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Student Loans–Too Much of A Good Thing


Student loans can help you pay for college.  But too many student loans can ruin your life.
An article today in the New York Times reports that student loans have now outstripped credit card debt in the US, and that the amount of loans will surpass $1 trillion next year.
That’s a lot of debt.
To those undergraduates thinking about taking out student loans, please hear me and hear me good:  don’t take out any more than the Federal loan limit, which is $5500 your first year, $6500 your second year, and $7500 in each of your third and fourth years.
So your maximum for undergraduate loans:  $27,000.  And if you can do it for less than that, you should.
If your college of choice asks you to borrow more, tell them “no thanks” and walk away.
A loan of $27,000 paid out over 10  years at an interest rate of 6.8% (the current rate) without any loan fees (and there will be fees) will mean that you will pay $310.72 per month for 10 years.  Your total amount paid will be $37,285.87.
So think about it.  For a slightly higher monthly payment, you could lease at brand new, 2011 Mercedes C300 4Matic Sport coupe (okay, so you have to come up with a down payment of $5000). But hey, you can easily get a Hyundai for that sort of payment.  And you can lease a new one every three years!
If you’d prefer to pay your loan over a longer period (say, 20 years) you can reduce your monthly payment to $206.10, which would mean that you would have to pay a total of $49,464 for the right to borrow your $27,000. This payment might not seem like a lot.  But let’s put it in perspective.  According to the article, the average salary of a college grad in America–of all ages–is about $55,000.  This is higher than the average for people without a college diploma.  Remember, however, that this is only an average.  About half of Americans with college degrees make LESS than $55,000, and some (especially younger grads) make a lot less.  So paying back nearly $50k to The Man At The Bank is like losing a whole year of salary (on average) over your lifetime.
And don’t forget, twenty years after you graduate, your own kids will likely be in high school…so then it will be time to take out loans to pay for college for THEM!
This may be manageable for many students.  But when you think about borrowing more than the Federal Stafford loans, look out.
If you borrow $50,000, your monthly payment will be $575 if you pay in 10  years and $382 if you pay in 20 years (assume no loan fees and a 6.8% interest rate, which is lower than the market rate for non-Federal loans.
If you borrow $75,000, your monthly payment will be $863 if you pay in 10  years and $572 if you pay in 20 years, based on the same assumptions.  (Note to students:  you can rent a nice two bedroom apartment in Denver for $850/month).
Want to borrow $100,000?  Why not. Your your monthly payment will be $1,150 if you pay in 10  years and $763 if you pay in 20 years.   My colleague, Katherine Price, heard about a student today who decided to attend NYU to get a degree in dance, and who will take out over $100,000 in loans to pay for it.  In order to pay off her debt, she will have to make $14,800 per year after taxes for 10 years just to pay off her debt.  As a dancer.  Sure, college is an “investment.”  But does that investment make any sense to you?
Don’t do it, folks. No college is worth tying an anvil around your neck.
Borrow no more than the Federal limits.
Mark Montgomery
Educational Consultant


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