Yellowstone Financial, Inc.

How Much In Student Loans Can You Handle?

Today is the deadline for many high school seniors to confirm their college choice.  For many it’s a culmination of a process of hard work in high school, ACTs and SATs, and building an extracurricular resume.  It’s an emotional decision as you decide where you will spend the next four (or more) years of your life, which will have an impact on your career, your friends, and where you will end up living.

Today you also choose how much your parents and you will be in debt, if you don’t have sufficient resources to pay for all college costs.   While finding the right college can be a challenge, for most it pales in comparison to the impact of taking out too much in loans to pay for it.

A rule of thumb that has endured is that you should graduate with no more in student debt than you can reasonably expect to earn your first year out of college.  Sure it’s hard to know what you’ll be doing when you graduate from college when you’re still in high school, so you may want to take salary averages compiled by the federal government.  If we take CU Boulder as an example, the median salary of those who entered college ten years ago and received financial aid is $47,700.

If you borrow about $11,000 a year and graduate within four years, you’ll end up with high but manageable student loan debt as long as your career pays close to the averages.  It would be best  to limit yourself to the federal student loan maximum, which starts at $5,500 in your first year of undergrad and goes up to $7,500 by the time you’re reached your third year.  You may need to go to private student loan resources, although they do not have the good terms of a federal loan and will likely look at your credit and ability to pay.

If you’re an Arts and Sciences student at CU, your total annual costs will be close to $27,000 with Business and Engineering students paying a few thousand more.   Your challenge is to figure out how to bridge the $16,000 annual gap.  If your parents are willing and able to pay for part of college, that’s wonderful news.  Be grateful!  You also may qualify for need-based financial aid given your parent’s financial situation, or merit-based aid if you earned good grades in high school.

If there’s still a gap that means that you will need to work in the summers before and hold down a part-time or work study job while you’re in school.  While working in college may not be your first choice, studies have shown that college students who work under 20 hours a week do not see their grades suffer.

There are also PLUS loans that permit your parents to borrow up to the full amount of your cost of attendance.  Home equity lines of credit are another commonly used resource.  These loans may in your mind bring more expensive college options into reach.  But think about if you really want your parents borrowing a five or six digit sum so you can go the school of your choice.  By the time you graduate, your parents may be close to retirement age.  They need to be financially strong so they don’t end up depending on you when they retire.

Student loans if misused can be financial weapons of mass destruction.  For the students, it can limit career choices, and delay buying your first home and getting married.  We’ve seen that the more you borrow,  the more you tend to put off the milestones of adulthood. For parents taking out loans, it can be as simple as delayed retirement  or could result in financial insecurity in their retirement years.

So as you commit to that college, begin with the end in mind.  Where do you want to go, and how much do you want your parents and you to owe?