As a kid, the last day of school was always exciting! It meant the beginning of summer, which afforded the ability to swim, sleep late, and stay up even later. My friends and I would rotate spending the night at each other’s house. Video game tournaments would last until the wee hours of the mornings before someone would eventually get mad and throw the controller.
As an adult, the end of the school year brings slightly different feelings. On the surface, it means having to find activities to entertain kids for 8 weeks. More importantly, it means being one year closer to car purchases and college expenses!
The sobering truth is that college costs have risen three times faster than inflation over the last twenty years. Unfortunately, the use of student loans is now the most common way to pay for college. Last year, seventy percent of college grads carried a student loan balance at graduation. The average was $37,000. About 6% of college grads owed more than $100,000. That’s a difficult starting point on your first day in the working world.
On the economic front, student loans have risen at such a dramatic pace that many economists are concerned about the long-term impact on the economy. Student loan debt totals more than $1.4 trillion, the second highest category of debt in the country behind home loans.
Who owns all those loans? The largest loan holder is the federal government. Federally-owned student loan debt totals nearly 6% of the total economy, up from 0.8% a decade earlier. The 90-day delinquency rate on those loans is over 11% according to the New York Fed.
For comparison, the delinquency rate on mortgage loans at the peak of the 2008/2009 financial crisis was 11.5% according to the Federal Reserve. Currently, the mortgage delinquency rate is about 3.5%.
With that said, the student loan issue is relatively unlikely to lead to a crisis like we saw in the mortgage market a decade ago. The most likely outcome is that high student loan debt becomes a drag on spending and hampers economic growth as interest rates move higher.
More importantly, as parents or grandparents or other family members, we can begin planning now for the future education of our loved ones. There are various tools available to plan and save for future college costs and other expenses, such as cars. Pre-paid college tuition plans are available in most states, as well as 529 College Savings Plans. Even Roth IRAs offer educational flexibility. Custodial accounts (UTMA / UGMA) also provide an avenue for family members to save money for more flexible expenditures that aren’t necessarily college related.
If you are interested in learning more about strategies to save money for the next generation please contact us to discuss your specific concerns.
Source: CNBC, Wall Street Journal
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