College Loans? Begin with the End in Mind
Here comes a fresh crop of college graduates….burdened with even more student loans to repay.
If you don’t follow the college loan scene, you might be shocked to learn that student loan debt now amounts to more than U.S. credit card debt.
College students owe more than $1 trillion in student loans, according to Mark Kantrowitz, an expert on financial aid and publisher of FinAid.org and FastWeb.com. He cites data from the Consumer Financial Protection Bureau, published in March, 2012, but acknowledges there’s some disagreement on how much student loan debt is actually outstanding. (The Federal Reserve and the Consumer Financial Protection Bureau publish conflicting data.)
Regardless of the total debt amount, the real question is…Can these college grads repay their loans on time—and will they?
While paying off student loans quickly would be ideal, most graduates don’t. Many who land entry-level jobs, often find moving costs, car payments and just general expenses eat into a salary that may not be able to support hefty loan repayments anyway. According to Kantrowitz, the percentage of students graduating with a bachelor’s degree AND with student loans is 65.6%. Most of them—94%—still have debt one year later.
Some grads take 12-15 years to repay—and their own kids are looking at college by then. As much fun as continuous college loans would be, it should make you think about how much to borrow.
What’s a good strategy?
First, begin with the end in mind—because that’s when your course is set. Take into account your area of study, the degree you need for the job you want, and the salary commanded by professionals in your chosen field. The big question to answer? Is the potential salary adequate to pay off the loans?
Kantrowitz’s rule of thumb is, “If total education debt is less than annual income, the borrower will be able to repay the loans in about 10 years. If total debt exceeds annual income, the borrower will struggle to repay the loans and will need an alternate repayment plan, like extended repayment or income-based repayment, in order to afford the monthly loan payments.”
Kantrowitz advises students not to borrow more than $10,000 each year in college. “If you do, you’ll graduate with more debt than 90 percent of your peers,” he adds.
How Much to Borrow?
Know your costs to attend before you decide to borrow. To find a sticker price for tuition, check the College Board site.
The College Board, comprised of nearly 6,000 institutions, publishes a “Trends in Higher Education” series that surveys in-state tuition and fees at public four-year institutions.
In 2011-12, tuition and fees averaged $8,244, up $631 (8.3%) from 2010-11. Including tuition and fees and room and board, average total charges were $17,131, up 6.0% from 2010-11. (Interestingly, average net tuition and fees paid were lower in 2011 dollars than they were in 2006-07, after adjusting for inflation, according to the College Board survey.)
If you’ve borrowed and are about to repay student loans…
1. Research your options on repayment plans, grace periods, and consolidation. Get set up to repay in a way that is most beneficial to you.
2. As with any loan, don’t miss payments. Set up a reminder system on your phone, especially for that first payment. Better yet, set up auto-pay with your bank or credit union.
3. If you find you can’t repay, don’t default! Talk with your lenders and work out a plan. Most borrowers have options.
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