Stats that matter: How much student loan debt can my child afford?
College is full of numbers, and not just for math majors. Schools are happy to tell you about their ranking, acceptance rate, graduation rate and these days even school dining hall rating (I think I would’ve gained the freshman 30 at #1 ranked UMass Amherst). However, one number that often falls by the wayside is what the student loan payback may look like after attending four years and earning that diploma.
Your child deciding on the school of their choice is like them buying a house. Except there’s no limit on how much they can borrow for the loan, no income requirement to qualify for the loan and they’re 17 or 18 years old. Most importantly, if they can’t pay back what they borrow, they can be saddled in debt for the rest of their lives.
What makes this even more difficult is that your son or daughter has worked their butt off for the past 4 years of high school, challenging themselves academically with the goal to get accepted to the school of their dreams. But what if they won’t qualify for financial aid, and are faced with massive tuition payments? The other side of college that many parents fail to talk about with their kids is planning for how to pay for it.
Let’s start with a rule of thumb to use when starting the conversation with your child. For every $10,000 that your child borrows, it translates to roughly a $100 monthly payment in student loans after graduation[1]. Let’s say your child Bobby is applying to New York University or Boston University, each with a cost of more than $70,000 per year at full price. If Bobby graduates, he’ll have a great degree, but he’ll also be faced with a $3,000 monthly payment upon graduation, and that’s if he graduates in four years.
To put the $3,000 monthly payment in perspective, a student graduating with a first job paying $50,000 per year, has roughly $3,250 in monthly take home pay. With $3,000 in a monthly loan payment, there’s no room for rent, never mind eating out and bar nights with friends that you’d hope any young adult in their early 20’s would be able to enjoy.
Now this rule of thumb is not one size fits all. After all, college is an investment in your child. Some majors have higher starting salaries than others, and there is some flexibility with methods of loan repayment. For those students motivated and interested in high paying career choices, it may make sense to take on additional loans if it is their pathway to a financially successful career. But one thing remains the same: we all know of people who have taken out too much in student loans and the impact that it has had on their financial life. It’s important for your child to know this risk before they make their choice.
Do you have a grasp on how much your child can afford in student loans? Feel free to reach out, I’d be happy to help.
All the best,
Andrew Holmes, Certified College Planning Specialist™
Andrew@PlanWithFPS.com
860-878-7032
Check out my recent whitepaper: 5 College Planning Mistakes to Avoid
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[1] Based on a standard 10 year federal student loan repayment plan