College loan time bomb to hit on July 1

They are calling it the "student loan time bomb." Millions of college students and grads will be forced to pay higher rates on their loans in a few months.  It will be almost impossible to avoid.

But if you have children who are not yet in college, you can avoid some of this trouble by planning ahead.

Crazy Amounts of Debt

Ah, the crazy things we do in college, such as letting other kids throw eggs at us for a frat benefit. Even crazier: the stunning amount of student loan debt many young people are now taking on.

College Junior Joanna Frazier said, "It's outrageous, the loans people are having to pay back. I mean, that will be me when I graduate."

Joanna and her friend Maggie Cobb told us college loans are a worry hanging over many students, even at Northern Kentucky University, where tuition is very reasonable.

"The chances of getting a job straight out of college to pay for that is getting slimmer and slimmer, so it's a lot more stress to put on yourself," Maggie said.

Rates About to Jump

And it's about to get more stressful this summer. Unless Congress acts, which does not appear likely, federal student loan rates will double July 1 from their recession reduced 3.4 percent to 6.8 percent.

The 3.4 percent rate was a temporary adjustment during the recession, and is expiring.

Higher loan rates are something students are not looking forward to. "I think I have close to $8,000 in loans this semester, and next semester will be even more," Ryan Gnessin said.

How to Avoid it

There is not much you can do now if you are burdened with college, except to budget for the higher rates coming. There is no way to lock in the lower rate.

However, if you are a parent with children not yet in college, this student loan time bomb should be a warning, the experts say.

They suggest saving as much as you can now -- in a state 529 plan -- rather than paying later, with interest charges.

Paul Paeglis is the head of the Ohio 529 plan, known as College Advantage.

"Every dollar saved is one less dollar that has to be borrowed ultimately," Paeglis said. "I don't think there are too many families that ever regretted saving too much for college. It's certainly an expensive proposition and the more that can be done up front helps."

Plus, 529 accounts have two big advantages:

1. Deposits up to a certain amount (usually $2,000 a year) are deductible on your state income taxes.
2. The interest and growth does not get taxed, unlike in a child's savings account.

It's a great way to avoid the college loan trap.

Bankruptcy No Option

By the way, it's almost impossible to discharge college loan debt through bankruptcy, except in rare hardship cases.

So if you're uncomfortable with the size of the college loan you'll need, you may want to consider a cheaper public school, or start with a two-year community college, then transfer into a more expensive four-year program after the first two years.

That way, you don't waste your money.