College graduates in 2011 walked away with a diploma and an average of nearly $27,000 in student loans, according to a recent report from the Institute of College Access and Success.¹ The report also estimated that two-thirds of the class of 2011 held student loans upon graduation, up 5% from the 2010 findings.

Student debt is widely understood to be a serious and growing problem in the United States. The total debt recently topped $1 trillion, and represents the largest form of consumer debt. The Pew Research Center reports that nearly one out of five U.S. families has outstanding college debt. About 10% of those with debt owe more than $61,894, and 4% owe more than $100,000 according to the study.4

The amount of debt appears to be more than students can manage. The federal student loan default rate is now the highest it has been in 14 years, at 9.1%.² According to economists with the Federal Reserve Bank of New York, more than five million student loan borrowers have at least one loan past due.³

The news gets worse: While unemployment for college graduates was at 8.8% in 2011 — mostly in line with the national rate — an estimated 38% of recent graduates are working in jobs that do not require a college diploma.

In addition, student loan debt is usually not forgiven. Bankruptcy is generally not an option for student loans. Students who default on their loans can face an extra 20% collection fee, their wages can be garnished, and their tax refunds may be seized.

What can you do to help contain costs for your college-ready child? Here are some tips.

Start locally — Attending a community college for one or two years could substantially reduce costs when compared with a four-year public or private school.

Tap into federal loans first — Find out more at the Federal Student Aid website, created by the Department of Education. Federal Student Aid provides more than $150 billion in federal grants, loans, and work-study funds each year.

Investigate Income-Based Replacement (IBR) — Available for federal student loans since 2009, Income-Based Replacement caps monthly payments at a manageable share of income and forgives any debt remaining after up to 25 years of payments, or as few as 10 years of payments, for those working for public or nonprofit employers.

Consider private loans as a last resort — These loans can be tricky, as graduates find themselves locked into loan terms that can make repayment difficult as they navigate the job market and struggle to find steady work.

Balance your career choice with the overall cost – If you career choice is one that pays modest compensation, but the cost of education for that career is high, evaluate the long-term consequences of your decision.

Do not sacrifice your retirement nest egg — Although it may be tempting to help your child by taking a distribution from your 401(k) or IRA, most Certified Financial Planners™ discourage it. There are scholarships, grants, loans and work study for college but no one is likely to lend you money or give you a scholarship for retirement.

¹ The Institute of College Access & Success, “Student Debt and the Class of 2011,” October 2012.
² U.S. Department of Education, Federal Student Aid Chart, October 2012.
³ Federal Reserve Bank of New York, “Grading Student Loans,” 2012.
4 Investment News 10/1/2012

The opinions expressed above are solely those of Kondo Wealth Advisors, LLC, a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, LLC nor its representatives provide legal, tax or accounting advice.

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