College Debt – Where to Draw the Line
December 21st, 2009 | by admin |
I still remember a few years ago when in an online discussion a student asked, “is a hundred thousand dollars a lot of money to borrow?” The question nearly knocked me out of my chair. I know I’ve become desensitized when the question now is “is $250,000 a lot of money to borrow?”, but I only shake my head. Students in particular need to get an understanding of what is reasonable debt, and what is a life-killing nightmare.
A good place to start is a college debt calculator like the one at Collegeboard.com. Calculators like these give students and parents a much clearer picture of just what their student loans are going to cost them over the long term.
Let’s look at an example… According to the National Association of Colleges and Employers (NACE), the average 2008 starting salary for a college graduate (B.S. in Business Management) is around $43,800. Typical monthly take home pay for that level annual income would be about $2,823.
If a student took out only the Stafford loans (typical loans included in the financial aid package) and graduated after four years with $27,000 in debt, then his or her monthly payments on those loans would be $311 per month. That’s just about 11% of the graduate’s total monthly take home income. 11% is considered pretty reasonable by most experts.
Now what if the student borrows that $100,000 as I mentioned in the first paragraph? We’ll be generous and assume they can get the additional $73,000 at the same interest rate as the Staffords (in reality, the interest rate will be higher). The graduate’s monthly payment is now $1,151 every month. That payment represents over 40% of their monthly take home income. That kind of payment is insane. There is no way a newly minted college graduate is going to be able pay for those students loans and cover the cost of their rent, their car, their utilities, their groceries. It’s just financial suicide.
Before you decide that you just can’t live without the degree from a college that is going to put you in the hole above you neck, you better get a handle on what the real cost of that debt will be.
By: Scott A Anderson
A good place to start is a college debt calculator like the one at Collegeboard.com. Calculators like these give students and parents a much clearer picture of just what their student loans are going to cost them over the long term.
Let’s look at an example… According to the National Association of Colleges and Employers (NACE), the average 2008 starting salary for a college graduate (B.S. in Business Management) is around $43,800. Typical monthly take home pay for that level annual income would be about $2,823.
If a student took out only the Stafford loans (typical loans included in the financial aid package) and graduated after four years with $27,000 in debt, then his or her monthly payments on those loans would be $311 per month. That’s just about 11% of the graduate’s total monthly take home income. 11% is considered pretty reasonable by most experts.
Now what if the student borrows that $100,000 as I mentioned in the first paragraph? We’ll be generous and assume they can get the additional $73,000 at the same interest rate as the Staffords (in reality, the interest rate will be higher). The graduate’s monthly payment is now $1,151 every month. That payment represents over 40% of their monthly take home income. That kind of payment is insane. There is no way a newly minted college graduate is going to be able pay for those students loans and cover the cost of their rent, their car, their utilities, their groceries. It’s just financial suicide.
Before you decide that you just can’t live without the degree from a college that is going to put you in the hole above you neck, you better get a handle on what the real cost of that debt will be.
By: Scott A Anderson