Financing a College Education

Feelings of shame surround the subject and parents hate talking about it.  It’s an awkward topic.  Are you ready to talk to your kids about… money? 

Let's discuss paying for college.  I'll turn a financial aid award letter into a real life scenario, and then calculate a potential future loan repayment amount.  For our real life scenario, we’ll use Joey Jr., who has several colleges to choose from.  It’s a difficult decision.  Joey has been accepted into SUNY Buffalo (a public school located in upstate New York).  His award letter shows nine different award types. 

(These figures are from an actual award letter for a student in Brooklyn, NY.)

Award Description

Fall Amount

Spring Amount

Total Amount

Federal Work-Study

1200

 

1200

Federal Pell Grant 1

2823

2822

5645

Federal SEOG Grant

200

200

400

Educational Opportunity Prog

1000

1000

2000

TAP Estimate

2500

2500

5000

SUNY Tuition Credit Estimate

298

297

595

Federal Direct Sub Loan 1

1750

1750

3500

Federal Direct Unsub Loan 1

1000

1000

2000

Federal Perkins Loan

500

500

1000

 

Breaking Down the Financial Aid Letter

Federal work-study enables Joey to earn some money towards tuition.  The next five financial aid sources are grants or other forms of free money.  In total, these awards total $14,840 for the year. 

We will focus on the last three federal loans in the award description.  The federal loans are included in his financial aid package and have to be paid back.  In his first year he will receive $6,500. If he completes his degree in four years, he’s looking at a minimum of $26,000 in loan debt.  The actual amount will likely be higher since tuition increases over time and many students take more than four years to complete their degree.

This is not too far off from the “average” student.  About two-thirds of college seniors graduate with student loan debt.  The average debt load is about $27,000, not including other types of debt like credit cards.

Making Some Assumptions

Let’s assume that Joey will consolidate his loans when he graduates. I multiplied each of the loan amounts by four (four years to graduate) and the result is that he will owe $14,000 in subsidized loans, $8,000 in unsubsidized loans and $4,000 in Perkins loans.  I plugged these figures into the Department of Education’s student loan consolidation calculator.

If you want to try out the calculator, for the purposes of this example, I’ve assumed the following interest rates:

  • Subsidized loans: 3.4% (Category “D” in the online estimator)
  • Unsubsidized loans: 6.8% (Category “L” in the online estimator)
  • Perkins Loans: 5% (Category “F” in the online estimator)

Paying Back the Loans

If he chooses the “standard” repayment option, the minimum monthly payment will be $168.02 per month with an interest rate of 4.75%.  At that rate, it will take him 20 years to pay off the debt and he will end up paying more than $40,000 including interest.  If he wants to pay off the loan in 10 years, the payment would be $272.60 per month.  This would save him approximately $7,500 in interest charges. 

As long as Joey Jr. gets a decent job when he graduates, $168.02 per month should not break his budget.  Keep in mind that these projected debt figures were for a state school and Joey is receiving a substantial amount of financial aid.  What if he picked a more expensive school?  On the flip side, what if he chose to go to a community college for the first two years?

Planning Ahead

To project future income and learn about different professions, check out My Next Move.  You can translate gross income into take home pay using this calculator

Take things a step further.  What might his budget look like in the future?  Does he plan to have a car?  What does rent potentially cost?  Thinking about how things might play out should make a difficult decision just a tad easier.

If you and your child stop long enough to look at some of the numbers, you’re way ahead of the game.  I teach a seminar on student loans to a group of sophomores at a college in New Jersey.  They feverishly take notes when I reveal the interest rates on loans they have been taking out for 1.5 years.  I look forward to the day when students know their loan rates (and the implications of them) before they start college!

College