Growing Student Loan Debt

The statistics on rapidly growing student loan debt are crippling for many recent graduates. It’s not surprising that 20% of student loan recipients are behind on their monthly payments according to the latest Report on the Economic Well-Being of U.S. Households.  It shouldn’t be surprising when I reviewed the cost of tuition for my alma mater and found that the tuition per credit hour has increased 80% in the 12 years since I graduated.  That’s 6.7% per year – or 4.8% higher inflation on education costs per year than the average US inflation over the same period.   

Like many millennials, I had to finance my own higher education with student loan debt. As the youngest of three kids, there just wasn’t enough to go around by the time I got to college. It took me six years after college to fully repay my student loan debt. Much of the success has nothing to do with what I did after college, but everything I did before & during college.  Here are some tips for high school students, current college students & their parents about how you can minimize your student loan debt:

Take advantage of AP Classes

In high school, Advanced Placement (AP) classes are offered to help you earn college credits early. These are college-level courses that are taught to high school student at a fraction of the costs.  The cost of an AP class is typically only the cost of the exam or $94. Using my alma mater as an example, their current published rate is $482 per credit hour. Each class is typically equivalent of 3 credit hours – so the total costs would be $1,446 for the equivalent course in college. That’s a savings of 93% per class!

There are over 35 types of AP classes, including languages, history, sciences, math, computer science, English and arts. These are typically the same content you would have in college and many are pre-requisites for any undergraduate degree. Another benefit – let’s say you already took regular US History in high school but not AP history, you may be required to repeat a lot of the same content again at a very steep price. My regret, I only took one AP class in high school.

Attend Community College First

Community colleges are another affordable way to earn college credits at a fraction of the cost. You can start taking community college classes in the summer before public or private college like I did. I even had one of my good friends graduate high school early to take a full semester in community college. For me, it was also an affordable way to explore some potential alternative career paths, which were still applied towards my public university degree.

Using my both my alma matter and formed community college as an example, the current prices are $482 vs. $105 per credit hour respectively. Community college is a savings of 78% per class. You could also spend several semesters at community college before you transfer to a public or private college – but it’s best to work very closely with both the community college and other college to ensure all the credits are transferable and can be able to be applied to your expected degree. Often colleges are less strict about common undergraduate requirements but have strict requirements for courses within your major be taken through their institution.

Apply for scholarships

Take advantage of every potential scholarship opportunity! Keep applying – even if you spend a couple hours per application, it may save you hundreds of dollars if not thousands of dollars off your student loan debt. I personally only took advantage of a couple scholarship opportunities that saved me a few hundred dollars a semester, but every bit adds up. There is no shortage of different types of scholarships available

Sites like Niche and are a great way to search a whole slew of college scholarships opportunities that meet your eligibility requirements.

Evaluate alternative living options

One reason my student loan debt wasn’t completely off the charts is I did not have your typical college dorm experience. Student loan debt isn’t just associated with tuition, they also include the cost of room & board.

I personally chose to attend a university about 5 miles from my childhood home. For the first 2.5 years, I had the flexibility of living at home. I spent one semester on study abroad, where I lived in an apartment and when I returned to school, I thought continuing to live amongst my peers in a dorm would enhance my college experience. It wasn’t long before I realized the cost and the experience was not for me. At my parent’s, I was an “only child” for the first time in my life, I got real home cooked meals, I didn’t have to share the laundry or better yet a bathroom with total strangers.  I also had my own room and quiet place to study without the distractions of living on campus. I also took early morning classes to allow me to get to work in the afternoons – which didn’t work well with my night-owl suite mate. I only lasted one semester in the dorm and promptly returned home to my cushy life as an only child.  Also, isn’t it a little better to still live with your parents in college rather than returning to live with them afterwards because you can’t afford to live on your own?

Another option, especially if you can swing the down payment, is to buy a house nearby to the college and rent it out to your friend or other college students. This is the approach Mr. Mula took. You’ll obviously have to abide by any local regulations about how many other renters you have, but typically if the owner also lives in the house you can have 2-3 additional renters present. This way you can spread the mortgage, utilities, and home maintenance costs. You might even be able to live for free and build equity in the home. Do your research, as some colleges may have restrictions and require you to live in the dorms at least the first year before moving off campus.

These are just two alternative living options and they still may not be a desirable choice for a lot of young adults starting their first college experience. Dorm life gives you a lot of social opportunities and convenience. Home ownership can also be a headache. Weigh the variables and ensure you find the right fit for you.

Expect to work your way through school

Even if you get scholarships and take out student loans, there are also your regular everyday living costs like clothes, toiletries, dining out, entertainment that aren’t covered by student loan debt. A lot of students take of credit cards to pay for these incidentals, but it’s a big mistake! Credit cards have the highest interest rates and will but a huge burden on your credit score if you’re not able to make the minimum payments.

