We asked James Cashman, College Funding Advisor at 3Rivers Federal Credit Union, to share his discussion with students that are considering taking out college loans. Many students don’t take the time to understand their budget after graduation and the impact their loan payments will have on their day-to-day. James gives his advice on how to calculate this cost and see if taking out a student loan is right for you.
We all know – college is expensive – and getting pricier. Industry experts think college costs will increase between 2% and 5% every year. For many students, that could mean thousands of dollars in extra payments.
How does a family deal with rising costs and pay for college? In general, there are four sources of college funding. Every student is different!
1. Student-earned aid. This comes as a result of the student’s work – whether in an after-school job, in the classroom, or out in the community as a volunteer or innovator. This typically comes in the form of scholarships (or free money) that the student applies for or receives from a college. Another option is the Questa Education Foundation that provides low-interest loan awards that could be up to 75% forgiven. This is a unique loan because a portion of it could be forgiven, and is student-earned.
2. Family-earned aid. These are family, and other support system, contributions. College savings plans (check out the Indiana CollegeChoice 529 plan), parental jobs, and graduation gifts are the common methods.
3. Need-based aid. This category steps in for some students who may lack family-earned aid. The most common measurement of “need” is combined family income. The less money a family makes, the more need-based aid is typically available. Many families expect help here. In reality, only about 35% of students receive the Federal Pell Grant – one of the largest sources of need-based aid. This aid is determined by completing a FAFSA application.
4. Student loans. Student loans spread the cost of college out. The downside? Students trade payment now (in college) for monthly payments that could last 5, 10, or 20 years after graduation. A student loan is a tradeoff with our future selves.
How much student debt can you afford to take on for your degree? Our advice: do the math yourself.
A helpful way to get a grasp on how student loans will impact you after school is to use a future-focus model on cash flow (income and expenses). Think: what will life after college look like? Where will you work, live, pass time with friends, eat, and spend money? What activities will you do on a weekly basis? Begin by exploring career prospects and understand your potential income. What will your chosen career pay?
Thanks to new tools from the Department of Education, students can now see median earnings one year after graduation from many majors. Find reliable sources – ask internship providers, coworkers, and trusted mentors.
Next, list monthly expenses for your future self. You will want to consider a variety of costs – taxes, healthcare, living costs, fun money, emergency savings, and retirement savings. It will be important to understand how much a student loan payment will be, too. For easy math, use 1% of the total balance as a payment amount.
There are a variety of easy-to-use budget planners on the internet. Feel free to find one that works for you or use this basic excel file template that I use when planning with families. Check out the excel template here. As you calculate your income and expenses, there are a few helpful items to be aware of:
If you apply for a car loan, apartment, credit card, mortgage, or other form of loan, many lenders consider your debt-to-income ratio. This is a comparison of creditor expenses (housing, auto loans, personal loans, credit cards, and student loans) and monthly gross (pre-tax) income. Debt-to-income ratios above about 40% may lead to declines on future loan requests. Below 40%, many creditors will be more comfortable. In simpler terms, if you have too much debt out of college, you may be less likely to receive a loan for a new car, for example, until you can pay down some of your debt.
Having a variety of savings opportunities creates financial independence, such as emergency savings, mid-term savings for a future family or a home, and long-term savings for retirement.
This exercise isn’t set in stone – you can always change your budget. Add and remove expenses, change expectations for life, reduce student loan debt, and do what you can to make sure your budget is in balance. This exercise gives you time to make those changes before you are experiencing life.
If you need help with money – ask. We are glad to support you!
About the Author: James is passionate about education. He started at 3Rivers in 2016 and has found joy in connecting students with dream careers. In his role as College Funding Advisor, he supports families as they plan for higher education and transition to the workforce. Prior to coming aboard, he studied Spanish and Intercultural Studies at Indiana Wesleyan University, worked as a social worker in Kalamazoo, Michigan, and taught in Barcelona, Spain. Outside the office, he serves on the board of directors at the East Wayne Street Center, a local education non-profit, and enjoys travel, languages, and reading. For more information, visit www.3riversfcu.org.