by David Wattenbarger, nooga.com
“Student loans are stressing me out.”
Recent conversations with friends and colleagues here in Chattanooga have finally driven home for me how great an impact education debt is having on household finances.
In my own experience, I was privileged enough to escape college with a degree and no debt, thanks to a combination of scholarships and part-time jobs. But for many, the experience is different and has many signs of a full-fledged crisis.
If one image can tell the story, it’s the graph below.
Over the past 10 years, the general prices in the U.S. economy, as measured by CPI, have risen about 22 percent.
College tuition and fees, on the other hand, have risen more than 66 percent.
Add to the mix that from 2003 to 2013, the average U.S. wage rose from $34,000 to just under $45,000, or a 32 percent rise, while the median wage rose about 24 percent for the same period.
Those facts contribute to the current reality: Student loan debt has grown by 218 percent since 2004 to a total of $1.5 trillion.
The prospective student
You are in high school and everyone is telling you that college is the path to the good job, more options and financial security. And they are right—a college degree is still the best bet for getting a higher-paying job.
But an important part of that math is not spending too much to get the degree in the first place.
The harsh reality is that some careers are likely to pay more than others, but the tuition hours cost the same.
It makes sense for high school seniors to consider some facts before choosing to take on debt.
—All degrees and careers are not created equal (in terms of pay). On average, a mechanical engineer earns $64,000, while a paralegal earns$43,000. Similarly, a copy editor might make $41,000, while a meteorologist makes $51,000.
—$10,000 to $20,000 a year can make an enormous difference when it comes to paying off school debt. Though choosing a career should involve more than the potential payout, deciding how much debt is reasonable should involve some analysis of paying it off.
—College costs vary. Using Chattanooga-area schools as examples, the annual cost of an in-class (as opposed to online) year of education varies greatly. Assuming in-state residency and not living with your parents, the estimates range from about $17,000 at Chattanooga State to $22,500 at UTC to as much as $27,000 or $30,000 at Covenant or Southern Adventist. The quality of education matters, and so does the cost. Prospective students should weigh those considerations when choosing a school.
—Student loan debt is a tax on future earnings. Borrowing $40,000 at 6.8 percent requires $305 per month to pay it off over 20 years, or $460 for a 10-year payoff. That is $3,600 to $5,500 per year out of your future income for the 10 to 20 years after graduation.
| Amount borrowed (at 6.8%) | Monthly payment for 10-year payoff | Monthly payment for 20-year payoff |
|---|---|---|
| $40,000 | $460.32 | $305.34 |
| $75,000 | $863.10 | $572.50 |
| $100,000 | $1,150.80 | $763.34 |
| $150,000 | $1,726.20 | $1,145.01 |
For the student or graduate already in debt
One very common question from people with student debt is, “Should I try to pay the debt off before I start investing?”
The truth is there is no one right answer.
Most people in this scenario should look at their options. What are the payoff scenarios? Are you in a career that offers loan forgiveness? What are the chances of significant increases in pay over the next 10 years? Do you like your odds to earn more in the market than you owe in interest on your debt?
The truth is that it is likely that significant school debt will impact other budgetary choices, such as buying a house, spending money on travel or a wedding, or getting a good start on retirement savings.
Finding the right balance between paying down the debt on your education and living the rest of your life can be tough, but making a plan with real numbers and a timeline can help.
The rest of society
If you are among the lucky two-thirds of the tax-paying population not currently paying down student loans, you may still have a part to play.
Consider contacting your representative in the House or the Senate. Or look into funding scholarships directly with a university or via a local organization.
More Business Stories
