Recently, many Americans were able to breathe a substantial sigh of relief. In early August, the Biden administration announced an extension regarding student repayment loans, giving those who borrowed money for college a reprieve until January of 2022 to resume payments.
In addition, the DOE has canceled $5.8 billion in student loan debts for borrowers with total and permanent disability and for those students who were victims of fraud by colleges and universities. By midyear 2021, nearly 500,000 applicants had debts wiped away, but that’s still only 2% of overall total student debt loans.
This is the first time we’ve seen loan forgiveness of this scale in the two decades that I’ve been working with Middle Tennessee families. We’ll have to wait and see if it’s a one-time helping hand from the federal government at a moment when many Americans’ finances have been negatively impacted by the pandemic. Regardless, student loan debt will continue to be part of the national conversation about college affordability.
Even with these new announcements, college debt continues to plague the majority of young adults. According to Investopedia, almost half of students leave college with an average of nearly $40,000 in outstanding loans. Most borrowers will not be eligible for loan forgiveness, but there are some simple strategies young adults can adopt to reduce outstanding debt and improve their finances:
Focus on debts with high rates first. The first step is understanding how much is owed and what the rates are for each outstanding loan. The loans with higher rates should be paid first and, if possible, extra payments applied to the principal. Once these loans are paid off, the loans with smaller interest can be targeted. If applied correctly, this strategy can cut loan payment plans by several years.
Look for opportunities to consolidate at better terms. Fortunately, student loan terms and rates are usually some of the best in the credit space, but that doesn’t mean that borrowers shouldn’t shop around. The difference between 0.5% and 1% on a loan over the course of time can potentially save thousands of dollars.
Build a better budget. Setting a disciplined budget can keep finances in order and help set money aside to pay off debt. Make a budget and track weekly spending to account for every penny spent. Using categories such as food and housing helps identify where dollars go and where there are places to spend and save. After several years of accumulation, even putting away as little as $25 per week can add up to big savings.
Success follows the prepared. For tens of millions of Americans, leaving a university with sizable debt is a reality. But, for millions more with college ahead, why not prepare early so that debt is either eliminated or greatly reduced?
• Scholarships, financial aid, grant opportunities and work study programs can lessen the amount paid to attend college. Students attempting to qualify for the HOPE and Tennessee Promise scholarships must complete a Free Application for Federal Student Aid form.
Nashville Goes to College can be a valuable resource for families navigating this process. According to the website, one encouraging statistic for prospective students is that 72% of applicants receive financial aid to pay for college – proof that looking for, applying and researching financial assistance can pay dividends.
• For families, a 529 college savings plan can grow money for school and avoid future student debt. With a state-sponsored plan, your contributions can grow tax-deferred (some states allow contributions to be partially or completely deductible) and distributed income tax-free as long as distributions are used for qualified education expenses such as tuition, fees, room and board at higher education institutions.
Even with the high cost of an undergraduate education, over time, the benefits of school for an individual’s career can far outweigh the price. A study by Current Issues in Economics and Finance estimated that college graduates will earn more than a million dollars more than high school graduates over the course of their respective careers.
Finding smart ways to finance a degree can set students up for success in the future and steer clear of the burden of oversized debts after graduation.
Donna Spears is the VP, Business Development Officer II at First Horizon Bank and has been a financial wellness advocate for 14 years.