Student Debt: When to Pull in the Reins

In the next few months, students will be hearing back from colleges with admissions decisions. Before you hopefully hear the good news from your “reach,” 50-50, and “safety” schools, make sure that you have thought long and hard about the price tag associated with that school, and how much student debt you might be willing to take on. Let’s consider some facts:

• The average student now graduates with $26,000 in student loans.
• After all interest is paid on your loans, the average student will end up paying almost $8,000 in interest alone.
• By retirement, a household with average student debt will have earned almost $208,000 less than a household with no student debt.

This information comes from a 2013 whitepaper titled At What Cost? Creating two model households, one with average student debt and one without student debt, Robert Hiltonsmith creates a simulated timeline of events for those two households and shows the financial drain of student debt. Some conclusions include the following:

• A household with no student debt can save 6% for retirement and 2% for emergencies 5 years out of college. At that time, a household with student debt cannot save for emergencies and can save only 2% for retirement.
• A household with no debt can purchase a more costly home with more of a down payment at a lower interest rates than can a household that is paying off its student debt.
• At retirement, a household with no student debt has $130,000 more saved for retirement and $70,000 more in home equity.

Keep in mind that these two households are models. Depending on race, socioeconomic status, actual loans borrowed, and current employment opportunities, the disparity could be greater.

Why begin the year on such a sober note? You are more likely to think objectively about your financial decisions now than after you have received your admissions responses. In March, you will hopefully receive several acceptance letters and colleges will begin their courting process. On college visit day, the sun will be shining, the a cappella groups will be singing your favorite song, and the cafeteria food will be delectable. On that day, you will definitely want to have written down some important numbers. Talk with your parents and decide on how you would complete these sentences:

• I will not graduate from college with more than ____________ in student loans.
• That translates to ____________ per academic year.
• My family and I will be able to pay ____________ per academic year.
• In order to meet my student loan goal, I will need to receive at least ____________ in loans or grants to attend this institution.

For example, if the price tag at a four-year college is $40,000 per year and the college is offering $10,000 per year in scholarships, we’re looking at $120,000 remaining to be paid or borrowed. You’ll definitely want to look those types of numbers dead in the eye before signing the dotted line.

These types of questions don’t relate to seniors alone, but are worth the attention of sophomores and juniors. If you find yourself in this group, now is the time to make sure your GPA and test score numbers will put you in the running for scholarships that will help reduce the financial burden. Look at your school’s website and see the SAT/ACT and GPA cutoff scores for various scholarships that apply to you.

It certainly isn’t the most enjoyable topic, but it is a very necessary one to have at this time. While you are still able to think objectively about your college plans, make sure you consider how much you and your family are able to pay, how much in student loans you are willing to take on, and how much the school will need to offer to seal the deal on your college plans.