Grade 9-12
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Lesson

How Will I Pay for College?

Updated: December 24 2020,

Introduction

College costs have escalated over the past two decades, and many students are relying on student loans to cover the costs.  Therefor, it is more important than ever to carefully consider the costs of college, your anticipated career income, and how to best finance those college expenses.  In this lesson, you will learn about current trends in student borrowing and determine a reasonable debt load for hypothetical students.

Task List

According to the Federal Reserve Bank of New York, student loan debt has tripled between 2004 and 2014, and the average amount of debt per borrower in 2014 was $27,000.  Most students do not understand the long-term implications of taking on large amounts of student debt and have no idea what their monthly loan payments will be after graduation.  Despite the high costs, it still pays to attend college.  However, you need to carefully consider the options for financing your education before utilizing student loans.  In this lesson, you will analyze the student loan decisions of hypothetical students, consider ways to reduce the amount to borrow, and examine data to determine wise choices for your own anticipated student loan debt.

Process

1.  Take the Student Debt Quiz.  Think about examples of friends and family members to help guide your answers.

Student Debt Quiz

View Interactive Activity

 

2.  In the Hidden Costs of College lesson, you calculated the cost of attendance for two different schools.  You may have realized that you may need to take out student loans to cover part or all of your college expenses.  In recent years, student loan debt has significantly increased, so it is very important to consider not only the cost of college, but the income you can expect to earn in your career after college.  If you intend to enter a career which pays a lower income than others, you will need to determine whether borrowing large sums of money to attend your dream college is appropriate.

Look at the graph below on consumer debt and answer the following questions:

Graph of Delinquent Loans

  • What do banks mean when a loan is 90+ days delinquent?
  • Which type of loan had the highest rate of delinquency in the first quarter of 2004?
  • Which type of loan had the highest rate of delinquency in the first quarter of 2015?

3.  Read the article The Student Loan Landscape, which summarizes research on student loan debt by staff members of the Federal Reserve Bank of New York.  Then answer the following questions:

  • What happened to the amount of student loan debt between 2004 and 2014?
  • How much is the average student debt per borrower?
  • Why has the amount of college debt increased?
  • Why is the student loan repayment rate low?
  • Is the student loan default rate increasing or decreasing?
  • Why are some borrowers, who are making their payments, seeing their loan balance continue to increase?
  • How does significant student loan debt affect a person’s credit score?
  • Why is a credit score important?
  • How can the high amount of student debt affect the macro economy?
  • Why is a college degree still a worthwhile investment?

4.  A good rule of thumb is to avoid taking on more debt than you expect to earn in your first year of work.  Armed with your background knowledge about student debt, read case studies of hypothetical students and advise them regarding a manageable amount of money to borrow.

CASE STUDIES

For the first two case studies, use one of the following websites to find the salaries the students in the case studies can expect to earn:  https://www.bls.gov/oes/current/oes_nat.htm   or http://www.careeronestop.org/toolkit/toolkit.aspx .  Divide annual income by 12 to determine monthly gross income.

For all four case studies, use the interest repayment estimator to determine the monthly student loan payment:  https://studentloans.gov/myDirectLoan/repaymentEstimator.action

Click “Add Loan,” select “Direct Unsubsidized Loan,” and type in the amount to be borrowed.  Use 4.29% as the interest rate.  This is the interest rate for https://www.investopedia.com/personal-finance/federal-direct-loans-subsidized-vs-unsubsidized/ initiated in 2015-2016.  Use the Standard Rate as the monthly repayment cost.

Compare the monthly income to the monthly student loan repayment.  How would you advise each student in the case studies?

  • Huojin wants to become an elementary school teacher.  His dream school is out of state, which will require him to borrow $191,560.
  • LaTonya wants to become a welder.  She can complete a one-year program at her local community college, which requires her to borrow $14,523.
  • Shawn spent his first year of college partying and skipping classes.  As a result of his poor grades, he will now have to attend a fifth year of college in order to obtain his four-year degree.  He will have to borrow an additional $23,032 for his fifth year.  Assuming a $40,000 income after graduation, by how much will his monthly loan payment increase for the next ten years?  By how much will his total loan increase, including interest?
  • Selina took several AP and dual credit courses in high school, which will allow her to graduate one semester early.  Assuming a $40,000 income, if one semester’s cost of attendance is $12,530, what is the total amount she will save in loan debt?

