Oh my gosh — it’s spring already! Acceptance letters and financial aid packages have been received, final decisions on which school to attend are being made, the high school counseling office is excited to be notified, and graduation is just around the corner. All in all, an exciting time for high school seniors and their families.
It is also an ideal time to take a sanity check and make sure the collegiate path chosen is one that fits not only goals and aspirations but finances as well. Each year I speak with young college graduates who feel overly burdened with student loan debt (well over $100,000 in many cases!) that I want to keep others from falling into the same trap.
College is an excellent investment. I have yet to meet anyone who graduated from college and regrets having a college degree. I don’t believe you need to know exactly what you’re going to do as a profession once you graduate. Most college graduates change majors at least once while earning their undergraduate degrees. College is a time for exploration. You develop critical thinking skills, you get to know people from a wider range of backgrounds, and you learn how to become a lifelong learner.
What concerns me is the desire among some high school students to attend a college at a cost that is way beyond their means. In the United States we have so many excellent choices for learning at widely varying price points that it is possible to get a great education at a price you can afford.
It’s natural to get swept up in the excitement of going to college. What can get lost is a thorough explanation and understanding of the financial cost of the student loans that are granted to new high school graduates. It is pretty easy for a student to borrow $25,000 per year for four years of college. This is the average cost to attend an in-state public university. In a typical loan arrangement, interest accrues but no payments are due until six months after graduation. Upon graduation, the balance due will be around $118,000 if the loans have a 6.8% interest rate. To repay this debt in 10 years, a typical repayment period, the monthly payment will be $1,358.
In certain fields such as engineering, computer science, or finance, $1,358 per month might be manageable. For others, however, such as education, psychology, or marketing, this amount eats up a third to half of the typical paycheck.
In either case, is this much debt desirable? It will certainly interfere with the ability to finance a car, condo, or just about anything else the first five years after graduating. “Saddling graduates with crippling debt limits their ability to take career risks and limits entrepreneurship,” according to Don Phillips, managing director at Morningstar. “It forces people to follow the highest-paying professions rather than their passions. It also creates generations of young people who will be severely constrained in their ability to save for their futures, thus putting a bigger drain on society.”1
Before helping your future college student sign on for this much debt I recommend three things:
1.Check out the Federal Student Aid website if you haven’t done so already. This site has information on the latest repayment plan options, sources for grants, scholarships, and work-study programs. A little research and legwork can save thousands of dollars.
2.Research the salaries in different fields of study — not just the ones your student is focused on but on some that are tangentially related — to get a feel for what it’s reasonable. A place to start is the National Association of Colleges and Employers. These surveys don’t reflect how many applicants there were for the positions hired so bear in mind that some fields are tough to break into.
3.Aim for graduating with no more than one year’s salary in student loan debt. Figure out how best to utilize other sources of funding such as savings, work-study, grants and scholarships, as well as less expensive education options to keep the debt in check.
Taking a sanity check on the cost of the college education, and balancing sources of funding against potential future salaries, means that not only can there be fun, rewarding times during college, but there will also be fun, rewarding times after graduating!
1Phillips, Don. “A Costly Education: Amid soaring prices, financial planners need a role in solving what ails U.S. Universities”, p10. Morningstar Magazine. April/May 2015.