To tackle this thorny question, first we'll need to get some basics out of the way. We all know what loans are. Students looking for financial assistance to go to school, in particular, tend to become all too familiar with them. The three main types of loans are:
- Student loans such as Stafford (see below) and Perkins (school-based) loans
- Parent loans, like PLUS loans
- Private student loans
Stafford loans are one of the most common Federal loans for students. They can be either subsidized - where the government pays your interest while you're in school - or unsubsidized - where you have to pay your interest, though your payments may be deferred until you graduate. The subsidized loans are reserved for undergrads who demonstrate real financial need, but all students, whether undergrad or grad, are eligible for the unsubsidized variety.
Well, that sounds great, right? You don't have to come up with tens of thousands of dollars to have an equal chance at a career! There is one small catch, though. It comes as a shock to many new graduates that these loans, with all their diversity of variable terms and interest rates, have to be repaid on a set schedule. Depending upon how much debt you accrued during your educational career, it can actually turn out that your starting annual salary doesn't stretch far enough to cover the normal expenses (housing, food, entertainment, transportation, and everything else grown-ups have to pay for now that they're on their own), plus on top of that, those darned monthly debt payments. If you haven't done your homework (and you thought you were finished with that!), you can find things spinning out of control before you know it. And, unlike your so-far safe existence in academia, where you had some leeway, the rough-and-tumble real world can be unforgiving and subject you to some pretty harsh consequences for mistakes, even if you didn't know you were making them!
So it's important to figure out, ahead of time, what kind of trade-off you're willing to make between two very important sets of numbers:
- the amount of student debt you'll require to pay for the schooling you need to prepare for a better life
- the size of the payments you're gambling that you can keep up with, as well as the number of years you'll have to keep on keeping up with them (flash to image of retirement home facade) - not to mention the probability that you won't find yourself working in a much lower-paying job than you expected!
If you haven't thought these numbers through, here's some help. And if you already have, then read on anyway - there's always a chance you could find out something new!
So, How High Is Too High?
Knowing how much debt is too much debt at the start of the whole process can save you serious headaches later. According to U.S. News author JP, here are a few statistics every undergraduate student needs to know:
- If you graduate with $25,000 in student debt, expect installments of about $150 per month (for a 20-year payment term). If you make $30,000 to $40,000 yearly, you should be able to manage those payments.
- If you start out with $50,000 in debt, your monthly payments will run around $450. Your interest payments will probably be higher since you had to take on some private loans to cover your tuition because it was over $31,000. This will be taxing, but still doable, provided your yearly income is between $40,000 and $50,000.
- For $75,000 in student debt, you can look forward to around $750 per month as a graduation present.
- Those beginning a career with $100,000 in student debt will face monthly payments of about $1,075.
- $150,000 in debt means you'll be paying back $1,700 each and every month for quite some time. You had better be doing some highly lucrative work (that means six figures), or else just plain lucky - speaking of which, it's easy to predict that some folks will be eyeing lottery tickets whenever they buy gas.
If you haven't come to terms with these facts or developed a well-considered plan of action - including such factors as how much you'll be getting paid to start with - you may end up nose-to-nose with the realization that you can't handle your student loan payments. This is among the more frightening experiences a young adult can have. Those in student loan purgatory to the tune of $50,000 see their monthly payments running neck-and-neck with their food expenses. At the $100,000 level, they may struggle to sustain expenses such as food, gas, and clothing. $150,000? Think about being a doctor, lawyer, or banker. Other ideas are welcome. In fact, here are some creative solutions for extreme student debt.
Important Resources for Money-Strapped Students
Part of dealing with big debt or its possibility is doing your due diligence. For up-to-the-minute information on all things financial aid, head over to FinAid.org. You'll find helpful calculators to help you calculate the amounts you'll need to borrow, whether it's for undergraduate, master's, doctoral, or professional studies. It's not surprising that graduate and professional students tend to borrow more than undergrads - $30,000 to $120,000 more, in fact. StudentAid assists in explaining how much you can borrow, depending upon your specific circumstances. The site also offers a helpful guide to available Federal student loan programs.
More than Just Student Loans
For example, be sure to understand or get help to know what your best options really are. Not doing that can land you in difficulty. Alicia Aiello wanted to attend Syracuse University for her undergraduate studies. The only problem: Syracuse's tuition was too expensive. So, Aiello, refusing to give up merely because of a shortfall in her existing financial aid, decided to take the initiative and get an $18,000 bank loan on top of everything else. When it later became clear she'd owe around $6,000 in interest alone, she realized she might have made a strategic error. Not only do students today face astronomical tuition rates and a weak job market, but they are also compounding their problems due to ignorance of financial matters, leading to small mistakes which tend to get much bigger months/years down the line. Many students simply sign on the dotted line with no understanding at all of the obligations they have just incurred.
In late 2012, the Consumer Financial Protection Bureau released a report saying private loans now account for approximately $150 billion of aggregate student debt. Around $8 billion of this debt was found to be in default. Adding fuel to the already out-of-control fire, private lenders, such as banks, tend to charge higher interest rates than their federal counterparts. Clearly, students need to know what they're getting into when they start taking out loans. They need help to navigate the dense undergrowth of confusing terminology, interest rates, repayment plans, and refinancing - help in the form of financial literacy training, better communication between school financial aid departments and students, increased staffing within those organizations, and more in-person financial aid counseling, etc.
What about the Student Loan Interest Rate?
It's Congress that sets the rates for federal loans - unchanged from 2001 until the start of July, 2013, when the previous rate of 3.4 percent doubled to 6.8 percent. Congress was unable to extend the lower rates for another year, so undergrads taking out new subsidized Stafford loans on or after July 1 will feel this change. And much discussion has occurred over how much this rate change will actually affect students. Luckily, while many students aren't too happy about the changes, many experts feel there won't be much to write home about: for instance, the average borrower will only have to pay about $20 more per month, according to financial aid expert Mark Kantrowitz.
Students are understandably concerned, but it's not totally clear just what the real impact will be. Many graduates may find the interest rate increase a further burden just when they're hoping to purchase a home, car, clothes, and food. For current students, though, the added interest payments mean more Federal funding available for their loans while they're still in school. What remains to be seen is whether Congress can bridge the gap between the Democrats and Republicans and amend the law with a retroactive agreement to lower the new interest rates for undergraduate borrowers. The experts aren't sure if that's possible, at least right now.
What's the True Goal of Higher Education?
It may seem repetitive, but it bears repeating: you have to know how much debt you can afford before you start. Then, after you graduate, you can make up some of the difference with a little skimping as you make your payments. It may be a drag, but in the long run, you'll be much better off. Bear in mind that college graduates earn 80 percent more, on average, than folks with just a high-school diploma.
And remember: it's not just about the financial side of it. It's about your future and what you're willing to do to get there. So do the due diligence, weigh the costs and benefits of your education, and make up your mind what you will sacrifice in order to accomplish your dreams. According to education consultant Danielle Babb, most students are simply looking for a way to better their lives: you'll be working for the better part of 40 years, so why not invest during your 20's or 30's in making the most of your potential during all that time?