What a difference a year makes! Last June (an election year), the president and Congress agreed to postpone any hike in student loan interest rates, reaching a compromise for one year.

This time around, no such deal.

Interest rates on subsidized loans are set to double, from 3.4% to 6.8%, for loans granted during the 2013-14 academic year. Despite last minute negotiating, our elected officials in Washington failed to reach a deal to either extend the lower rate or to peg repayment to a variable rate over time. Instead, by failing to act, Washington (I blame both Congress and the White House) has placed an additional financial burden on today’s youth and in particular lower income and middle class families who qualify for subsidized loans in the first place.

In my practice I try to avoid all loans for students. That said, not all loans are equally onerous, and I have recommended the subsidized variety when appropriate, given their historic low rates and favorable terms. Now I may need to reconsider that advice.

Instead of investing in our future, we are forcing our young citizens to pay an even higher price for the overspending of their parents and grandparents. These are the same young citizens whose brainpower, creativity, and innovation should serve as our economic engine into the 21st Century, yet they will be handicapped with higher loan repayments just when they are starting their careers. Studies have shown that high student loan debt has delayed many lifestyle choices for young post-grads, including getting married, starting a family, and buying a home — all factors that carry significant economic and social impact.

What does all this mean for you?

If you are the parent of a high school student, you need to make sure that your college plan is in good order for today’s realities so that you and your student need not become dependent on high-interest rate loans (did you know that many schools have ‘no loan’ or ‘loan-limited’ policies?). The time to make sure that your plan is sound is NOW, ideally before January of your child’s 11th grade year, and most certainly not at the end of the year when your 12th grader is getting ready to apply.

I see many families with FL Prepaid Plans, or 529 Savings Plans, and these may be good ways to start for many families. Yet they are far from enough when it comes to addressing the high and rising cost of today’s college tuition and navigating (successfully) the complex nature of need-based grants and merit-scholarship programs A sound college plan for today’s middle class families encompasses 4 components:

1. The Financial Aid System
2. Tax-favored Strategies
3. Innovative Funding Strategies
4. Student Positioning for maximum merit opportunities

These 4 components are not always available to all families. Some are able to select only 3 or perhaps even just 2 of the 4. Regardless of your situation, the sooner you start, both by getting your student engaged in the process and in your own financial planning, the more options your student will have come April of 12th grade.

Recommended Posts