The Freedom to Pursue Your Ideal Life
College Search Starter Kit: Post 4
“There is a small debate going one regarding whether or not the true cost of college has risen and, if so, by how much. The group that believes the relative costs have not risen points to the fact that while advertised costs have gone up, so to has financial aid; meaning the increase is far less dramatic than we are led to believe. But who is right? For me the answer is completely irrelevant. What matters is that the average student now graduates with nearly $40,000 in student debt, and while many experts say that can still represent a “manageable” debt load based on the average starting salaries for many professions in the United States, the reality is that in many cases it is not manageable. And even that is to say nothing of what an individual may need to do (or sacrifice) in order to secure the required level of income, or what that debt load can morph into after even a short period of payment deferral. The message is clear…students need to be smart about how much they borrow, what they get in return for their college investment, and how their student loan debt can evolve over time. Let’s talk about some critical aspects of student loan debt and post-graduation freedom…”
Of all the post in the College Search Starter Kit series this is both the hardest to write and arguably the most important. As discussed in the first three posts in this series I believe every college search should aspire to achieve three critical aims, and this post is about the third aim – i.e. graduating with the flexibility to pursue your ideal life after college. Now there are many dimensions to this topic, from geographic location, to the flexibility and marketability of your degree, to your post-graduation financial situation, but we are going to focus on that last one because it’s typically the least understood of the five pillars (e.g. geographic, academic, social, extra-curricular and financial) and if you get it wrong everything else you did right (e.g. learning a decision-making process and finding a school that represents a value investment) can become irrelevant.
Now before we move on I highly recommend you go back and read the first three post in this series. Through those articles I explain my college search philosophy and cover the first two critical college search aims in detail. So, while this is arguably the most important because the financial implications of your college search often has the most obvious and direct impact on you post-graduation flexibility, the first two aims (learning a decision framework and treating your college decision as an investment) are also hugely important to long term happiness and success, and can be your greatest tool for overcoming a potential financial set-back.
So what exactly are we going to cover today? My goal is to address four points in this post:
– Provide a quick overview of how loans work.
– Discuss healthy and excessive debt loads.
– Recommend a few reference articles.
– Leave you with a few tips on reducing the cost of college.
Now before we dive into these topics I want to point out that this article is not meant to be a comprehensive guide to financing your college education. Remember, this College Search Starter Kit is meant to be a college search “fire starter” designed to get you thinking about some of the most critical aspects of making a wise college investment and to give you a major competitive advantage by pointing you towards some hugely important topics many students miss.
So my purpose with this article is to simply make sure you understand some of the key facts and figures about student loans, and to give you some ideas about how you can navigate college without taking on excessive debt, which can add a lot of stress to your life and hinder your ability to pursue the life you attended college to create in the first place!
Let’s start with some Student Loan Basics…
I’m assuming at this point you know how loans work. Now there are many, many different types of student loans, but the mechanics are generally the same for all (pro tip…don’t confuse loans with grants). You borrow money from a bank, institution, organization or private individual and agree to repay that money, typically with interest, with payments beginning at a certain point in time and continuing at regular intervals until you have repaid the debt (whether or not you actually complete your studies – and often times whether or not you declare bankruptcy!).
But do you know how repayment works? For example, do you know how much your monthly payment will be, or how much interest you will pay over the life of a loan?
These answers obviously vary based on the type and size of loan you take, but let’s use a $40,000 student loan as an example (approximately the national average of post-college debt). Let’s also assume the loan interest rate is 6% calculated monthly and the repayment period is a standard 10-years. And to keep it simple let’s just assume there are no other factors to consider.
Based on these factors your monthly loan payment will be about $444.08. And while that payment will be split across principle and interest on a sliding scale throughout the life of the loan, in the early days only around $244.08 will go towards reducing your debt and the other $200.00 will go towards interest – meaning it is of no benefit to you!
Now assuming you make your monthly payments (no more, no less) this will continue for 10-years (or 120-months!) and by the time you repay the loan – sometime around age 32 – you will have paid approximately $13,289.84 in interest (again, money that you simply handed over to the lender for the pleasure of letting you borrow their money)!
And what if you couldn’t begin repaying that loan immediately and were forced to defer for 12-months? Well, you would then begin a year after graduation owing another $2,400 or so (roughly $26.00 per month)!