Working during school is likely the reality for many college students. I personally worked several different jobs throughout college about six days a week – I even joked that I worked more hours than my mom did while I was going to school full time. I used part of the money towards tuition ~$1,500 per semester and the rest of the money went to pay for books, groceries, dining out and entertainment.  I also worked over the summers.

Unless you’re getting a lot of financial support, you need to have enough cash to cover the incidentals and anything extra should go towards your tuition to minimize student loan debt. Whatever you do, don’t rely on credit cards to bridge the money gap while in school.

Stay on the 4 years (or less) track

Another significant way to reduce the cost is to ensure you’re not dragging your heels through school. A college student will need to take about 5 classes a semester to stay on the 4-year track.  If you change your major, aren’t taking enough classes per semester, or are taking too many elective classes that cannot apply to your degree, then you run the risk of extending your college experience. 

I had an opportunity to graduate a semester earlier as I only needed one more class to graduate.  For me, I was dragging out the possibility of continuing into a master’s program which I ultimately decided against.  I cannot stress enough to go over your major credit requirements thoroughly to ensure you don’t miss a required course – some classes may only be offered in the fall or in the spring, while other classes might have prerequisites you cannot afford to overlook.

Staying in college any longer than required might sound like a good idea – avoiding the real-world responsibilities and prolonging the start of some serious student loan debt. The incremental costs of tuition, room and board will add up in your student loan balance and ultimately cost you more in the long run.

Get a good return on investment

The last bit of advice is about assessing if you’ll get good return on your investment.  If you look at the dollars that went into your education and compare it to expected outcome – make sure the numbers make sense. A lot of corporate job requirements include a minimum degree to even apply. There’s value in getting your degree, but if your job prospects post degree doesn’t align to the level of student loan debt you’ll acquire – you should really stop to reconsider the following:

What is the expected total student loan debt you’ll have at the end of college?

This should be relatively easy to figure out if you take the annually tuition, room and board costs. These should be published by your respective schools. You may not know exactly how much scholarship funds are available to you, but for now ignore those if you don’t already know.

What is the average expected salary the first year out of college?

This may be harder, because you may not know exactly what you’ll do with your degree. There is a lot of readily available information, potentially directly from your college about their post-graduate success rates and on career hubs like LinkedIn and Glassdoor.

If your average expected salary in the first year is greater than your total expected student loan debt, then this should feel like a reasonable return on your investment,

If your average expected salary in the first year is less than your total expected student loan debt, then you need to reconsider.

Here’s why:

  • The standard repayment term on a federal student loan is 10 years.
  • The average undergraduate student loan interest rate is 5.05%
  • If your average salary is less than your student loan debt – less than 13% of your post-graduate pre-tax salary will need to go towards student loan repayment
  • If you’re student loan is double your first-year salary – a whopping 26% of your pre-tax salary will need to go towards student loan repayment, which let’s be honest just isn’t feasible.

Here’s an example, if you have $50,000 in student loan debt making $50,000 a year after graduation, at 5.05% over 10 years you’ll pay $531.55 per month or about $6,378.60 your first year – that’s 12.8% of your gross salary. After taxes, health insurance, social security, rent, car and cost of living, there isn’t a lot of wiggle room to allocate more than 13% of your salary towards paying off debt.

I personally had about $20,000 of student loan debt and made $48,000 my first year out of college. The first year is always tough – especially affording a deposit and furniture if you’re renting an apartment, buying a professional wardrobe, and a car payment. It can all add up quickly. You also want to take advantage of any corporate 401K retirement up to any employer sponsored matching, which can tie up even more of your money. Any more student loan debt, at least for me, would have been crippling at certain points in my early career.

Hopefully these tips will help at least one person evaluate and prepare for the realities of student loan debt.  Let me know your biggest financial challenges or tips when it comes to dealing with your own personal student loan debt.

3 Replies to “Growing Student Loan Debt”

  1. Hi Mrs. Mula! What are you thoughts on 529’s? I have setup a couple for my children over the past several years and with the recent IRS changes they seem to be an even better option with extended flexibility of use.

  2. Your kids are lucky to have a Dad proactively investing in their education! Any amount you can save for their college is really incredible. What type of 529 plan do you have? There are two types – one is a prepaid tuition plan and the other is an educational savings plan. The prepaid tuition is good because you can basically pay tuition prices based on today’s tuition prices, but it does not cover room and board. As i mentioned in the article, tuition rates are creeping way faster than inflation – so any way to lock in those tuition rates will be a huge benefit. Ultimately I think the tax advantages on the earnings are big so long that you actually use the money to fund your kid’s education – else you’ll be subject to larger penalties. You should also check out whether you are using a broker or direct-sold plan – as you could be paying a lot in fees which will reduce the value over time.

Questions, Comments, Thoughts?