How to avoid crushing student debt


As the national student debt balance continues to rise, college hopefuls and their parents need all the help they can get. If you're headed for an institution of higher learning, there are a number of steps you can take to avoid taking on a crushing financial burden.

How to avoid crushing student debt

Carefully planning and saving in advance, shopping for colleges, applying for grants and scholarships, and working part-time while in college are a few steps that may ease families' long-term financial burdens. Even a decision to place college funds in a parent's account rather than a child's can make a difference.

Falling short
"The most important thing to do is save for college, but it's not being done," says Dennis Twenge, a financial adviser for Ameriprise Financial Services, Inc. in Salem, Oregon. Today, the average balance of 529 savings accounts is about $21,000, according to the Board of Governors of the Federal Reserve System.

However, the typical bill for a four-year college education requires more money than that. In 2015, total published in-state charges for just one year of school averaged $19,548 at four-year public universities, while out-of-state charges averaged $34,031, according to The College Board. Average private university costs were $43,921 annually.

High tuition rates have resulted in a growing student loan debt. The national student loan debt balance is now $1.35 trillion, according to March 2016 Federal Reserve figures. For a bachelor’s degree recipient, the average total student loan debt balance was about $35,000 in 2015, according to Edvisors. The average total student loan debt balance for post-undergrad education range from $51,000 for master’s degree recipients to $207,000 for medical school graduates.

As a result, many borrowers struggle to keep up with student loan payments, despite government programs to help certain graduates with their federal student debt.

"The goal is either save enough before college or work your way through college or, of course, have your way paid by parents," says Rick Kahler, president of Kahler Financial Group in Rapid City, South Dakota. Back-to-school guide 2016

Back-to-School Guide 2016

The latter option isn't necessarily advisable, however, because if parents ignore retirement savings in favor of a child's education, the child may face a far greater financial burden years later if he or she has to support Mom and Dad, Kahler says.

Students should contribute
Kahler believes it's good for students to have some "skin in the game" in paying for higher education, either by saving before college or working while in school. This view runs counter to that of many parents who consider it their duty to foot the entire college bill, but Kahler says working can be beneficial for students.

Kahler cites research by the University of California, Merced, published in the American Sociological Review in 2013, indicating that parental financial aid decreases student GPA, although it increases the odds of graduating. The study suggests that students receiving help from their parents "dial down their academic efforts." The same is not true of other financial aid from other sources, such as grants or scholarships.

However, while part-time work during college doesn't adversely affect GPA, full-time employment does, the paper notes.

In his own family, Kahler has agreed to pay for half of his 17-year-old's college expenses, applying any scholarships to the child's half of the bill. At some schools, good grades can be worth $1,000 a month in scholarship funds. "That kind of incents the student to step up and pay attention and apply for them," Kahler says.

The college financial aid realm can be complex, but websites and university financial aid offices offer resources to help. "Knowledge is power ultimately," Twenge says, noting that mistakes, misunderstandings and procrastination can cost a student "free money."

Important to-dos
Here are other steps parents and students can take to limit college debt:

• Start saving early. Fund a 529 education savings plan as heavily as possible in a child's early years, Kahler says, acknowledging this can be hard for young, cash-strapped couples. He generally suggests keeping the account in the parents' names. This allows the parents to direct the money to another child, or to cash it out themselves, with a penalty and tax on earnings, if they need money.

An even more important reason to keep the account in the parents' names is that when the government calculates the expected family contribution toward college costs and a student's aid eligibility via the Free Application for Federal Student Aid, or FAFSA, it counts a far greater percentage of a child's assets than a parent's holdings.

"Try to minimize the amount of assets held in a student's name," Twenge says.

• Comparison shop. Look at a variety of colleges, examining tuition and other costs and the amount of merit aid, grants, work-study funds and loans available.

Don't overlook private colleges or be scared by sticker shock, especially if the student has good grades and SAT scores, Twenge says. Private colleges can cost less than a state school because of the amount of merit-based aid they provide, he says, adding that private colleges generally have more leeway in awarding aid.

"You want to shop the colleges. Who gives you the best bottom line?" Twenge says, suggesting that students "look at the free money first," such as merit scholarships. "You want to have the school that gives you the best net cost," he says.

Colleges participating in federal aid programs must post net price calculators on their websites. Use the calculators to get an idea of the cost of attendance, including room and board, textbooks and other expenses, Twenge says. Enter the data and the calculator should be able to estimate award size and the student's net cost at a given institution, he says.

• Apply for financial aid. Fill out the FAFSA, a key form for those seeking grants and other aid from the government and schools. But beware that applicants sometimes mistakenly count assets they don't have to include -- life insurance policy cash value, retirement plan value or a small family business, for example -- thus limiting their aid awards unnecessarily, Twenge says.

A four-year college education may not be the most crucial thing.

-- Rick Kahler
Financial planner

Also fill out the more in-depth CSS/Financial Aid PROFILE , which is used by private colleges and scholarship programs in awarding nonfederal aid.

"One of the biggest mistakes is people don't apply for financial aid," Twenge says, noting that many think they're too wealthy to qualify. "Everybody should apply, no matter what income level, for financial aid. If you're not in the computer of the financial aid officer by filing these forms, they won't know you're there."

• Consider all other options. Avoiding crippling student debt may require starting at a community college, opting for a trade school or simply avoiding excessive spending at college.

"A four-year college education may not be the most crucial thing," Kahler says. Over a lifetime, he adds, a plumber can make as much money as a primary care physician. "Education is important, but it's the right education that's important," Kahler says.

"Just borrow as little as possible, live frugally, don't use it for things that aren't for college," Twenge says. "Don't take a car to college, don't spend your money on beer and pizza."

See related: How credit scores impact some student loan approvals, Americans look abroad to avoid student loan blues, The new math: Working through college may not pay off

Updated: August 2, 2016

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Updated: 10-22-2016

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