The point is, loans are real money you have to pay back, and while $40,000 may sound like a manageable debt load, owing more than $400.00 a month can have a major impact on your post-college options. So if you ever catch yourself saying something like, “Oh that school is only $10,000 more spread over four-years…” and you plan on financing college in part through loans, realize that you are likely talking about paying approximately $100 a month for 10-years or more after graduation!
Note, these figures were all based on a hypothetical example and loan terms for illustrative purposes – payments and other factors will vary for each individual. As such, I recommend you play around with a student loan calculator (there are many online such as the one at Bank Rate – again not an affiliate, just an easy to use loan calculator I found) to get a sense for what your payments may look like. But regardless of what any calculator says, be sure to read your loan terms and understand your debt before signing on the dotted line…not all loans are created equal.
Healthy and Excessive Debt
So by now you’ve probably heard some of the scary statistics. Student loan debt as of the end of 2017 was somewhere in the neighborhood of $1.48 trillion dollars. The average graduate in 2017 owed somewhere around $39,400 at the time of graduation. Student loan debt has now surpassed auto debt and credit card debt, and sits just behind mortgage debt, in the pecking order of money owed by Americans. But is student loan debt good debt, and how much student loan debt is too much?
First the harder of the two questions…is student debt good debt? Unfortunately that depends. I personally don’t think any debt is good debt, and to the extent you can minimize it I would highly recommend that approach (within reason). So I would be more inclined to label student loan debt as (for most people) “necessary” rather than “good” – which is why I think you should be rigorous about treating your college search like an investment and ensuring, to the extent possible, you maximize the potential returns.
As for how much (debt) is too much…again it depends, but there are a few rules of thumb out there. Probably the most common rule of thumb is that you should keep your student loan debt lower than one-year of your projected first salary.
So, for example, if you anticipate you will have a starting post-college salary of $50,000, according to this rule you would want to try to keep your student loans below that number. Why? Because someone, somewhere estimated that with an annual income of $50,000 you should be able to service approximately $500 in monthly loan payments relatively comfortably. But this will obviously depend on a a lot of other factors like what other money you may owe, whether you need to go to graduate school, where you live, and your overall cost of living. And this is to say nothing of the uncertain future of many current professions owing to technological progress (remember, it typically takes around 10-years worth of those $500 payments to “retire” the loan).
So if you decide to use projected salary as your benchmark, be sure to do your homework. Research expected salaries for your target profession and location, research the health and long term projections for that field, especially in the face of technology, try to project your other living costs based on where you will likely live and what your other life circumstances will be, and think about how good you are with managing money, budgeting, stress, and sacrifice.
Another rule of thumb is the idea of “excessive debt”. This one is a little more complicated, but is definitely worth considering. Rather than try to explain it here, I’ll link to this short article from Time Magazine written by Mark Kantrowitz, author of several books about paying for college, which explains the topic and gives a little context. One quote from the article that I find particularly interesting is this:
“I also found that students who graduate with excessive debt are about 10% more likely to say that it caused delays in major life events, such a buying a home, getting married, or having children. They are also about 20% more likely to say that their debt influenced their employment plans, causing them to take a job outside their field, to work more than they desired, or to work more than one job.”
Finally, there is perhaps the best benchmark of all. Doing your research, finding the best bargains for your money, understanding what you are truly getting in return for your college investment, and sticking with a loan amount you feel comfortable with; especially now that you should have a general idea about what loan payments look like, how interest accumulates over time, the importance of understanding individual loan terms, and what the national averages look like.
And again, I can’t stress this enough, my views on debt (good vs. bad) and debt loads (how much is too much) are irrelevant. You have to do what you are comfortable with. Unless I am working with you one-on-one I can only share my ideas and point you to some resources to help trigger the conversation and start your research (and thinking) process, but for me, I would personally aim to be well below the national average if possible – unless I felt very certain the extra debt would pay off in the long run.
