A college education has become seriously expensive. But you’ve decided it’s worth it and you want to go to college. Your parents would like you to get a college education. Unfortunately, they’re not in a position where they’ll be able to help you a lot financially. This means you’ll have to go into debt to finance that education.
According to a study done recently by the College Board the average cost of fees and tuition at a private 4-year college for the 2015- 2016 school year was $32,405. The average cost of a year at a public college doesn’t fall far behind at $23,890.
Do the math and if your choice will be a public college you’ll be paying somewhere around $95,000 for your four years, not including room and board, books and miscellaneous spending.
How much of that $95,000-plus will you have to borrow?
That will depend on the amount of aid you’re able to get. But even if you can get some scholarships and grants you might still graduate owing around $35,000, which was the average amount or debt owed by 2014 graduates. And that’s almost twice the amount that students had to pay back two decades ago.
How to have a college education practically debt-free
If you want to graduate debt-free or at least owing very little, there’s a simple solution. Go to a community college for your first two years. Here’s an example of why this makes sense. The cost of going to New Jersey’s Bergen Community college is only $2670 per semester. This allowed one student to pay off her associate’s degree before she even left school.
The big misconception
Before you fall over in a dead faint at the idea of attending a community college, consider this. There’s a big misconception about two-year community colleges, which is that the quality of education you would get is not as good as at a four-year school. But then as many people will tell you it’s really up to you to get the most out of your experience – whether it’s at a community college or four-year college.
After community college
The core classes you would take at a community college are essentially the same as you would take the first two years at a four-year school. This means you’re not missing very much by going to a community school. Once you graduate from it – with an Associate’s Degree – you could then transfer to the school of your choice. Assuming you took advanced classes at the community college and got good grades you should be able to get a lot of financial aid when you transfer to a new school. In fact, one young woman who transferred to the Stevens Institute of Technology that cost $65,000 a year applied for and got more than 30 scholarships as well as grants and need-based financial aid. All of this totaled up to about $200,000 so that she graduated owing practically nothing.
Choose your major carefully
If you will be borrowing money to finance your college education, it’s important to think ahead when choosing your major. It might be okay to follow your passion but if your passion is philosophy, social work or early childhood education, it may be a very long time before you will be debt free. For example, social workers earn an average of $42,000 a year, while people in early childhood education earn even less at $39,000 a year. If visual and performing arts is your passion be prepared to earn only about $42,000 a year. Elementary teachers do a bit better at an average of $43,000 a year and those that majored in Studio Arts also earn an average of $42,000 a year.
Let’s say for the sake of an example that you major in early childhood education and will be earning about $39,000 a year. If you graduate owing $25,000 at an average interest rate of 6.80% and want to have that debt paid off in 10 years, your monthly payment will be $287.80. You will pay a total of $9,524.24 in interest and your cumulative payments will be $34,524.14. Assuming you’re single, your take-home pay after taxes as an early childhood educator will be in the neighborhood of $1124. This means the payment on your student debt would eat up almost 25% of your take-home pay, leaving just $837 a month for everything else. As you can see from this example if you follow your passion when choosing a college major, and you don’t think about what it would mean to you financially, you could be spending a lot of money with not much of an ROI.
Understand the alternatives
The example given above is based on the 10-year standard student loan repayment plan that all graduating students are automatically put into. If you find your monthly payment too much to handle under this plan, there are alternatives. One of the best of these, which was just announced in 2015, is called Pay As You Earn (PAYE). It caps monthly payments at 10% of your discretionary income. Going back to our example of being an early childhood educator, you would have a monthly payment of about $112 PAYE in place of $287.80. Unfortunately, PAYE is available only to some borrowers with newer federal loans. In fact, to qualify for PAYE you need to have received your first federal student loan after October 2007 and if you received a Direct Loan or Direct Consolidation loan you must have received it after October 1, 2011.
If you can’t qualify
As a newly-minted college graduate it’s likely that you would qualify for PAYE. but if not, don’t despair. There is another student loan repayment plan called Income Based Repayment (IBR) that’s currently available to everybody and that caps monthly payments at 15% of the borrower’s discretionary income. Obviously, if you could qualify for PAYE your monthly payments would be two-thirds of what you would pay under IBR. In addition, if you qualify for PAYE and make all your payments for 20 years any remaining loan balance is forgiven. However, it’s important to remember that having your monthly payment capped at 15% of your discretionary income, as is the case with IBR, would still be much better then under the standard 10-year repayment plan.
If you’d like to know more about IBR and PAYE, be sure to watch this short video.