Student Loan Conundrum

It is nothing new that student loans are becoming an increasing expense for college graduates, with the majority of students leaving school with debt equivalent to a small mortgage. It is no wonder they have trouble moving out of their parent’s house, trying to buy a car or house, or becoming financially independent. I recently met with my cousin to go through her loans and put a plan in place to tackle them as quick and cost effectively as possible. The whole process can be very overwhelming, and since the trend seems to be only getting worse, I thought it would be beneficial to talk about what to do before college. So let’s start before you even get to your new school.

How exciting, you are starting the college search process. You probably never thought there were so many choices out there, small and big, cheap (ok maybe I should say cheaper) and expensive, industry focused or liberal arts. The list of options goes on and on. Do you want to stay close to home or go as far away as possible? Do you want a school focused on internships? How about a campus so large, you will somehow get lost even after your fourth year? You will hear from everyone to put a list of priorities together to help narrow down the search, but what they won’t tell you is to look at the school’s value. What I mean by this is to see how much you are willing to pay for the extra “bonuses” of the school such as nicer dorms, new fitness center, great business department, or whatever it is. You are investing in this college or university, so think of it like researching a company you might buy. Are those added bonuses worth the hefty price-tag?

I remember hearing one person say, “I don’t know why we put a $200,000 decision in the hands of an eighteen year old. No offense, but $200,000 is a lot of money and the magnitude of that price-tag might not sink in when you are looking at schools. This is obviously the case since student loans have grown between $53 billion to $120 billion between 2001 and 2012[1]. Colleges are expensive, and the price is only going up, yet wages haven’t gone up. More and more kids are borrowing money to go to these very nice but pricey colleges. I mean some of them look like country clubs! The problem is they aren’t thinking about what $20,000 of student loans will look like when they graduate. A lot have upwards of $50,000 of student loan debt. And then you add a jobs market that is NOT in favor of graduates, with the average income being $50,556 in 2016.[2] However, that is if you can get a job!

Let’s do the math:

If you are lucky enough to get a job and one that pays $50,000, your net income after paying taxes is about: $42,000.

The average student loan payment is $280 a month or $3,360 per year.[3] This is based on a debt total of $25,000 with an interest rate of 6.8% being paid off in 10 years.

Now your income is $38,640. But what if your debt total is double that? What if you borrowed $10,000 each year of school to go to your top choice for a total of $40,000?

Well your total annual payments each year would be $5,520 assuming a 10 year loan at 6.8% interest. And you would waste $15,239 from your interest payments. Is that school worth it to you to spend an extra $5,500 each year for ten years? Ten years is a long time to be stuck paying debt. Trust me, you will want to move out of your parent’s house at some point (I’m sure they want you gone too!), you will want to get married, buy a house, travel, and the list goes on and on. And having these payments can get in the way of those dreams.

aybe it is and maybe it isn’t, but do the math before you commit. Just like any big purchase, put a price limit on your search. Here are a few items you need to consider before borrowing for college:

  1. Figure out how much in student loans you are comfortable with borrowing.
  2. Think about the type of job you will have after you graduate and do research on how much that job typically pays. Does it make sense to borrow $60,000 to pay for college if you’re only going to make $40,000 on a teacher’s salary?
  3. How is the job market in your industry? So many young adults have jobs and part time jobs, but they aren’t in the field they went to school for, but they needed an income to pay off their debt.
  4. Are you willing to live at home for a while to help pay off your debt?
  5. What other big expenses will you have when you graduate? Do you need a new car, rent for an apartment, etc.
  6. And most importantly, your college experience is what you make of it. Having a brand new dorm room or having an old one without AC isn’t going to make or break your life. What you put into college is what you are going to get out of it. Remember this when they try to win you over with all the bells and whistles because you will be paying a hefty penny for those glamorous extras.

Jessica Weaver, CFP®, CDFA™, CFS®
Wealth Advisor




Any opinions are those of Jessica Weaver and not necessarily those of RJFS or Raymond James.