July 31, 2012

Rising Student-Loan Debt: What Can Families Do?

ORLANDO, Fla. Bill and Susan Fay thought they had played all the right cards to get their children through college debt-free: savings, Bright Futures scholarships, thriftiness and hard work.

Then came cuts in the state’s education budget, higher tuition and soaring living costs for students. And then Bill was laid off from his job as a communications writer for Lynx, the region’s bus agency.

Now the Orlando family has taken out thousands of dollars in student loans to cover the expected shortfall in school funds for their two older sons — Dylan, a senior at the University of Florida, and Max, a freshman this fall at Florida State University.

“We’re still in pretty good shape. We know everyone will get through this OK,” said Susan Fay, an elementary-school art teacher. “But I won’t kid you — it’s tough.”

It’s tough for many Americans these days, as total student-loan indebtedness recently topped $1 trillion for the first time. And in Florida, where higher education at state schools has long been considered a relative bargain, average student-loan debt is growing faster than almost anywhere else in the country, according to a recent report by the nonprofit Project on Student Debt.

Still, there are steps you can take to avoid student-loan “debtor’s prison,” experts say, whether you are supporting college students now, planning ahead for young children or going back to school yourself to prepare for a new career.

“Getting some good advice in the beginning can help you keep out of a really bad situation,” said Karen Carlson, director of education for InCharge Debt Solutions, an Orlando-based consumer-credit counseling service.

“If you take on a huge student-loan debt, it can cause financial catastrophe if you already have a lot of debt in other areas, such as mortgage, credit card and auto loans,” she said. “It will hit especially hard if you lose your job, have health issues or face other unexpected events.”

To avoid the student-loan debt trap, there’s no substitute for a savings plan that’s established long before the first college bill comes due. Many people have used tax-exempt educational-savings accounts through the years, though they have fallen out of favor more recently because of lackluster returns. Some have turned to Roth IRAs, which allow you to withdraw principal tax-free if it’s spent on educational expenses.

Although its value has eroded in recent years, the Florida Prepaid College Plan is still one of the best deals in the country for people who plan far ahead. The plan, which allows you to pay for a child’s tuition, room and board in current dollars, for use years down the road, is also one of the biggest such programs in the country.

“This plan used to be a much better deal three or four years ago, but rising costs have forced repricing, and the terms are not as attractive,” said Dennis Nolte, a Winter Park financial planner and senior vice president of Capital Guardian Wealth Management. “But if you want to fix your college costs upfront, this is the exact way to go. We still have one of the country’s most affordable, high-quality university systems.”

According to Nolte, people should take a multifaceted approach to managing college expenses, to minimize their reliance on student loans. Among other things, they should comparison-shop among schools, consider the financial virtues of community colleges, and do a serious cost-benefit analysis of selected degrees based on their salary potential in the workplace.

Parents should also engage their children in the financial-planning process for college early on, instilling a work-and-savings ethic and setting specific financial targets for them to aim for.

“I’m not sure why, but a huge number of my clients feel an obligation to pay all of their kids’ college costs,” said Nolte, who advises many affluent investors. “It is surely a value judgment, but there’s a lot to be said for what you learn while working your way through college.”

For Bill and Susan Fay, that was part of the blueprint for their three sons’ college educations: Dylan, the UF senior, has worked every summer at Universal Orlando’s Islands of Adventure theme park and now works a shift in a UF library. Max, the FSU freshman, worked throughout high school for Publix Super Markets and plans to continue a part time job in Tallahassee.

Everyone in the family, including the youngest son, Luke, has been involved in saving for college and living frugally. They take few vacation trips, use “rabbit ears” to watch free broadcast TV instead of subscription cable and drive the family cars for a decade or more.

And while forced now to take out students loans, the Fays still think all that hard work has paid off. Dylan, for example, will graduate next year with about $4,000 in student loans to repay, compared with an average debt of more than $21,000 for Florida college graduates overall.

“We’ve played it pretty tight,” said Bill Fay, a former sports writer in Orlando and Tampa who joined Lynx in 2004. “We made it clear early on that getting an education would be a priority for our family. Our children were willing to make sacrifices because they knew we would do what it would take to make that possible.”



Preparing for college expenses:

Set up tax-exempt accounts (Roth IRA or 529 Plan) to start saving early for college.

Involve the child early on in working and saving for college.

Consider the Florida Prepaid College Plan; it’s not nearly as attractive as it used to be, but it still locks in most tuition, room and board at current prices.

Avoid dipping into retirement accounts, using credit cards or taking out private, Parents PLUS loans to cover educational costs.

Consider staying in Florida, where the public community-college and university systems are still among the most affordable in the U.S.

Encourage the child to earn a Bright Futures scholarship; even with recent cutbacks in the program, the state-funded aid, based on a student’s grade-point average, still covers a big chunk of the tuition and fees.



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