A Few Articles:
So I have already recommended a few articles throughout this post, but here they are (and a few more) for you to read and consider. Again, none of these represent affiliate relationships, and none should be taken as the one and only definitive truth. But I do recommend you read each and consider them as part of your holistic college search strategy because (perhaps unfortunately) there is almost no getting around the fact that money can have a HUGE impact on how our lives unfold:
- Elite Colleges Don’t By Happiness for Graduates
- Bank Rate Student Loan Repayment Calculator
- Student Loan Debt Statistics for 2018
- Why Student Loan Crisis is Worse Than People Think
- 10 Things You Absolutely Need to Know About Student Loans
A Few Tips on Reducing the Cost of College
Okay, so you’ve read this post, checked out the linked articles and now you’re curious about some ways to cut the cost of college. While there are no magic bullets to completely change the facts (e.g. tuition, your grades, your financial aid entitlement), there are some strategies you can use to save a material amount of money, for example:
One of my favorite ways to save thousands, sometimes even tens of thousands of dollars is to consider Honors Programs. Why? If you’ve worked hard in high school and have the grades and test scores to show for it, why not leverage your profile to get a premium education from a less expensive school? Once you get beyond the truly elite colleges like Harvard and Stanford, I would challenge the idea that graduating from an Honors Program at a university a few spots below another in the latest magazine rankings is a disadvantage…and you can save a lot of money in the process which can give you all sorts of other advantages in the post-college world. And the perks typically don’t stop there. Honors colleges/programs often give students the best they have to offer, from special grants and merit based scholarships, to housing perks and the inside track on the best internships.
This one you obviously know, but most states have a variety of public universities/colleges and there is likely one that fits your interests and budget. If it is important to you that you keep your student debt low, we suggest you always take a healthy look at your state’s public colleges and include one or more on your final application list. The cost for in-state tuition is often significantly lower than the price for out-of-state tuition at a public school or tuition at a private school, and all the money you save can be put towards an elite graduate school program (which are often easier to get into) or simply getting a head start on life. Again, I would challenge in most cases that paying an extra $20,000 a year to go to that private school a few notches higher in some magazine’s rankings will make much of a difference once you step off campus in many cases.
Community Colleges (and not necessarily what you think)
Community colleges (CC) are a valuable local resource and can be used in two interesting ways – and I strongly suggest you consider learning what your local CC has to offer.
I’ll start with the option that is most appealing to students considering a four-year degree…you can take summer classes at a CC with the plan to transfer credits into your 4-year university – and, if enough credits are transferred you can potentially graduate in less than 4-years and save a semester of tuition (or potentially even more)! Just be sure to get prior approval – sometimes transfer credits need to be from a 4-year school. If that’s the case checkout cheaper online courses or your local 4-year state school.
Another potential way to leverage a community college is to earn an associates degree (i.e. attend for two-years) before pursuing your bachelors degree. With this approach you can potentially increase your chances of getting into a highly selective four-years school for your final two-years and reap the benefits of the diploma at a reduced price.
Similar to the strategy with Honors Programs, applying to schools where your grades and standardized test scores (if required) will likely earn you merit based aid will decrease the cost of your tuition. You can often find outstanding academic programs within colleges that you consider a safe option. Do research on “safety school” options as much as you research target and reach schools. Finding a “safety school” you love alleviates much of the pressure surrounding admissions. And because I know this can be a hard strategy to commit to, I’d recommend you reread the article “Elite Schools Don’t Buy Happiness for Graduates”.
Graduate on Time!
With the current cost of college, being diligent about graduating on time can save you some serious money! And I know this sounds like common sense, but the National Center for Education Statistics reports that only 59% of students graduate within 4 years of enrollment.
Pay For a Portion of Your College Expenses with Part Time Employment
For many of us this is the way our parents did it! Working a part-time job while in school and during the summer can help pay for a portion of your college expenses. I know work can be no fun and part time jobs are for “spending money” and gas, but trust me, as a 22 year-old graduate you will be grateful for having less to pay back. Just think about having your own apartment versus moving back in with mom and dad! Remember our student loan example above. Even if you can only contribute $10,000 to your college expenses from part-time work, that same amount in a standard loan could work out to more than $100 a month for 10-years! Not to mention the work will likely be a nice resume booster!
Research and Apply for Scholarships
I know, with all the information out there researching and applying for scholarships may feel like finding a needle in the haystack, but there is money available for those who are diligent enough to search for it, and a lot of apps and programs have emerged which can help with the process. It may seem like a lot of work now, but think of it like a job. If you are successful you are literally getting paid for your efforts.
Take College Credits in HS
If you take dual enrollment courses (HS and Local College Credit) or score high enough on your AP tests or International Baccalaureate tests you can often earn enough credits to graduate early and save a semester of tuition.
Alright, that’s all for now. If you liked this post I hope you will share it using the buttons on the left, and if you haven’t already, join the Your Path College Consulting Online Community for more articles, tips, tools and strategies!
And remember, you can always use my home page to submit your most pressing college search questions and I’ll be happy to do my best to provide you with my professional opinion. No sales, no pressure, just answers!
Almost there…see you in post five!
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