Did you know the class of 2015 set a new record as the most indebted class of college graduates so far? It's estimated that graduates who took out student loans will, on average, owe a total of around $35,000 by the time they finish school. When combined with the loans parents took out on their behalf, the numbers add up to 10 times more in student loan debt since 1994.
Did these graduates and parents understand how much debt they would take on at the onset of their college journey? Maybe. Maybe not. Choosing the right school is important, and many students only consider what they want to achieve from going to school—whether that be a better job, a promotion, or making more money to afford that bigger house or family vacation. But, determining just how much debt you're willing to take on for yourself or your child, plus understanding how much time it will take to pay back, should also be an equal part of the decision-making process. Here are some things to keep in mind.
Traditional college institutions are becoming more and more expensive. Not only is tuition rising, interest rates are also expected to increase and may become unpredictable now that they are no longer fixed rates set by Congress. Interest rates are now tied to the US Treasury 10-year note, which means that when the Treasury note rates go up or down, so will federal student loan rates. Based on Congressional Budget Office projections, rates on undergraduate loans will increase to 5.72%, up from the 2014–2015 rate of 4.66%.
According to statistics from the Department of Education, more than 1 in 8 outstanding loans are in default, and more than 1 in 5 borrowers who should be making payments on their loans are one year or more behind. In 2014 alone, half a million Americans defaulted on their student loans.
If you default, the government can actually withhold up to 15% of your income and they might tack on a 16%-25% collection fee on the total current amount due. Not only are your wages at risk, social security payments and tax refunds can also be withheld – even your spouse's tax refund can be withheld if you default!
Defaulting can make it nearly impossible to buy a new home, car, rent an apartment – it could even stop you from signing for your own cell phone. Unlike consumer debt, which can sometimes get wiped away by filing for bankruptcy in cases of hardship, student loans fall into their own special category and likely won't be dismissed.
A lot has changed in higher education and the U.S. economy during the past decade. While many factors pushed the price tag of a degree to increase significantly, others such as effective career education and online learning have helped make college an attainable, affordable option by significantly reducing or eliminating the cost of transportation, living expenses and textbooks. Today, there's no one-way approach to a college education – but there are a variety of ways to finance it, including options that won't bury you in debt.