Save $1 for College, Cut $2 in Debt

Paying for college doesn't mean you have to take out thousands in student loans.

The explosion in student debt has been grabbing headlines. Political candidates have touted proposed solutions, and the Obama administration has released its College Scorecard—a compendium of raw data for individual schools on such things as cost of attendance, debt incurred by students, typical monthly debt payments and salary after attending.

See Our Slide Show: 10 Colleges That Don't Require Student Loans

But there's another side to this story. September is College Savings Month, which should remind parents and students that every dollar saved is a dollar you don’t have to borrow. In fact, says Mark Kantrowitz, publisher of, a Web site that focuses on paying for college, "every dollar you borrow will cost about two dollars by the time you repay the debt."

The trouble with loans. That’s just one reason I've always thought that student loans can be both a blessing and a curse. They help students pay for college, but they also make it easy for students to get in over their heads (see our story How to Keep Student-Loan Debt Under Control). What's more, a new analysis by the Federal Reserve Bank of New York finds that when the federal government expanded student aid in the form of Pell grants and subsidized loans, there was a significant increase in tuitions.

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Data show that the biggest debts are run up by graduate and professional students—who can borrow as much as they wish, up to the cost of attendance. The worst default rates, however, are among students who borrow relatively small amounts but drop out of school without completing a degree.

Get borrowing under control. There's bipartisan support for automatically linking student-loan payments to income. But it seems that proposals to forgive student debt, however well-intended, are on the wrong track: They give students an incentive to borrow even more, leaving taxpayers to pick up the bill, and they make it easier for schools to raise prices.

One way to address this problem would be to cap loan amounts for parents and grad students. Other ideas include limiting loan-forgiveness programs or tying the payback period to the amount borrowed. "If you borrow more, you'd pay it back over a longer time as your income rises," says Andrew Kelly, director of the American Enterprise Institute's Center on Higher Education Reform.

Just as important is encouraging students to complete a degree in a reasonable amount of time. The unemployment rate for college graduates is 2.7%. That puts grads in a favorable position to repay their loans, which averaged $27,300 per borrower for the class of 2013.

A recent report by Zillow, the real estate Web site, found that student debt has little impact on homeownership among young adults who get their degrees. But young people who rack up student debt and never graduate are much less likely to buy a home by their early thirties. Kiplinger's rankings of the best values in public and private colleges reward schools for their four-year graduation rate.

Boost savings. That brings us back to College Savings Month. In its latest College Savings Indicator Study, Fidelity Investments found that saving for college has reached an all-time high: 69% of families with children age 18 and younger who are expected to attend college are putting money aside. Interestingly, a study by T. Rowe Price shows that many families are saving for college in regular savings accounts or even in 401(k) retirement plans.

Nationwide, there's a huge amount of money in state-sponsored 529 college-savings plans, which usually trump other options for college savings: a total of $235 billion in 11.3 million accounts. Yet only 34% of the respondents in a survey by brokerage firm Edward Jones could identify a 529 plan as a college-savings tool. To learn more about these accounts, use our tool to help find the best 529 college savings plan for you.

Colleges step up. Many schools are doing their part to cut costs, control student borrowing and increase their students' return on investment.

-- Rosemont College, a small, private liberal arts college in suburban Philadelphia, recently slashed its tuition sticker price by 43% to more accurately reflect what students actually pay after discounts.

-- Indiana University (IU) sends students a "debt letter" before they take out loans for the coming academic year that shows how much they've already borrowed and what their monthly payments and cumulative debt will be. IU also has a "Finish in Four" initiative to encourage students to get a degree in four years. See our story How Colleges Can Help Keep Student Borrowing in Check.

-- Two western New York colleges, St. Bonaventure University, in Olean, and Hilbert College, in Hamburg, a suburb of Buffalo, are partnering to offer bachelor's degree programs in the hot field of cybersecurity. The two schools will share faculty resources via distance learning to capitalize on each other’s strengths in computer science and security. "This is a perfect example of an innovative program that meets the educational needs and interests of today's students," says Steven Andrianoff, St. Bonaventure's cybersecurity program director.

See Our Slide Show: 7 Hidden College Costs

Janet Bodnar

Janet Bodnar is editor-at-large of Kiplinger's Personal Finance, a position she assumed after retiring as editor of the magazine after eight years at the helm. She is a nationally recognized expert on the subjects of women and money, children's and family finances, and financial literacy. She is the author of two books, Money Smart Women and Raising Money Smart Kids. As editor-at-large, she writes two popular columns for Kiplinger, "Money Smart Women" and "Living in Retirement." Bodnar is a graduate of St. Bonaventure University and is a member of its Board of Trustees. She received her master's degree from Columbia University, where she was also a Knight-Bagehot Fellow in Business and Economics Journalism.