversity and inclusion program manager at the Mike Ilitch School of Business at Wayne State University.
“College can certainly be seen as a worthy investment,” she said, “but the staggering amount of debt you can accrue while pursuing that investment is heartbreaking.”
“Hopefully these young men will utilize this gift to take bold, advantageous next steps,” Taylor said.
“It’s so easy to take any paid position when you’re a new graduate with significant debt over your head. But with a clean slate, maybe they can take the ‘dream’ job or start their own business. The pathway of opportunity just got even wider for these graduates.”
Yet while such a gift is wonderful, most people can’t bet on a quick fix to the $1.5 trillion in student loan debt that’s outstanding nationwide.
“You have to make your own luck,” Kantrowitz said.
Here’s a look at three more gifts you might give yourself when it comes to student loans.
Skipping the grace period
College grads receive a six-month grace period before they have to start paying down student loans. Getting a diploma in May means many will begin to repay those loans in November.
But if you have unsubsidized federal student loans, the interest keeps building during that six-month period.
If you have $25,000 in college loan debt at graduation, you’re talking about saving $795 if you have a loan rate of 5% and immediately make amortized payments after graduation, instead of delaying six months, to pay off that debt in 10 years, Kantrowitz said.
On $25,000 in college debt, Kantrowitz said the monthly payments would be $265.16 if you immediately enter repayment. That would go up to $271.79 per month if you defer repaying during the grace period and then have the $625 in interest added to the loan balance.
Track down your loans
Odd as it might sound, you need to know how much you owe and to whom. Create an account on the Federal Student Aid web site at Studentloans.gov to start.
You’d want to create an account with each loan company listed on the FSA site. Doing so will allow you to find your monthly payment for each loan servicing company and track your payments over time.
If you don’t track your student debt, you might overlook a loan and end up accidentally defaulting.
Once you begin repaying your college debt, sign up for automatic payment plans that can take a bit off the interest rate that you’d pay.
Make sure you talk with your parents to understand who will be repaying the Parent PLUS loans.
Parent PLUS loans are increasingly part of the picture when it comes to student loan debt.
Annual student loan borrowing peaked in 2010-11 and has declined for seven years in a row, to $105.5 billion in 2017-18, according to Credible.com.
But loans taken on by parents have grown.
Even after adjusting for inflation, PLUS loan borrowing has grown by 17% in the last seven years, to $23.1 billion. Private student lending has picked up even faster, growing by 36% to $11.6 billion, Credible.com noted.
In 2017-18, the parents of undergraduates borrowed an average of $16,452 in Parent PLUS loans, according to a recent Urban Institute analysis.
Kantrowitz noted that the figure involving Parent PLUS loans for Morehouse grads is almost double, at $29,167.
Dependent students who borrow the maximum amount of loans allowed are more likely than others to have parents who also borrow, according to the study.
“Parents appear to use PLUS loans to help fill the gap between the aid a student receives (both grants and loans) and the cost of attendance,” the Urban Institute study noted.
In some cases, parents are expecting that their adult offspring help to eventually pay off those loans.
Be careful
While some budget-friendly repayment plans make sense to help you avoid defaulting on your student loans, you need to realize that paying as little as you can now could dig you deeper into a debt.
To be sure, income-driven repayment plans can make a good deal of sense for many new college graduates who start out in a low salary but expect to see their paychecks grow significantly over time. Such students benefit by making small monthly payments now and bigger monthly payments later when they’re better able to afford it.
And in some cases involving an income-driven repayment plan, Public Service Loan Forgiveness could cancel the remaining debt after 120 qualifying payments, or 10 years or more of payments. But not everyone qualifies and the rules are complex.
And what about students who are stuck in low-paying jobs for years and years? They’re deferring making higher payments each month, while the interest is building and building under an income-driven plan.
Opting for the standard repayment plan for federal loans would trigger slightly higher payments than income-driven plans. Yet over the long run, you’d pay off your loan sooner and pay the least amount of interest.
College graduation season should remain a time of happiness and hope. But the reality is most grads really need to think about paying off those student loans nearly minutes after they take off that cap and gown.
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ABOUT THE WRITER
Susan Tompor is the personal finance columnist for the Detroit Free Press.
