Is 2013 the Year the Student Loan Bubble Bursts?

Our country has been hit by several financial "bubbles" that wreaked havoc on the economy when they burst. Remember the tech bubble and the real estate bubble? Now there is speculation that student loans may be about to join this infamous group. The Los Angeles Times recently stated that student loan delinquency rates had "hit the danger zone" after a report from FICO Labs showed that delinquency rates had risen to 15.1 percent, an increase of almost 22 percent in just three years. This debt burden represents not just a lifelong problem for the student borrower, but could have a massive impact on the broader economy as well.

In addition, student loan balances continue to rise precipitously. Last year's average was $27,253, which was up 58 percent from the $17,233 that was borrowed in 2005. The sluggish economy and low job growth rate means that it will be tougher than ever for today's college students to repay their student loans. This early failure to repay the holders of their student loan debt will affect their later ability to borrow money for houses or even to save money to finance their own children's education. When enough people can't borrow money, the economy suffers as a whole.

Community Research Partners published a report in January titled "Need-Based Financial Aid: A Tool for Supporting Ohio's Education and Workforce Goals," which showed the effect Ohio's drastic cuts were having on need-based financial aid. The report concluded that college was becoming less accessible for lower-income demographics and strongly urged officials to increase financial aid funding levels.

What Can Today's Students Do to Pay for College?

What all this means is that today's students and their parents will have to be much smarter in determining how they will pay for college in order to avoid the alternatives of high debt or no college at all. The best way to avoid debt is to borrow as little as possible. Parents must take advantage of 529 plans to start saving money for education while their children are still very young. Skipping the coffee and saving just a dollar a day could be the start of a big financial difference for your child's future.

As the child becomes a teen and starts the college application process, financial questions need to be an important part of the selection criteria. Billions of dollars of financial aid are still available but accessing this money begins with the completion of the Free Application for Federal Student Aid (FAFSA). Many students lose out on their fair share of financial aid by failing to complete these forms early and accurately; additional funding is available through scholarships, but many students simply miss application deadlines. Work study programs can also help ease the financial burden.

When colleges send out their final acceptance packets, they include a financial aid package. These amounts may not be set in stone and it is possible for applicants to negotiate with the colleges to see if any of these offers can be increased. A professionally trained college financial aid adviser can help the family sort through the maze of options to make the wisest financial choices.

Once the student is in college, parents and child can work together to minimize expenses so any loans taken will be as low as possible. Student loans should not be used to finance a lifestyle or make costly purchases as this strategy will only cause problems down the road. With smart planning and informed decision-making, the millennial generation doesn't have to be the one that breaks the economy's back.