Think the college-savings years fly quickly? Just wait until school begins. One minute, parents are hauling heavy milk crates up four flights in a freshman dorm. Before they can catch their breath, their kids are grown up and graduating—and the college loans are due.

Although super-wealthy clients are unlikely to face outstanding student loan balances, which top $1 trillion nationwide, the problem is growing among families making a mere six figures. Though they are finding college less affordable, they still don’t qualify for need-based financial aid.

Some parents who at first were hitting their college-savings targets have veered off course because of the financial crisis and the sluggish economy. Older parents may be struggling to simultaneously save for college and retirement. Others expect their kids to contribute to their educations.

According to a Wall Street Journal analysis of data from the latest-available Federal Reserve “Survey of Consumer Finances,” the ranks of those with student loan debt rose the most among upper-middle-income families—those earning $94,535 to $205,335 a year—jumping from 19.5% in 2007 to 25.6% in 2010. They owed an average of $32,869 in 2010, up from $26,639 in 2007, after inflation was taken into account, the analysis found.

Loan repayment start dates vary. Parents who acquire federal Plus loans on behalf of a child must begin repayment when the children graduate. Students have to start repaying federal Stafford loans within six months after graduating, withdrawing from school or dropping below half-time status. Private student loans may also offer grace periods.

“The six-month grace period goes very fast if you’re not in graduate school or don’t have a full-time job,” says Karen McCarthy, a policy analyst at the National Association of Student Financial Aid Administrators. Graduate students can receive deferments, although interest accrues on nonsubsidized loans during this period.

Student loan debt is sticky. It is not expunged in bankruptcy and delinquency can ruin people’s credit and or cause their wages and Social Security to be garnished. U.S. Treasury Department data cited by Bankrate.com indicates that 122,056 retirees had their Social Security checks garnished in 2012 because of delinquent student loans, up from just six people in 2000. That might be partly due to the fact that senior citizens often co-sign student loans for children or grandchildren.

So what’s the best way to tackle student debt? How can parents balance this with their retirement? How can they help new or soon-to-be grads get their financial bearings? What happens if children end up unemployed or underemployed? And what should debt-laden students heading to graduate school bear in mind?

Getting organized is the most important step, says McCarthy. Students should use the U.S. Department of Education’s National Student Loan Data System (www.nslds.ed.gov) to identify the current holders of their federal loans and find out how to get in touch with them. They should also gather this information for private loans.

Borrowers of federal student loans who graduate, leave school or drop below half-time status are required by law to receive exit counseling. Many schools now provide this online through StudentLoans.gov, McCarthy says. The Web site includes a calculator that estimates a person’s total loan obligation upon graduation.

Loan holders will contact students before graduation and ask them to select a repayment plan, she says. These plans generally last 10 years.
Advisor Assistance

Michael Beloff, a financial advisor with Shelton, Conn.-based Barnum Financial Group, raises the topic of student loans when conducting annual reviews with clients whose children are nearing college graduation.

He encourages them to divide the loans they hold into different buckets, such as subsidized Stafford loans (which are need-based), unsubsidized Stafford loans (available to any student), private loans and Plus loans. A student’s loan program may contain multiple loans, each with a different lender and start date.

Borrowers should understand the features of each loan before consolidating them, he says. A good place for students to start exploring the loan consolidation process, he says, is their school’s financial aid office. To consolidate loans into a Direct Consolidation Loan, students can go to StudentLoans.gov. They should watch out for scams. “With consolidation, it’s buyer beware,” Beloff says.

Subsidized student loans don’t start to accrue interest until graduation. To keep principal in check on unsubsidized Stafford loans, Plus loans and private loans, Beloff says families with free cash flow may opt to pay interest while a child is in school.

Parents may take penalty-free distributions on IRAs to fund college costs while children are enrolled in post-secondary institutions eligible to participate in federal student financial aid programs. But Beloff says he is often leery of this. “It’s easier for parents who are retired to help kids with loans,” he says, “than for kids to help parents with retirement.”

“Saving for retirement and keeping kids afloat is a balancing act for every family to do on its own,” he says—and advisors can help. Since loans are paid over time, families can adjust the portion they will pay as their children become more financially secure, he says. A lot also depends on whether a family has other children to put through college. “When the kids start to graduate, the game changes a little bit,” he says.

