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How to avoid getting crushed with student loan debt during the pandemic

How student loans became $1.6 trillion worth of debt for Americans

While universities and colleges struggle to decide if they should reopen for a fall semester amid the coronavirus pandemic, many Americans are questioning the value of a college degree. College is more expensive than ever. Yet many campuses may remain closed, forcing millions of students to take classes online. 

A 2020 high school graduate could face $37,200 in loans upon completing a four-year degree, according to a new NerdWallet analysis of data from the National Center for Education Statistics. It’s no wonder close to 44 million Americans are collectively plagued by $1.6 trillion in student loan debt.

The situation has become more tenuous since the onset of the pandemic, with millions of Americans unemployed, unable to repay their mounting debts. Luckily, the federal government has offered some assistance under the CARES Act. Federal student loans offered by the U.S. Department of Education have been placed in forbearance until Sept. 30, yet political gridlock makes it uncertain if this will be extended.

However, people with private student loans still have to pay back their loans. Tara Falcone, a certified financial planner and founder of ReisUP, offers tips on how to manage the financial burden.

1. Pay private student loans first

This is important, since “[lenders] are still collecting, so definitely make these loan payments if you can afford to,” Falcone says. Failure to do so will adversely affect your credit score and hurt you in the long run. “You don’t want a scare the next time you check your credit report,” she warns.

2. Refinance if you can

With interest rates near record lows, now is also a good time to refinance your private loans. However, not everyone will be able to refinance. People with good credit scores, 700 and above, and have a steady income are the likeliest to be approved.

3. Get ahead of the curve with your federal loans

With federal loans in forbearance, Falcone advises that people still try to make payments if they can. “If your situation has not changed too much in recent months, continue to pay down your federal loans. Your contributions will go straight to the principal and end up saving on interest.”

If you are struggling to keep up with payments, Falcone advises that people start slashing expenses where they can. “You don’t want to default, because it will hurt your credit score, Try to protect it by getting rid of unnecessary expenses.” 

4. Look for loan forgiveness programs

Financial planning for the future

For millennials saddled with college debt who are starting families, long-term financial planning is key. Despite their challenges, they have to find a way to save for their children’s future. The last thing they want is the next generation to have the same financial burden they have.

No one knows if college will be more expensive in 20 years, especially now that higher education may be changed forever. 

Parents hoping to ease the burden on their children have a few options, but they first need to decide how much they want to fund, says Falcone. “Will it be half of tuition and the other half the student pays for? Will it be all of school? Parents need to decide and set a savings goal.”

A 529 savings plan is the most popular option. The two main benefits of the 529 are that they provide tax-free growth and tax-free withdrawals for qualified education expenses, such as tuition, fees and books. However, if contributions aren’t used toward qualified education expenses, you will have to pay income taxes and a 10% penalty on your gains.

Each state offers a 529 plan, and residents are not restricted to their home state’s 529, as the investment options, fees and tax benefits vary between each state’s plan.

“When shopping for a 529, look at the general account fees, expense ratios within the account and the type of fund that best suits your needs,” says Falcone. “You want to do your homework to find a plan with low fees and high returns.”

It’s also important to have peace of mind with a 529 plan. If market fluctuations keep you up at night, it might be better to look at other options. 

Americans currently have $371.5 billion saved in 14.25 million 529 plans, according to the College Savings Plan Network.

There are other options  that can be used as savings vehicles for college costs. For parents with high incomes, a backdoor Roth IRA may be a good option, says Falcone. A backdoor Roth IRA takes advantage of a loophole that allows people to convert money in a traditional IRA into a Roth IRA. You’ll pay some taxes, but your money will grow tax-free from there. 

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