5.  Consider ways you can reduce college costs, reducing your reliance on student loans.

  • Take AP or dual credit classes while in high school
  • Attend an in-state college
  • Live at home rather than in an apartment or dormitory
  • Carefully compare your options for housing and meal plans; consider what you really need
  • Attend community college for a year or two for your classes, and then transfer to a major university for classes in your major area of study
  • Graduate on time; work with your adviser to select courses and keep up your grades
  • Buy or rent used textbooks; you won’t reuse most textbooks and can resell them
  • Buy only what you need; you don’t need every college sweatshirt, towel, and hat
  • Check to see whether local businesses offer discounts with a student ID
  • Pay bills on time to avoid paying interest charges and late fees
  • Complete your FAFSA form and apply for as many scholarships as possible – even the little ones
  • Work at least part-time while in school to reduce the amount you need to borrow

Conclusion

At a time when college costs are higher than ever, it is important to carefully consider the level of student debt you should carry. It is critical for you to plan in advance, find ways to reduce your college costs, and be realistic in selecting a college with costs you will be able to afford to repay.

Given concerns about the size of student loan debt, is a college education worth it?  Absolutely.  Even though costs have escalated in the past decade, a college degree is still a worthwhile investment for most students.  On average, college graduates earn significantly more income than non-graduates, and they are less likely to become unemployed.  A study by the Federal Reserve Bank of New York   found that the return on investment in a college education (calculating the costs and benefits of a bachelor’s degree) is approximately 15% – more than double the 7% historical rate of return in the stock market!  Of course, not all degrees are equal.  Engineers saw a 21% return on investment, while teachers only saw a 9% return on investment.  But given the trends of falling wages for those with high school diplomas, compared to stagnant wages for those with a college degree, the benefits of a college degree still outweigh the costs of that degree.  To calculate the age at which a college degree will begin to pay off, visit:  https://www.frbsf.org/education/teacher-resources/value-of-college/ .  To see an infographic about college benefits and costs, visit:  https://web.archive.org/web/20210527170418/https://www.stlouisfed.org/education_resources/college101/index.html . The videos on this website can be useful in supporting the infographic.

Your choice of college and career are among the most important decisions you will ever make.  Take the time to do careful research and prepare to reduce your costs, so you can enter a career with minimal debt and make those investments and choices of your dreams!

Assessment Activity

Let’s bring this close to home.  Use the salary indicator to determine your likely salary in the career you are considering:  https://www.bls.gov/oes/current/oes_nat.htm   or https://www.careeronestop.org/Toolkit/ACINet.aspx .

Then find the estimated annual cost of attendance for the college you would like to attend.  Visit the college’s website or go to https://nces.ed.gov/collegenavigator/ to look up tuition and fees.  Multiply that annual cost by the number of years you expect to be in college.  Although the costs of graduate school tend to be significantly higher than for a four-year degree, for purposes of this lesson, just use the same tuition for additional years of graduate school.

Assume you must borrow the entire amount to pay for your education.  Use the interest repayment estimator to determine the monthly student loan repayment:  https://studentloans.gov/myDirectLoan/repaymentEstimator.action

Given what you have learned in this lesson, write a paragraph answering each of these questions:

  • Given the monthly student loan repayment and projected salary, is this college a smart financial choice?  Explain why or why not.
  • Explain three specific actions you could take to reduce the amount of student loans required to finish your college education.

Extension Activity

You can work with your parents to calculate the estimated net price of attending college.  The College Board Net Price Calculator at https://professionals.collegeboard.org/higher-ed/financial-aid/netprice/participating-schools?excmpid=mtg382-st-1-mat bases the estimates on parents’ financial records, test scores, and GPA. Please note that not all schools participate in the Net Price Calculator. In the Net Price Calculator, click on “Participating Schools” and then select a school and “Enter as a Guest” to get started.