Jill On Money: Paying for college

Jill Schlesinger

By Jill Schlesinger

As college acceptance letters pour in, it’s time for families to get real, and to make decisions that could have long-term implications. Although we are in a tight labor market and wages are rising, an undergraduate degree is still worth it. According to research from the Federal Reserve Bank of New York, a college education can add nearly $1 million in earnings over the course of a career, which is a 15 percent rate of return above what those without a degree earn. Even those who borrow money to attend school are likely to be better off than they would have been without the degree. The big issue is that it is important not to borrow too much money to earn it.

How much is too much education debt? College funding experts recommend that students should borrow less than what they will earn in their first-year salary. For parents, who are increasingly helping to foot the bill, a good rule of thumb for borrowing for all children should be less than annual income, including cosigned loans. Even when families limit the borrowing, the numbers are astounding. By the end of 2021, the Federal Reserve reported the total amount of student loan debt was $1.749 trillion held by 43.4 million borrowers.

The numbers are big, but a little less daunting when we drill down. According to the Education Data Initiative, despite horror stories of six-figure loan balances, as of last year, the average federal student loan debt balance to attain a bachelor’s degree was $37,113 ($40,904 if private loan debt is included) and the average public university student borrows $30,030. The good news is that with the tightening of the labor market and recent wage gains over the past few years, the average starting salary for the college Class of 2020 was $55,260, according to a recent report from the National Association of Colleges and Employers. Even so, average is average, and many borrowers struggle to whittle away the mountain of debt they have accumulated. It will take the average borrower 20 years to pay back their student loans, according to the Education Data Initiative. Graduates in 2022 are projected to take 10 years to pay back $44,595 of debt if they make monthly payments of $372.

Carrying debt means that many borrowers delay at least one major financial milestone, like paying down outstanding credit card and other debt, establishing an emergency reserve fund, or saving for retirement. There is also a non-financial cost of student loans. In Psychology Today, Kate H. Choi Ph.D. cites research which shows that “having a sizable student debt may be hurting the mental health of young adults. Students with high debt tended to have poorer psychological functioning than those with little financial concerns.” Borrowers report higher levels of tension, anxiety, and can also lead to sleep issues.

To state an obvious fact: the decisions families make about financing college will impact their lives for years and sometimes decades to come, so it is important to underscore that financial aid packages are notoriously difficult to read and compare because there is no single way that schools are required to detail scholarship, grant, and loan information. Additionally, when colleges send out letters, they often don’t include important information like interest rates, term of the loan, or projected future payment amounts upon graduation. That means that the decision-making process for college must also include a deeper dive into what is free and what is borrowed money, which may mean contacting each institution to pinpoint exactly what the offer entails.

You will also want to know whether the student is assuming a subsidized loan, which is based on financial need and doesn’t accrue interest while a student is enrolled in school or an unsubsidized loan, which starts accumulating interest as soon as funds are disbursed. With the details in hand, you can consult two government search tools, College Navigator and College Scorecard, which are designed to help families consider costs, graduation rates, job placement rates, and earnings of various schools. There is also a Consumer Financial Protection Bureau (CFPB) portal that can help.

Forbearance Update: Various government actions helped nearly 37 million student borrowers push the pause button on their federal loans since March 2020. On April 6th, the Biden Administration announced that for the sixth time in two years, borrowers will get even more time before the clock restarts. The new extension means that loan servicers will resume collection of payments, interest accrual, and involuntary collection of defaulted loans as of September 1, 2022.