Don’t Be Overwhelmed by College Debt

Student debt in the U.S. is soaring. It now tops $918 billion and eclipses credit card debt. But students aren’t doomed to a life of indebtedness. In this article, I’ll suggest a few techniques to control student loan debt.

The latest data on student debt show that the average graduating senior leaves college with $24,000 in student loan debt. On a typical 10-year repayment plan, this would cost a new graduate $276.19 per month for 120 months. By the end of repayment, the graduate will have paid back the principal plus $9143.13 in interest—for a total of $33,143.13.

The debt calculator at Mapping Your Future estimates that in order to comfortably afford this amount of student debt, a new graduate needs to earn $41,428.00 per year. (It is recommended that student loan payments be less than 8 percent of gross income.) At the same time, unemployment for recent college graduates climbed from 5.8% in 2008 to 8.7% in 2009—the highest annual rate on record for college graduates aged 20 to 24. And the median starting salary for students graduating from four-year colleges in 2009 and 2010 was $27,000, down from $30,000 for those who entered the work force in 2006 to 2008, according to a recent study by the John J. Heldrich Center for Workforce Development at Rutgers University.

The average graduate or professional student leaves school with cumulative debt totaling $47,503. The average medical school student graduates with $127,272 in student loan debt.

I’ve written before about techniques to obtain scholarships and cut college costs. But for students who have exhausted those options and still decide to borrow, there are some techniques to minimize total debt and student loan payments.

  • Accept only subsidized loans. Subsidized loans do not accrue interest while a student is enrolled in college, during the six-month grace period, or during deferments. When a typical student receives his or her loan package, it will include both subsidized and unsubsidized loans—the amount of subsidized loan based on financial need.  If possible, only accept the subsidized loans—which can be up to $3,500 for the first year of school, $4,500 the second, and $5,500 for every subsequent year.
  • Return money you don’t use. Federal formulae for calculating student loan amounts aren’t always accurate. After tuition, fees, and (if living on campus) room and board have been paid, return any additional funds to the lender. A part-time job should be sufficient to afford all other expenses including books, supplies, and transportation.
  • Make payments while in school. On subsidized loans, all payments made during school directly decrease the principal. For unsubsidized loans, students receive an interest-only bill every three months; students may pay the interest or let the interest accumulate and have it added to the amount borrowed. Paying the interest will prevent the amount owed from growing too much during college. Making payments—even small ones—during school can significantly decrease your monthly payments after graduation.

The table below outlines four estimated borrowing and repayment scenarios based on a student who borrows $6,000 a year ($3,000 a semester) for four years of college and repays the loan using the standard 10-year repayment plan. As the table shows, accepting only unsubsidized loans and making small payments while in college can help students keep their loan payments after graduation affordable. (Making payments during the 6-month grace period will lower eventual monthly payments even further.)

For students who still graduate with considerable debt, there are several repayment options available—some based on a graduate’s income. These options aren’t ideal, since they generally extend the amount of time a student takes to repay a loan and increases the total amount of interest a student must pay. (They can also be a moral hazard for students, which I discussed in a past article.) But for students deep in debt, they might be the best option.

The bottom line on student loans: borrower beware.