Much has been written about how college graduates can tackle their mountains of student loan debt. But what may be more effective is to warn and prevent high school students seeking a college education from taking on unaffordable school debt in the first place.
More than 1 million borrowers defaulted on their federal direct student loans — meaning they went 361 days or more without making a payment — in 2015, according to data from the U.S. Department of Education.1 Most of those borrowers were defaulting for the first time, but about 91,000 were defaulting for the second time.
Defaulting on student loans can have serious consequences. The government can keep any tax refund owed to the borrower and require the borrower’s employer to withhold money from their paycheck and send it to the government to repay the school loans. Default can also cause the entire loan balance to become immediately due and payable; increase the amount owed by adding late fees, collection fees and court fees to the loan balance; and damage one’s credit score for years, making it difficult to borrow to buy a car or a house and to rent an apartment or get a credit card.
What do high schoolers need to know before they commit to any student loans so they do not one day find themselves in default and so they do not limit their future opportunities by crushing themselves with student loan debt.
“Borrow as little as you need, not as much as you can,” Mark Kantrowitz, publisher of college and scholarship search website , has repeatedly advised students. He recommends limiting total student loan debt at graduation to less than what students expect their annual starting salary to be so they can afford to repay their loans in 10 years or less using 10 percent of their gross income. He uses gross income rather than net income since net income depends on where the borrower lives: state income taxes vary a lot.
“If annual income is $40,000, then the monthly income will be one-twelfth that, or $3,333.33. Dividing the monthly payment into the monthly income is 12 percent. Anything under 15 percent is affordable, though 10 percent and under is preferred,” Kantrowitz explained in an interview.
Students who take on too much debt may be forced to turn to extended repayment or income-driven repayment plans to make the monthly payments manageable, Kantrowitz said. But by stretching out the loan term over 20 or even 30 years, graduates will still be paying off their own loans when their children enroll in college. They will also be spending a lot more.
For example, $40,000 of student loan debt paid off at a 4 percent rate of interest over a 10-year period would require a monthly payment of $404.98 and total $48,597.68, Kantrowitz pointed out.
Extending that loan over 20 years would lower the monthly payment to $242.39 and bring the total up to $58,174.38 … almost $10,000 more in interest.
And 30 years? The monthly payment drops to $190.97, but the total rises to $68,746.51 … more than $20,000 in added interest.
Kantrowitz emphasized that compared with repaying the loan over 10 years, repaying the loan over 20 years more than doubles the total interest, and repaying the loan over 30 years more than triples the total interest.
“Income-driven repayment plans are intended to be safety nets, not a default choice,” he said.
Choose the Right Type of Student Loan
Students can choose from many types of loans to pay for college, but some are considerably most costly than others.
“The only student loan that students should take out is a subsidized Stafford loan,” suggested college admissions consultant Scott White of Montclair, New Jersey. “This is interest free while the student is in college and about 4 percent after that. Non-subsidized Stafford loans and private student loans, as well as parent PLUS loans, have interest rates way above market rate and cannot be discharged in bankruptcy.”
For parents who are considering borrowing to help their children pay for school, he recommends home equity loans or pension loans over the options mentioned above.
But Kristen Moon, an independent college counselor and the founder of MoonPrep.com, thinks the maximum students should borrow is the maximum offered by Stafford. (Related: Paying for College: Direct Student Loans)
Just Because Someone Will Give You a Loan Does Not Mean You Should Take It
Moon said it is very easy to be approved for a student loan because the debt cannot be discharged in bankruptcy.
“In fact, if a parent cosigns for a loan and the student dies, the parent is still on the line for the debt,” she said in an interview. (Related: What Happens to Your Student Loans When You Die?)
While there is an undue hardship exception that, in theory, makes it possible to discharge a student loan in bankruptcy, Moon says that in practice, it is nearly impossible to get student loans discharged.
And Kantrowitz points out in his public policy paper on excessive student loan debt at graduation that while colleges say that student loans make college more affordable, all they really do is delay the payment obligation — they do not reduce or eliminate it.
Do Not Let Student Loan Debt Limit Your Future
In his paper, Kantrowitz analyzed data from the 2012 Baccalaureate and Beyond Longitudinal Study and found that the consequences of graduating with excessive debt included delaying buying a home, delaying getting married, delaying having children, taking a job instead of pursuing additional education, taking a job outside one’s field of study, working more than desired and working more than one job.
For high school seniors, it can be hard to imagine that any of these things might one day feel more important than attending the college of their dreams next year. But Kantrowitz found that even a year after college graduation, students who graduate with too much debt are more likely to feel that their education was not worth the money than students who graduate with a manageable amount of debt.
The world is full of opportunities at age 17 or 18. Why limit those opportunities for the next three decades? By keeping student loan debt at a minimum, graduates will still be able to travel the world, continue their education with an advanced degree, start a business, or pursue lower-paying but potentially life-changing opportunities like volunteering with the Peace Corps or teaching.
White, the college counselor, explained how he breaks it down for his clients.
"So, you’re planning on being a teacher. You’ll earn, if you’re lucky, $50,000 in your first year. $20,000 will come out your paycheck for taxes, pension dues, healthcare, etc., leaving you with $2,500 a month, maybe.”
He then explains that if his client borrows the $120,000 required by a particular school’s financial aid package, he or she will be making debt payments of more than $1,300 a month after graduation, leaving just $1,200 a month for everything else.
“Bottom line, you’ll be living in your parents’ basement for at least the next 10 years if you take out this amount of debt,” White said.
Also hard to imagine at such a young age is the need to save for retirement, but starting at a young age makes saving enough for retirement so much easier. Any student who needs to borrow for college probably grew up in a household with some financial struggles. Instead of continuing that cycle into adulthood and repeating it for the next generation, high schoolers can start making financial decisions now that will allow them to live comfortably in the future and maybe even help their parents with their own retirement expenses. (Related: Saving for Retirement in Your 20s: Doing the Math)
Student Loan Debt Is the Student’s Responsibility
Dozens of plans for student loan debt reform have been proposed to the federal government in recent years in light of the increasingly burdensome amounts of debt students are graduating with and struggling to repay. High school students making college plans should not assume that any of these plans will rescue them, nor should they blame the system and assume they have no choice but to take on massive debt in order to get a college degree.
“Young adults are drowning in student loan debt. The media constantly blames the universities for charging such an exorbitant price, but I blame the student and their parents,” Moon said. “The reality is that students need to attend a university they can afford, plain and simple. Parents need to educate their children on what it means to take on large amounts of debt and not bank on debt reform being the solution.”
Moon said that between federal aid, state aid and reduced in-state tuition, it is feasible for all students to attend college with minimal student loans. The problem arises when the student decides to attend the private university that offers no aid and costs $65,000 a year instead of the less expensive state university.
“Would you buy an expensive luxury car you could not afford?” Moon asks. “No, that would be crazy!”
Students must not insist on attending universities they cannot afford and parents must not support the idea that it is OK for their children to take on six-figure student loan debt, Moon said.
“One of the best life lessons a parent can teach their children is how to responsibly manage money,” Moon said. “Guiding a student to attend a college they can afford and be responsible when it comes to borrowing money is a valuable life lesson for the student — perhaps even more valuable than attending a prestigious, expensive university.”
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1 US Department of Education, New Direct Loan Defaults, 1Q 2015–4Q 2015.