What I like about these tools is that they provide a good snapshot of costs and I do like the business-like approach of determining the best value. I strongly believe that when looking at colleges, you must consider them a business that are vying for your dollars as a consumer. Let’s take a look at a few tools in an example scenario with Georgia Tech in Atlanta, Georgia. For reference, I pulled all of this information on April 29th from the Net Price Calculator Tool on their website. (I pulled this information here on their website. The Department of Education Net Price Calculator Tool points to the instance is the same tool.)

In this example, we will assume I am an entering freshman from Georgia that plans to live on campus. I come from a family of five where two of us will be in college at the same time and our parents earn between $90 and $99K annually.

This is my result:

This is good information as it lets me know that if everything happens the way I plan, I can expect to pay almost $10K less a year.

The problem is that these tools aren’t guarantees and your results may vary. For example, if you live in the state of Georgia, you may be eligible to benefit from a higher level of the HOPE scholarship. Or, perhaps these grants already reflect the application of the HOPE scholarship and maybe you will not qualify for them. There are a lot of variables applied to these numbers and without detail, you can’t tell if these numbers really apply to you.

At the end of the day, these tool help guide you in applying for schools you might be able to afford. But, at the end of the day, these numbers may not come to pass in this way for you. Alternatively, just because a school is a “bargain” and offering you a “steep discount” with grants, it still may not be worth the final cost.

Even after a financial aid offer has been made, you still need to determine if you can afford the college or university you want to attend. Remember that just because a school offers you a tremendous package, it still may not be an affordable option for you. (See our blog on one student who had $40K a year in grants but would have drown in debt until well into her 30’s if she had chosen that school)

In other words, don’t count your chickens before they hatch and most definitely don’t set your heart on a college or university until you have all of the numbers in hand and a formal financial aid offer has been made. Once you have that offer in hand, carefully evaluate those offers to ensure you choose a school you can afford. If student loans are a part of the financial aid package, make sure you run a detailed financial assessment to understand how those loans will impact you after college. What looks like a golden package may sink you with debt payments for years to come. That’s not really a bargain in the long run!

Before You Ponder Student Loan Debt, Ponder the Total Cost of College

Student loan debt is only one part of the cost of attending college. You need to calculate the total cost of college across the four years. And that cost is more than just tuition and room and board. You need to factor in all of the other costs that go into attending one school versus another. For instance, if all things else being equal (meaning that if two schools could be identical in all ways), one college required you to have a car while another had acceptable public transportation alternatives, the latter would present a better value as you wouldn’t likely need to incur as much cost as having a car with insurance, gas and parking-related charges.

Looking at the total cost for college is important because its cost has an impact on you and your parents if they are offering to help. For instance, if the total cost for college was $100,000 over four years and your parents had offered to cover that expense, how does that cost affect their savings and ability to retire or pursue any goals they have? It’s only reasonable and mature that a student ask their parent(s) what the impact is to them for paying the level of money.

What if a student wasn’t getting any financial support from parents at all? That $100,000 takes on a whole new meaning in terms of how the student looks at paying for school.

Kick Off a Monumental Funding Drive

The next part of understanding the potential cost is of course, applying for any and every scholarship and grant that the student may be eligible for. This is all about reducing the impact through “free” monies. And don’t rely only on possible funding sources the college might suggest but looking for other scholarships and grants by organizations around the country that you could potentially attract. Every bit helps.

This should be a goal for students and parents alike regardless of how much the parent(s) are contributing. The cost of college is high and there is no reason to leave money on the table that could offset costs for either the student or the parent(s).

Calculate the Amount Needed in Student Loans

Once you have an idea as to the total cost for each college you’re thinking about and the amounts of any scholarships and grants you’ve been awarded (or are highly likely to be awarded), the next step is to see what’s left over for paying. This is where your parent(s) may contribute to the cost of college. Whether your parent(s) do contribute or not, this remaining amount is what you will have to fund and if you have no other resources to pull from, student loans may be necessary.

Assess the Impact of Student Loans on Your Financial Future

Next, you will want to create a budget outlook based on your future earning potential to see how student loans affect the quality of your life and ability to save for the future.

Lenders will always talk about “Debt-to-Income” ratios as a key measure to look at when evaluating an application to lend someone money whether that be for a mortgage, a car or other major purchase. Debt-to-Income is a simple calculation. Say, you borrowed $50,000 through college and your monthly payment at 6% for 10 years = $555. Let’s say you started your career with a job that pays $60,000 gross (before taxes) a year or $5,000 per month. Your Debt-to-Income ratio of student loans would be:

Debt-to-Income Ratio = Monthly Student Loan Payment/Gross Monthly Income

= $555/$5,000

= .111 or 11%

So, in this scenario, your debt-to-income ratio means your student loans make up 11% of your gross income each month.

Is that an acceptable amount if the student had no other debt? Actually, it can be. Though it varies across lenders, anything under a Debt-to-Income ratio below 20% is definitely attractive when considering a prospect for a loan. Sallie Mae cites a range of 10 to 15% of monthly income for general guidance on their website. Our own stances is that 15% is too high so that as long as the student was diligent in making payments and their credit worthiness is good (or at least not flagged as bad in any way), the student won’t be hobbled by student loans when it comes to borrowing for other types of purchases.

But this isn’t the whole story. We also need to look at what the overall cost of living might be too.

