College debt has a ripple effect
Itís amazing what a difference having the sun out on a cloudless day can do for oneís spirit. Add to that a warm summer day, a balmy breeze, a pair of flip flops and no question, the liviní is easy. Iíll admit that summer is my favorite time of year, which is rather odd coming from a third generation Vermonter. Indeed on a cold January day when the world appears to be frozen solid and it is dark outside before 5 p.m., I think back to the long days of July when there was life on the trees and take comfort in knowing that the lake will thaw and the green mountains will once again be green.
I was reminded of how fleeting the summer is this morning when I was discussing the potential for a couple of days for a family vacation in August with my husband. First week was out; first weekend a soccer tournament; second week a work conference for me; second weekend more sports commitments and, oh yes, then we have to begin packing up our oldest son for college. Well, I guess that about takes care of August. Packing. College. Where did the summer go?
It hasnít gone yet but when planning itís amazing how quickly in our minds the weeks fly by.
On a summer weekend, the last thing any of us want to do is think about anything serious. And money is usually pretty serious business. Soon many Americans will be faced with their children beginning or returning to college and the seriousness of financing that educational experience, which can be daunting.
The College Board reported that for a ďmoderateĒ college budget for the 2012-13 college year, the cost of an in-state public college was $22,261 and for a private college, the cost was just under $43,300. A few quick calculations and we are talking anywhere from $85,000 to $200,000 for a four-year education depending on travel and incidentals.
And wouldnít you know it, even the interest rate on a college loan has become a political football. Just yesterday, it appeared that the Senate was ready to offer college students and their families a lower rate on their loans this fall. Clearly no one running for re-election next year wants to be branded as someone who is looking to solve our financial deficit on the backs of college students but it hasnít been easy to get both sides of the Senate and President Obama to agree on an interest rate. Again, it appears a deal has been reached that would make it possible for undergrads to borrow at 3.85 percent, grad students at 5.4 percent and parents to get a loan at 6.4 percent. No guarantees about the future; they warn rates will probably go up. The House has already reached an agreement on rates, linking them to the 10-year Treasury note rate.
Bottom line, the deal will reduce the deficit by $715 million over the next decade. At the same time, the student loan debt in this country is over $980 billion at last count.
Some might argue what is a difference between loans at 4 percent or 4.1 percent versus 3.85 percent? The difference can be felt in every major sector of the economy. Students living at home because they canít afford rent and the dream of home ownership remains just that. Living paycheck to paycheck, they canít buy a car, start a family or save money. Student debt has tripled in the past nine years. A survey by the American Institute of CPAs noted that just under half of all recent grads with student debt are postponing saving for retirement because itís just out of their reach. Remember these young people are the future of our economy and itís their ability to save and spend that fuels our future growth and economic expansion.
Financing college is a matter of educating oneself early in the game and looking under every proverbial rock for scholarship money and savings plans that one can. When taking that first job, factor the gravity of your college loans into your budget. Itís easy to forget when you donít have to begin repaying the loan in the first few months after college.
Despite the cost, college still remains an important investment in oneís future. Plan now, spend wisely and manage your debt with awareness.
Karen Paul is a Vermont financial advisor.