Spring Into Action With Student Loans

Now that applications have been sent, and before admissions decisions come in, there’s no time like the present to figure out how much your family can afford to pay, and how much debt you and your family can afford to take on.

Marshall Findlay speaking to student

When is the best time to consider the cost of college in the admissions process?

There doesn’t seem to be an easy answer. Start too soon, and you risk limiting your dreams or missing out on potential scholarship opportunities (who knows if there’s a full-ride to an elite school with your child’s name on it?). After all, Harvard University boasts that 90% of its students pay less to attend Harvard what they would have paid to attend their state school. You wouldn’t want to assume that any college is too expensive until you hear back about scholarships and grants. On the other hand, start too late, and emotions may cloud better judgment (I can totally deal with $150,000 in debt; this is my dream school, after all!). Now that applications have been sent, and before admissions decisions come in, there’s no time like the present to figure out how much your family can afford to pay, and how much debt you and your family can afford to take on.

In 2012, approximately 71 percent of students graduated from a four-year college with student loan debt. The median monthly student loan payment was about $203 (average was $351, because a smaller number of students took out more student loans). Most students, around 68 percent of borrowers, qualified for federal loans that they will pay back in 10-years. This means that, for the 10-years after graduation, these borrowers will be making 120 equal monthly payments to cover the original loan plus interest. For more information on other plans, visit studentaid.gov.

How much of a downward push is an extra $203 per month? A Time magazine article examined data provided by the Bureau of Labor Statistics’ Consumer Expenditure Survey for 2014 and found that the average household income for 25 to 34-year-olds was $54,622, of which $43,368 went toward housing, transportation, healthcare, food, entertainment, Social Security. This leaves around $938 per month for everything else, including student loans. Considering that the average 25-to-34-year-old spends $424 per month on clothes, personal care, and other items, the amount of your paycheck that goes to student loans is not insignificant.

Is this doable? Absolutely! Will you have to say no to some things in order to make your loan payments? You bet. You can spend $900 in the blink of an eye, unless you practice the art of saying “no” to the things that you want and assessing your needs. And while the latest news article bemoans the state of indebtedness for each successive graduating class, a reasonably-priced college education with some debt to pay off on graduation day is very much worth it from a financial investment perspective. A study in 2011 showed that the median lifetime earnings for a bachelor’s degree holder exceeded a high school diploma holder by almost $1 million.

Of course, poor examples abound (when a student loan debt is in the run for a Guinness World Record, you definitely have reason to be concerned!). Moreover, we would be unwise if we didn’t point out that we are dealing with median numbers. Half of the reporting graduates had more student debt, and half of reporting graduates earned lower wages. You will want to run the numbers yourself, and you have the benefit of several useful financial tools.

  • Many colleges offer calculators that estimate the cost of attendance. You’ll want to have some numbers ready, including your family’s combined income, assets, and investments. For one example, see Williams College’s calculator.
  • Smartasset is a helpful website for estimating your federal, state, local, sales, and gas tax.
  • Bankrate has a really helpful student loan payment calculator, where you can determine the interest you would pay for over the life of your loan.

So what can you do now, as a senior in high school?

Learn about interest rates

Before you take a loan, make sure you understand with perfect clarity how compound interest works. A student who takes out $35,000 in student loans might pay an additional $7,000 in interest, or nearly $25,000 depending on the rate of the loan. Consider the following chart:

10-year fixed rate loan

A direct federal loan, paid off in 10-years, has an interest rate of 3.76%, which means that for every $1,000 you borrow, you will be paying back $37.60 in interest each year. That doesn’t seem like a lot, but interest on a $35,000 loan will add up to $7,046 over the 10-year repayment period. A student who gets a private loan through Sallie Mae at the maximum interest rate of 11.85% can expect to pay $24,894 in addition to the original $35,000 loan. Your goal before you take out loans is to negotiate the lowest possible interest rate.

10-year 3.67% loan

In addition to locking into a lower interest rate, you’ll also want to understand the value of paying down your principal quickly. In most instances, you can contribute more each month to your payment, and the benefit of doing so is that anything you pay above the minimum balance is deducted directly from your principal. And a little can make a big difference. Consider the table below, using $35,000 in loans at the federal rate of 3.76%. The more you can set aside each month, the sooner you can pay off your loan, and the less you need to pay in interest. You can also reap similar benefits with one-time cash payments. Think about it not as giving up extra money, but in buying your financial freedom. Every additional dollar you put toward your monthly payments results in around a week shaved off your loans.

Work on establishing a solid credit

The interest rate you get for private loans is based in part on your credit score, or that of your parents. An excellent credit score could get you a 5.74% private loan rate (requiring you to pay $11k in interest), while a poor credit score could get you an 11.85% rate (and interest payments totaling almost $25k). Now is an ideal time to speak with your parents about ways to begin building good credit. A good credit score will be essential for other loans you might take out in the future (for a car, a mortgage, etc.), so it will have benefits beyond your student loans.

Watch out for scams

Whenever you have relatively inexperienced individuals making very expensive decisions, you can be that predatory companies will be close by, looking for people to take advantage of. You should never need to go through a middleman to repay your student loans. If a company promises to reduce your monthly payments, it may only lengthen the time it takes to pay off the loan, and the additional interest you will need to pay off.

Don’t make unfounded assumptions

Most colleges will post average starting salaries earned by their graduates as a selling point. You will want to hold on loosely to these averages. Just as 50% of graduates have higher than average salaries, the same percent have below-average salaries. Plan for a safety net in case it takes a little longer than expected to land a job with a satisfactory salary.

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