For instance, let’s say the student lives in a more affluent part of town and the cost of living is so high that that $555 monthly payment means the student can barely get by. Though the student’s debt-to-income ratio is low, it doesn’t matter one bit if the student is unable to save because their cost of living is too great. A not-so-informed student may consider refinancing their student loans over a longer period to reduce their payments. A smart student may see the need to relocate and budget their spending so that they have money each month left over for savings and possibly to accelerate paying off their student debt.

Look at Student Loans in a Bigger Context

One last perspective here is the combination of the two factors. Let’s use the debt-to-income ratio of 11% again. However, let’s say you do have some money left over because you made better choices in the cost of living and live within a reasonable budget. However, now you’re looking at buying a house. Let’s say the house costs $250,000 and at a 4% interest rate, your monthly payment over 30 years would be $1,194.

Your debt-to-income ratio combining your student loan debt and mortgage debt would be:

Debt-to-Income Ratio = Monthly Debt Payments/Gross Monthly Income

= ($1,194 + $555)/$5,000

= $1,749/$5,000

= .3498 or 35%

Now, you can see how your overall debt-to-income ratio is much higher which is to say more of your monthly income is going toward servicing debt. From a lender perspective, you’re probably in a range where you don’t want to go any higher from a credit worthiness standpoint.

From a quality of life perspective, the student is running the risk of becoming cash tight and less able to save or build wealth given the level of debt servicing. What was once thought to be a reasonable level of student loan debt now feels like it’s constricting the student’s finances. Of course, some level of a mortgage payment is no different than what would be paid in rent. However, the costs usually go higher and include greater property taxes, higher cost of utilities, upkeep and maintenance as well. And then making more money each year can help. However, raises and promotions and the like are partially offset by any rise in costs such as healthcare costs and other increases in the cost of living.

Conclusion

So, in this last example, we hope you see that your end goal should be to minimize the level of student loan debt you incur and its impact on your future ability to save. By taking a methodical approach to evaluating the colleges you are interested in, you will have a window into their overall impact on you and your parent(s). You may still have the burdens associated with student loan debt depending on your end choices, but you can take comfort knowing that you made better choices to make your situation after college bearable versus brutal.

You Can Do This. We Can Help

If all of this seems a little daunting to undertake, this is what College Pathing helps you to do. We apply sound calculations to get at the total cost of college, identify the net impact of any scholarships and grants and parent contributions to get at what if anything, may need to be borrowed, and help you understand the future impact of the cost of college on your ability to save and build wealth when you leave college.

The student loan debt you incur today impacts the money you will have available in the future.

This student had an amazing grant package to a prestigious, east coast, private university she desperately wanted to attend. She had $32,000 a year in grants and she wanted to pursue a degree in Chemistry. She knew she would need a Masters degree at a minimum to do the kind of work she wanted to do so she was looking at 6 years of college. With her AP credits, she might be able to finish her undergraduate degree in three years and finish in 5 years.

Unfortunately, her parents were unable to contribute much to her college tuition but she believed she could make this university work because she had a very generous financial aid package full of low-rate student loans and, of course, those grants. As her dream school, she was heavily invested in making this work.

Here is her cost assessment for 3 years:

Let’s extrapolate this out. First, she would be walking away from an undergraduate degree with roughly $62,000 in loans, assuming she lives frugally and gets a part-time job to cover summer expenses.

Let’s make the following assumptions:

1. Student loan repayment shouldn’t go on for more than 10 years, which is the standard term, or it starts to impact your life decisions and savings in your 30’s.
2. Student loan payments should be 10% or less of your gross salary. Otherwise, after taxes, health payments, and 401K contributions, you won’t have enough to live on.

Now, let’s look at student loan payments. Taking each one of these types of loans and their associated interest rates, we come up with a monthly payment of $942 a month for 10 years.

$942 a month is a large number. We know at this point that she cannot afford to go to graduate school.

Let’s assume she starts working after her undergraduate degree. The average salary for someone with a bachelor’s degree in Chemistry is $45,000/year for their first year moving up to $66,000/year around year 5. Using a paycheck calculator, we can estimate the final paycheck minus taxes, health insurance, and 401K contribution. She would be taking home between $2000 and $2500 a month over this 10 year period. As you can see, her loan repayment is almost half of her projected take home pay.

Student Loan Repayment for a Chemistry Major

At this rate, this young lady would have a roommate at least until her early 30’s and will struggle to buy a car. Paying for the graduate school she needs is out of reach, even with the increased salary of a master’s degree.

So, what did this young lady do? She is just wrapping up her second year at a local state school. While this was actually her least favorite option, she’s made it work and it has worked out very well. She has a bright future ahead of her.

While this young lady wanted to study Chemistry, her real love is music. She is now pursuing a dual major in something she loves, music, which she would never have been able to do at the private university. Local band and orchestra contacts helped her secure a scholarship and she earns money playing in the university band and helping with the local student orchestra. More importantly, her smaller, independent scholarships go farther at a more affordable university. She is able to live at home and save on living expenses. She is on a path to graduate with no debt.

When this student and her family came to us, they were at loggerheads. At College Pathing, we believe that students are able to make good financial decisions when they are given the information to do so. This decision was a hard one to make, but it was her decision and she can take full ownership of the (amazing!) outcome.