Why Are Student Loans Such a Problem-Part 2-How Much do Student Loans Really Cost?
Last week, I wrote about how to avoid student loans. Click here to review that post. This week, in Part 2, I’ll discuss what Student Loans really cost. The average 18–19-year-old preparing for college has no idea how much student loan debt they’re signing up for, how much interest will be charged, and what the monthly payments will be. In addition, they have no idea what it costs to live as an adult, and what tacking on a student loan payment does to their lifestyle. So, are 18–19-year-olds setup to make good decisions about taking on student loans? Of course not! And how many parents sit down with their kids and go over the costs? Unfortunately, not many. So, for teenagers, or their parents, feel free to use this information to have this discussion together.
The average cost for a state university, including tuition, fees, books, room & board, and misc. expenses, is currently about $25,000 per year. That can be reduced in several ways, which I discussed in my prior post (see link at the top of this post). But many take on the full cost and use loans to pay for it. So, that would be $100,000 in student loans to cover four years of college. The average student loan interest rate these days is about 6%. So, if a student takes out $100,000 in student loans at 6% and pays it back on the standard 10-year repayment schedule, they’d be paying about $1100/month. Over 10 years, interest payments would be about $33,500. So that $100,000 loan would really cost $133,500! Obviously, a lower loan, of say $50,000 would be about half as costly, but they’d still be paying about $550/month for 10 years and it would cost about $16,800 in interest. So, the total cost of that $50,0000 loan would actually be $66,800. Still pricey!
Then, if an average student graduates and gets an average entry level job, the average salary would be about $55,000/year. That doesn’t sound too bad. But let’s break it down. $55,000 paid bi-weekly works out to $2115 per pay period. After taxes that becomes more like $1675 per pay period (depending on the state), and we haven’t even factored in health & dental benefits. Take out those benefits and net pay is down to around $1600 per pay period. So, most months, they’ll be taking home roughly $3200/month, with an extra pay period two months each year. With that $3200/month, they have to pay for their monthly student loan payment of somewhere between $550-1100. So, they’re left with $2000-2550 to pay for their living expenses. If they rent a two-bedroom apartment, and have a roommate to share costs, they’ll be looking at more than $1000/month (depending on location) for each roommate. So, they’re left with between $1000-1550/month (at best) to pay for food, utilities, gas, clothing, eating out, gym, fun, etc. Do the math a little further. $250-300 for gas, $500 for groceries (if they shop carefully), $125 for utilities, $100 for clothing & shopping (not much!) and $200 for eating out & the money is about gone! Does that sound like this young adult will be having a lot of fun for the next 10 years? Add in car or credit card payments and things are going in the wrong direction. Consumer debt can definitely build up fast!
On top of all of this, many student loan borrowers do not pay off their loans in 10 years. They may use an income-based repayment plan, which lowers the payment & extends out the payoff date, costing even more in interest. Many borrowers have problems paying their bills and go into student loan forbearance, which temporarily halts payments (but not the interest). It’s not uncommon, unfortunately, for student loan balances to grow & extend into a person’s 40s and 50s. I see it all the time. It’s a real problem that doesn’t go just go away. There’s no way to bankrupt out of student loans. You have to pay them eventually.
An 18-year-old may struggle to understand these numbers. But what it boils down to is that these student loans are going to make it really tough to have any fun or buy anything nice until they’re in their mid 30s. It also leaves them vulnerable to piling up credit card and other debts, making things even worse. This is where I’d hope that parents and college counselors would step in, before student loan decisions are made. Sit down with the student, do the math & put boundaries around their kids’ decisions. If a parent has saved up for college, some or all of it, great! Factor that in. But unfortunately, very few adults are helping their kids with these decisions. Another problem is that some parents feel guilty for not saving up and take on some, or all of that debt. Well, that’s super awesome (sarcasm). Now the parent has a $100,000 student loan to pay while retirement is closing in. What if, instead of wiping out the parent’s retirement or killing the kids 20-something years, you were just more careful how you spend money on college? What if you therefore kept student loans to minimal amounts or zero. Wouldn’t that be better? If so, I suggest you read my prior post by clicking here to read up on this subject.
All of this can be avoided with careful planning and saving, especially if you start early. But regardless of where you are, if you need help planning out the college years, if you need help budgeting and allocating money towards college savings, and help putting together an affordable college plan, this is where Financial Coaching comes in. Click here to schedule a Complementary Consultation. We can meet together, get to know each other, and find out if Financial Coaching is a fit. How would it feel to send your kids to college without debt? If that sounds exciting to you, I look forward to the conversation.
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