The Expected Family Contribution (EFC) calculated through the Free Application for Federal Student Aid (FAFSA) is divided by the number of kids a family has in college. So a family expected to contribute $50,000 for two college students may be expected to contribute roughly that same amount for the second child alone after the first child graduates.

“In this environment, it’s tough with that second kid if you’re trying to help the first kid keep their loan burden down,” he says. He knows families who have steered their second child toward schools that are less expensive or offer more non-need-based aid.

Parents should be explaining cash flow, budgeting, savings rates, taxes and other financial issues to their young adult children, says Beloff. Some clients have asked him to sit down and talk with their kids about it.

Jennifer Luzzatto, founder of Summit Financial Planning, a fee-only investment advisory and financial planning firm in Richmond, Va., also looks at college needs as part of a client’s overall financial plan. “A lot of college planning is tax planning with a college cap on it,” she says. This includes finding the right loans and interest payments.

It’s important to vet any college planner. “Make sure it’s not an annuity salesman in disguise,” she says. When people use annuities to hide assets from the Free Application for Federal Student Aid, it ends up costing families more in the long run, she says. Borrowers should also exercise caution, she says, if they use a home equity loan to pay off college debt.

Luzzatto used to do a lot of hourly planning for people overwhelmed by student loans and frustrated by unresponsive lenders. “We would hold their hand and put together a spreadsheet for them,” she says. Although the clients themselves had to speak directly with the lenders for privacy reasons, she occasionally participated in their conference calls with lenders.

Student debt can be an emotional issue. “I’ve seen marriages hang in the balance as couples disagree on how to pay off student loans,” she says. Many of her clients have found success using the “snowball method”—paying off smaller loan balances first and then allotting more cash flow to larger loans. “It’s exhilarating and very motivating,” she says. “They start to feel accomplished, and that it’s not impossible.”

But Mark Kantrowitz, an expert on financial aid, scholarships and student loans, isn’t sold on the snowball method. Although many view it as “a quick win and psychological boost,” he says, “it doesn’t yield any boost when you look at the numbers.” Instead, he advocates paying off loans with the highest interest rates first.

Helpful Hints
The typical college student graduates with eight to 12 student loans, says Kantrowitz, senior vice president and publisher of Edvisors, an education company focused on planning and paying for college, and founder of FinAid, a free source of financial aid information, advice and tools.

To stay on top of payments, he suggests borrowers set reminders in their personal digital assistants for two weeks before due dates. Signing up for automatic debit from a bank account can reduce late payments, and many lenders offer interest rate reductions of 0.25% on federal loans and 0.25% to 0.5% on private loans, he says.

He also suggests making extra payments, if possible. Neither federal nor private student loans carry prepayment penalties. Borrowers should specify that extra payments are to be applied to principal and which loan to apply it to, he says. “Otherwise, it can be completely arbitrary,” he says.

Loan deferment and forbearance are available to borrowers with hardships. Because interest continues to accrue, Kantrowitz says these options are best for shorter periods—for instance, if someone expects to land a new job within a few months, or is out on medical or maternity leave.

“Long-term deferment or forbearance not only delays the problem but makes it worse,” he says. Instead, he says, borrowers facing long-term payment difficulties can consider plans that offer extended, graduated or income-driven repayments. “Income-Based Repayment” plans cap repayments at 15% of a borrower’s discretionary monthly income, while “Pay-As-You-Earn” plans cap it at 10%.

In June, President Obama issued an executive order to expand the Pay-As-You-Earn repayment plan to more borrowers. “It’s not a done deal,” says Kantrowitz, “but it’s pretty likely there will be some expansion of Pay-As-You-Earn by the end of 2015.”

Income-Based Repayment and Pay-As-You-Earn plans offer debt forgiveness at the end of a loan period, but any remaining debt is taxable under current law.

Before students borrow funds for graduate school, they should explore research and teaching assistant opportunities that can defray costs, say Beloff and McCarthy. Beloff also suggests asking graduate school placement departments for employment statistics.

“Does the cost-benefit of an ancient history master’s and Ph.D. commensurate with the extra education?” he asks. “It’s a harsh reality.”