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Smart Moves to Minimize Student-Loan Debt

The number of college students who take out loans is on the rise, and millions of students remain in debt into their 40s. New rules make it easy to borrow, but they obscure your loan obligations. However, strategies exist to avoid piling up debt to pay for college.

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Abraham Mulberry is a freshman at Elmhurst College in Illinois, but he and his parents already have gone $8,000 into debt to pay for his education.

Considering that he has at least 3 more years ahead of him and plans to enter law school after that, Mulberry is on track to end up owing nearly twice as much as the average student who borrows for college. This comes despite help from his parents and his earnings from his summer job as a lifeguard.

Plus, he says, in a sagging job market, he has no way of knowing whether the investment even will pay off. “I may end up getting the same job I could get now at McDonald’s, except with $40,000 to repay,” he fears.

That adds a lot of worry to the typical stress of higher education. Mulberry hears about people “who are in their mid-30s, and they’re celebrating finally paying off their last college loan. Is that going to be me, except when I’m 45?”

Odds are that the sea of red ink will get only deeper for Mulberry and his generation. The price of tuition and room and board has increased by 42 percent above the rate of inflation at public 4-year colleges and universities since 2000 and by 31 percent at private nonprofit institutions, according to Department of Education. Student-loan debt has jumped by 511 percent during the same period, according to Department of Commerce’s Bureau of Economic Analysis (BEA). About 5.7 million people ages 40–49 still are paying off their student loans, BEA says, which is about 16 percent of the 37 million people overall who have outstanding student loans, according to Federal Reserve Bank of New York. The average debt per student increased by $3,700 between 2008 and 2011 alone, according to Project on Student Debt, which is an initiative of Institute for College Access & Success (TICAS). That rise outpaced the growth of average household income, Social Security Administration reports.

In 2012, the average student-loan debt was $27,253, which is up from $17,233 in 2005, according to credit-score agency Fair Isaac (FICO). That’s a whopping 58 percent increase.

According to a January 2013 survey by FICO, at least 15 percent of loans now are delinquent, which means that they are at least 90 days overdue. The number of student-loan delinquencies rose 22 percent during the past 5 years. More-recent figures haven’t been finalized, but experts believe that the pace of delinquencies has accelerated since the 2008 economic downturn. The number of people who are in big debt is rising, too: About 1.2 million individuals have student-loan debt of at least $100,000—at least three times the number that owed that much in 2005.

In the face of these trends, a federal income-based repayment program that’s called “Pay As You Earn,” which was announced in 2011, allows federal student-loan borrowers to cap their monthly payments at 10 percent of their income and have their loans forgiven altogether after 20 years—an improvement over the previous limit of 15 percent and forgiveness after 25 years.

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Department of Education also introduced other changes to tackle student-loan debt. In 2011, it began to require colleges to report the average debt and loan-default rates of their graduates. We believe that this forced transparency means that it now is in schools’ self-interest to help students to avoid loan debt and loan defaults, because applicants presumably would avoid the institutions where students take on the most debt or are most likely to default.

The College Scorecard, which Department of Education launched in February 2013 (collegecost.ed.gov/scorecard/) further streamlines the process of determining the average debt of graduates from individual colleges and their default rates. Department of Education also has made it slightly easier to delay the date that federal loans come due or, for borrowers who work in government or for nonprofit agencies, for the loans to be forgiven altogether. (See “Options to Manage Student-Loan Debt & Finances.”)

Despite these improvements, the process of paying off student-loan debt and acquiring those loans in the first place continues to be confusing and frustrating.

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