How to reduce your student loan debt

  • By Steve Garmhausen,
  • Barron's
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High school seniors are increasingly seeking early acceptance to their first-choice college, often in the hope that doing so will improve their odds of getting in.

But financial advisor Sarah Mouser wants students—at least those to whom financial aid matters—to think hard about this. “Since the applicant is already committed to enrolling, an institution may not be incentivized to offer [scholarships],” Mouser observes.

What’s more, early acceptance requires students to withdraw applications to other schools that might offer more financial aid.

College isn’t getting any cheaper, and the typical student borrower has more than $35,000 in debt, according to Experian. So while wealthier families can choose to avoid loans altogether, middle-class students and their families who want to limit their student-loan debt must be creative and question conventional wisdom, says Mouser, director of financial planning at McLean, Va.-based financial advisory firm Cassaday & Co.

As a certified education-loan analyst and college-funding specialist, Mouser counsels clients to consider options ranging from corporate tuition-reimbursement programs to shorter matriculation: compressing four years’ studies into three.

At the same time, she’s skeptical of enticing new solutions such as “income-sharing agreements,” which pay a student’s tuition in return for a slice of their future earnings.

It’s easy to see why families would be tempted by any possibility of financial reprieve. The sticker price for tuition and fees averages $36,000 a year for private schools and $10,000 for in-state public ones. Add room and board to that, and total costs at a top-tier school can be astronomical; a year at Harvard can run as high as $78,000.

Seek out tuition reimbursement programs

Reflecting the scope of the college-debt burden, more and more employers offer tuition reimbursement as a benefit, alongside health insurance and a retirement plan. The programs, which are growing fastest among talent-hungry technology and finance firms, typically contribute up to $5,250 per year toward undergrad tuition and $10,500 toward grad school tuition.

Read the fine print when an employer dangles a tuition-assistance offer. Most won’t provide aid until at least six months after the start of employment, and it typically applies to employees but not their children. And some require employees to repay all assistance if they leave before a certain number of years.

Sprint through your courses

One of the most significant ways a highly motivated student can limit costs is by squeezing four years of work into three. At least 32 colleges now offer three-year bachelor-degree programs. Of course, students have for years been knocking out core classes at community colleges. High school advanced placement exams, which can earn students college credits, are growing swiftly in popularity: 2.6 million students took them in 2016, twice as many as had a decade earlier, according to the College Board.

Naturally, it’s important to be realistic about a student’s ability to handle the crush of 15 or more credits per semester, advises Mouser. “You don’t want to overwork them to point where their GPA [grade point average] is going to suffer,” she says. “That could have a long-term impact.”

Be wary of silver-bullet solutions

Mouser is cool toward those income-sharing agreements, or ISAs, now offered by at least eight schools, including Purdue University, the University of Utah, and Clarkson University.

Under the plans, some backed by venture-capital firms, students pledge a percentage of their future earnings in exchange for money toward their tuition—typically up to $10,000 a year. Graduates repay that by handing over a certain percentage of their earnings over a specific number of years (universities set the terms, based on each participant’s major).

If this sounds a lot like a loan, it pretty much is. Indeed, some participants could conceivably end up repaying more than double what they borrowed—in the most extreme case equating to an interest rate of 25%. Conventional student loans are currently charging interest of 4% to 6%, notes Mouser.

“There’s a reason why [income-sharing agreements are] attractive to big investors as a lucrative investment,” she warns. “What concerns me most is that it’s not regulated, so there are not all the consumer protections available with [conventional student] loans.”

Still, because of more-favorable payback terms, those in higher-paying fields, such as technology or engineering, could come out ahead. You can use online calculators and guides to explore how income-sharing agreements stack up against conventional loans in various scenarios.

One clear benefit of ISAs: Participants are not required to start making payments until they’re earning above a certain threshold. Translation: A graduate can live with mom and dad, free of financial pressure, while searching for that perfect job.

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