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College Days: The Long-term Impact of Borrowing to Finance College

11/20/2008

Imagine walking up to the stage at graduation from college to accept your diploma but instead you are handed a certificate from the Chancellor that reads, "Thank you for attending our wonderful university. We hope you enjoyed your time here and found the experience to be worthwhile. As a token of our appreciation, we ask that you please pay us $44,000 over the next 20 years. Best of luck in what promises to be a bright future!"

Two out of every three graduates today walks away with a diploma, a $21,000 student loan debt, and a $3,200 credit card debt. How does this add up to $44,000 you ask? Add in the interest on the average 6.8% federal loan paid over 20 years and an average (sometimes even very low!) credit card rate of 12% while making minimum payments and the total amount paid will reach nearly $44,000. Given that the average first job out of school pays $33,000, the average graduate is giving up 40% of their gross income to taxes and debt payments on their first month on the job! Living on the remaining 60% comes out to approximately $1,650/mo for rent, food, gas, and entertainment, among other things. Not quite the "lavish" lifestyle many students envisioned while studying Econ 101 their Freshman year.

The cost of education is rising at four times the rate of overall inflation, leaving many students to finance their tuition payments along with room, board, supplies, and other costs associated with college today. As a result, graduates are left paying for their education for many years after walking away from their respective campuses. Many graduates believe that their salaries will rise over time, but given a starting salary of just over $30,000 and annual increases less than the interest rates being paid on debt, this has not been the case. Unfortunately, it typically takes additional professional education or more schooling to advance in one's respective career. Being in debt makes this additional education even more difficult when added to the rigors of starting a career. A recent survey shows that 54% of graduates would borrow less during school if they were to do it over again. Similarly, 40% of graduates blame their debt accumulation as the reason for not pursuing graduate school or other advanced degrees.

It's important that students considering advancing their education after high school know what such an education entails and how they will pay for it. Many think that their education will "pay for itself" but the reality is that it, in most cases, does not. If you do plan on pursuing a career that pays for the debt, consider whether you have the qualifications for a major such as chemical engineering which comes with an average starting salary of $63,000. For the average liberal arts graduate, however, it could take several years to get to this salary level. On the other hand, consider attending a lower cost institution or one closer to home where you could possibly live at home for a semester or two. For less expensive educational costs, an in-state public school can provide you with the same education as a private out-of-state school and equip you to enter the job market on equal footing.

Some facts to consider*:

Public vs. Private Loans:

Public/Federal - fixed, low-interest rates , borrower protection: Current Stafford Rate = 6.8%

Private - variable rates that can be very high, limited consumer protection: Current Private Rate = 8.31%

2 out of 3 graduates leave with an average debt of $21,000 (Source: Project on Student Debt). This is what their monthly payments look like:

10-year, 6.8% Stafford: $241.67/mo; Interest = $8,000.24; Total Amount Paid = $29,000.24

20-year, 6.8% Stafford: $160.30/mo; Interest = $17,472.31; Total Amount Paid = $38,472.31

10-year; 8.31% Private: $258.24/mo; Interest = $9,988.90; Total Amount Paid = $30,988.90

20-year; 8.31% Private: $179.73/mo; Interest = $22,134.11; Total Amount Paid = $43,134.11

10% of graduates from a private school leave with an average debt of $40,000

Over half of graduates carry credit card debt with an average balance over $3,200

Cost of education rising at 4x faster than overall inflation

Debt levels for graduates have more than doubled in last decade as of 2004

College graduates make 60% more than those with only a high school diploma

Typical liberal arts major earns $33,000 out of college

Median salary for workers with bachelor's degree fell 4.6% from 2001 to 2006

Salaries rose 4.3% for workers with professional degrees and 9.4% for those with doctorates

No reason to overpay for college, may be worth it to save for grad school

54% of students say they would borrow less if they were to do it over again

Nearly 75% of U.S. doctorates had no undergraduate debt, 10% of doctorates had undergrad debt greater than $20,000

Rule of thumb: don't borrow more for all four years of college than your expected starting salary, doing so should allow you to pay back your debt within 10 years

If planning on grad school: ask your employer if the company will help cover all or a portion of the costs; if not, find a company that does

Research in a 1999 paper by Alan Krueger and Stacy Berg Dale, showed that bright students excel no matter where they get their degree

Same study found that low-income students did benefit from attending the most selective college, implying that the impact of social networking paid off for them

Prestigious degrees aren't as valuable to major corporations as they once were

* Some content drawn from http://projectonstudentdebt.org