Don't Be Swamped by Student Loan Debt

As students prepare to head back to the books, college planning is on the minds of many families. It’s common knowledge that the cost of higher education has skyrocketed over the years and that many students end up struggling with a mountain of student loan debt once they graduate. In fact, the average student loan balance last year was $24,803, a whopping 70 percent higher than it was in 2004. During those same years, overall student loan debt nearly tripled to $966 billion.

If you’re concerned about runaway college costs, the California Society of CPAs ( offers this advice.

Examine the Numbers

If you are planning to take out loans to finance the cost of a college education, determine what impact a student loan could have on your or your child’s future. That means taking a hard look at the numbers to see exactly how much debt you’re likely to incur, what kinds of payments will be necessary after graduation and how long you’ll be making those payments.

Those are important questions. According to a survey by the American Institute of CPAs, only 39 percent of student loan borrowers and their parents said they fully understood the burden that debt would place on their future. In addition, the survey found that 60 percent now have at least some regret over their choice of education financing. So be sure you understand the commitment you’re making and believe it is worth it.

Set Limits

CPAs recommend that your total undergraduate loan balance should not exceed your first year’s earnings after you graduate. If you think you’ll be able to earn about $25,000 per year in your first job, then a balance no higher than $25,000 is probably prudent. If your balance is higher than that, it may be time to consider other financing options. At the same time, don’t take on credit card or other debt that will only add to your obligations when you graduate.

Be Creative

If the costs of the colleges you’re looking at are going to bust your budget, it may be time to consider alternative options. For example, if you attend community college for the first two years, then transfer to a four-year college after that, you will still get the same degree—but at a significantly lower total cost.

Living at home instead of on campus is another way to trim expenses, or you can pay off many of your tuition costs before your graduate if you work while going to school part-time.

Start Saving Early

Do your children receive money from relatives or friends on birthdays, holidays and other special events? Why not put aside half of what they receive in a special college account? That’s one of many steps you can take to make saving for college automatic.

Getting an early start will help you build the biggest possible nest egg and give you more time to accumulate interest or earnings on your money. Ask your CPA for advice on the tax-advantaged college saving strategies that might be best for you.

Pay Off Sooner Rather than Later

The longer your debt is outstanding, the longer you’ll be paying interest on that debt, and the higher your overall cost will be. That’s why it’s best to set your monthly payments as high as you can afford to when you graduate. Doing so will get you debt-free as soon as possible.

Consult Your Local CPA

College financing may seem like a daunting challenge, but there are many ways to cut your costs down to size. Whether you want to set up a realistic and tax-efficient college savings plan or evaluate your college financing options, remember that your local CPA can help. Turn to him or her with all of your financial questions.

Copyright 2013 American Institute of Certified Public Accountants.

The Money Management columns are a joint effort of the AICPA and the California Society of CPAs as part of the profession’s nationwide 360 Degrees of Financial Literacy program.