The Next Debt Bomb
Whether you call it a bubble or a bomb, the rapid increase in student debt has become a hot topic in the news, with media stories inevitably focusing on those who have accumulated $100,000 or more in college loans. Straight off the bat, it should be said that six-figure debt isn’t typical. “Most undergraduate students graduate with an affordable amount of debt, with less than 10% of college graduates having total student-loan debt exceeding their annual income,” concludes Mark Kantrowitz, publisher of FinAid.org, which provides resources on paying for college. Average debt at graduation in 2011 was about $27,000, says Kantrowitz—about the cost of a new car.
His analysis adds welcome perspective to the issue. But there’s no doubt that college debt is rising, and it appears to be part of a vicious cycle: Studies indicate that the very loans that are supposed to help students pay for college also contribute to driving up costs, and that prompts students to borrow even more. While policy wonks debate solutions to this Catch-22, students and families are faced with a practical problem: How do you pay for college—and make the most of student loans, if necessary—without getting in over your head?
It’s a subject Kiplinger’s has covered extensively. In our October issue, senior editor Jane Bennett Clark, who heads up our college coverage, warned parents not to assume that stretching for a prestigious school will pay off down the road. (See 7 Pitfalls to Avoid When Paying for College.) “Choosing the right major and making the most of every opportunity have more impact on future earnings than a school’s prestige,” says Jane.
So step one is to choose a school you can afford. This month we expand on that theme with our annual list of the best values in private colleges. Our rankings heavily weight financial aid packages—excluding loans—and give extra credit to schools that hold down average debt and get kids out in four years.
Do the math. If I could give families just one piece of advice, this would be it: Run the numbers to see how much it will cost to repay college loans. FinAid.org has a simple loan-repayment calculator based on the average starting salary in chosen professions. One rule of thumb is to limit your borrowing to no more than your child’s expected annual starting salary. I also like the recommendation of Carol Stack and Ruth Vedvik, authors of The Financial Aid Handbook, to limit the amount of borrowing to $32,000—the maximum most undergraduates can borrow in federal Stafford loans, plus $1,000.
In its annual College Savings Indicator study, Fidelity found that some parents are encouraging their students to focus on certain majors in hopes of landing higher-paying jobs. Tops on the list: computer science, nursing, engineering, psychology, biology and accounting (see our choices of the most—and least—lucrative college majors). Kantrowitz’s study showed that students majoring in theology, architecture and history were more likely to graduate with six-figure debt, while those majoring in computer science, mathematics and health care were less likely to do so.
Students who are interested in a subject with low pay prospects should consider combining that major with something more marketable—say, a foreign language along with English, or computer skills with journalism. Regardless of major, if you have to borrow $100,000 to pay for college, you need to come up with Plan B. Our lists of top college values can help you find an alternative.
This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.