“You’re going to college”. These are the words that many young people have drilled into their heads by their parents at an early age.
It’s an admirable goal. The attainment of a degree has historically opened up opportunities for millions that would have otherwise been out of reach. However, the story has become more complicated in recent years. With mounting debt, the financial burden is growing.
Breaking Down the Numbers
According to Forbes, there are 45 million borrowers who owe a combined total of 1.5 trillion dollars in student loan debt. That total exceeds all other debt categories except mortgages. The cost of attendance at in-state public institutions has increased at a rate of 221% over the last 20 years, outpacing both inflation and wage growth. The average borrower for a 4-year program from the Class of 2018 left school with $29,800 in debt. For those choosing a professional degree in a field like law or medicine to supplement their bachelors, they are likely to incur total balances in the six figures.
Now, when you are a 17- or 18-year old kid, you don’t yet possess a firm comprehension of what it means to borrow a large sum of money. Sure, you may understand that it is generally bad to borrow excessively and that it should be done for select purposes, but that is the extent of it.
Let’s break down an example to offer context.
Sharon’s Student Loans
Sharon is a recent graduate who owes the $29,800 that a typical undergraduate borrower owes, with a fixed interest rate of 4.53% (federal subsidized loan).
On a 10-year repayment schedule, Sharon will be paying $309.27 per month, assuming she does not make any additional payments.
With the monthly payment now calculated, Sharon has a number she can use. She can now compare how much it will cost to service her student loan per month, relative to how much money she will be making.
Now, hold on…Sharon has decided to attend law school.
For 3 years of law school at the best public school in her state, her total out-of-pocket expense will surpass $100,000. To simplify the math, we will use $110,000 as her total loan balance including principal and capitalized interest (graduate loans are unsubsidized, and you owe the interest for the entire time that you are still in school). Her interest rate is 6.08%.
On a 10-year repayment schedule, Sharon will be paying $1,225.65 per month, assuming again that she makes no additional payments.
Now, don’t forget, she still needs to pay off the balance she borrowed for her bachelor’s degree.
Total Monthly Payment
$309.27 (bachelor’s) + $1,225.65 (law degree) = $1,534.92/month
Ideally, Sharon landed a well-paying legal job in a major city where a $1,535 payment is no problem. Or, perhaps she didn’t.
Sharon could certainly consolidate her loans and refinance them at a better rate and repayment term, but she will pay more in interest over the life of the loan.
The message here is that the cost of borrowing money for an education is entirely notional until you break down the numbers.
Factors to Consider
When deciding on whether to attend college, where you will attend, or what you will study, there are many factors to consider. Here are six.
- Private or Public? Many private schools charge a much higher rate of tuition than their public counterparts, especially if a student is staying in their home state. The top schools in the United States are private (think Ivy League), however, there are many phenomenal state schools…which will likely leave you with a far smaller financial burden.
- Scholarship/Need-Based Aid Availability? Are there programs in your home-state that reward you for reaching certain benchmarks on standardized tests and/or achieving a certain Grade Point Average (‘GPA’)? Did one school offer you money to attend, while another did not? Do you qualify for need-based aid, like Pell Grants?
- Major of Study? Evaluate your skills, strengths and interests to help decide what your ‘Major’ or focus of study will be. In so doing, pay attention to likely career outcomes to know what the starting and mid-career earnings are for that Major.
- Graduate School? Will graduate school allow you to earn additional income over the course of your lifetime in your respective field? Is the degree required for your desired profession? Is it simply a non-financial personal goal of yours? How much will it cost to attend, and how long will it take you to pay it off?
- Alternative Career/Job Options? If you decide not to attend college, do you have viable alternatives for work? What do they pay, and what is the long-term viability of each of those options for you?
- How will you pay for School? What are your options for paying for tuition, books, fees, housing, food etc.? If you are not receiving assistance from family, or the assistance does not cover the entire cost, will you be able to work to cover the remaining costs? How much debt will you leave school with and what will the monthly payments be?
It is often pointed out that college or graduate school will be an investment in yourself, and that it is therefore worth the cost. Yes, education is an investment in yourself and in the vast majority of cases it will be worth the cost. Evaluate your choices and options based on key factors like your career aspirations and personal goals.
Above all else, know the numbers.