Money magazine posted a great article today with real-world tips for paying off what might be your totally overwhelming student loans. There is practical information in here for recent grads on the methods available and which one might work for you.
But, I think the real lesson here is for high school seniors who are looking to choose a school RIGHT NOW. Take the story of Taylor Villanueva, from the Money magazine article, who just graduated from the University of Southern California with $123,000 worth of loans:
Villanueva will graduate in December from the University of Southern California owing $123,451. If she goes on a standard 10-year repayment plan, her monthly payments are likely to be over $1,400.
“I got a little overwhelmed when I saw how much I was in debt,” Villanueva says. “My whole life I’ve been a saver.”
In fact, she made several payments over the course of her two years at USC—contributing about $10,000 from her savings. But she felt that hardly made a dent given how quickly interest was accruing. (See the full article here)
First of all, $123,000 is the size of a mortgage for some people and at $1,400 per month for 10 years her education will cost her $168,000.
Ms. Villanueva expects to earn about $50,000 or less in her first job. Optimistically, this would mean a monthly take-home pay of somewhere around $3,000. In the example above, nearly half of that would go to paying off her student loans. It’s pretty hard to live on $1,600 per month.
The experts in the article propose a solution that she go on an extended payment plan and pay $735 per month for the next 30 years, a total cost to her of $264,600.
What’s wrong with this picture? Everything.
You choose a college and a major to get you ahead in life, not behind. Ms. Villanueva is behind and there’s really no telling how long it would take her to dig out of this debt. What happens when she wants to get a mortgage or a car loan? On top of her current school loan payments, these additions to her lifestyle look impossible.
What college students need to know as they make this tremendously important decision of choosing a college is that the college price must match the major and the expected job upon graduation. Choose a school that is closer to the price range you can afford – a good rule of thumb is that over your 4 years in college, aim to borrow the equivalent of one year of expected salary upon graduation. In Ms. Villanueva’s case, this would have been a $50,000 loan for which her payments after college would have been a much more manageable $400 – $600 per month.
Don’t choose a college for the wrong reason – choose the college that will truly put you in an excellent position to succeed when you graduate.
Learn more about choosing a college that fits into your budget with our College LaunchPlan.