The last extension of the federal student loan payment hiatus officially ends on January 31, 2022. This means that many borrowers have not made student loan repayments for almost two years. Due to COVID-19, qualifying loans have suspended payments, 0% interest rate, and no collection on default. So, with that cliff ahead, let’s take a look at where student loan debt stands, what the federal government is doing for borrowers, and how to plan for college costs.
Where is student debt now?
At the end of March 2021, the total student loan debt for federal and private loans stood at $ 1.6 trillion. According to NerdWallet, 62% of the 2019 class graduated with student debt and an average loan of $ 28,950. Over 43 million Americans are in student loan debt. To put that into perspective, that’s one in eight Americans. With this, 92% of loans are funded by the federal government. The default rate on loans is 9.7%. To provide further context, according to the Federal Reserve in St. Louis, the default rate on single-family residential mortgages for the second quarter of 2021 was 2.49%.
What is the federal government doing?
While the student loan cancellation has yet to take place, the Biden administration has provided targeted relief. The Department of Education says relief has come in four areas currently.
The first is for those who were defrauded by their school or if their school closed before they graduated. This is called the borrower’s defense, and $ 1.5 billion has been provided as relief.
Second, $ 7.1 billion in loans were canceled for 364,000 people who qualify as disabled.
The third area focused on current and former active duty members. Interest was waived retroactively for 47,000 members.
And finally, the Department of Education recently expanded the federal student loan cancellation program that would allow thousands of other public sector workers, including the military, to seek reprieve on student debt.
The new policies would affect around 550,000 borrowers and give them two more years of progress toward forgiveness.
How much does college cost?
On its website, the University of Tennessee-Knoxville provides a breakdown of the undergraduate budget estimate for the 2021-2022 school year. Keep in mind that this is an estimate for state students, so each situation may be different. The failure looks like:
Tuition and fees: $ 13,244
Room and board: $ 12,150
Books: $ 1,598
Transport: $ 1,664
Staff: $ 4,002
The grand total is $ 32,678. There is a debate about how quickly the cost of education is inflating. However, 5% is a good average to use. If we inflate $ 32,678 forward by 5% for 18 years, it will cost $ 78,644 per year for the 2039-2040 school year.
How and how much do you save?
Now that you have the numbers, you might panic. I am here to help. If you are planning to pursue higher education for yourself or a dependent, consider the future. There are several ways you can save for your education:
529s are by far the most popular. Income grows entirely tax-free if the money is used for qualifying education expenses. Always consult with the IRS or your financial advisor to find out what qualifies.
AES Coverdell were mostly eliminated by 529s. They work essentially the same as the 529s; however, there are income limits and contribution limits.
Uniform transfer to accounts for minors (UTMA) are not traditionally used for education savings. This type of account can be used for anything as long as it is for the benefit of a minor. Some customers like the flexibility. However, the silver does not grow tax-sheltered like a 529.
Roth IRA are probably the least used vehicle for education savings. However, it is gaining popularity. There are income and contribution limitations. But the money grows completely tax free and there is no 10% penalty, which typically applies to early distributions, as long as it is used for qualifying education expenses.
So how much do you need per year? Using the example above, you should save around $ 6,400 per year or $ 533 per month. While this number may seem staggering (because it is), we can only plan based on current information.
Remember, I have only scratched the surface on the different rules and implications for each way of saving for education. There is no right or wrong way to save. At CapWealth, we work with our clients to determine the best way to save and how it fits into their financial plan and their lives. The most important thing is to start saving as early as possible. You are only 18 years old!
Jennifer Pagliara, CFP, CTFA, is Executive Vice President and Financial Advisor at CapWealth and a proud member of the Millennial Generation. His column is aimed at his peers and anyone else who wishes to progress financially. For more information on Pagliara, visit capwealthgroup.com.