There’s a big $1-trillion dollar elephant (or, beast, depending on your perspective) in the room.
Sometime in the past months, student loans became the biggest non-mortgage consumer debt out there – bigger than credit card debt or auto debt. New York Times recently published an article headlined “A Generation Hobbled by the Soaring Cost of College.” An ABC News segment reported that some parents are delaying retirement to repay their kids’ student loan debt. Most of these articles focus on undergraduate debt, but the cost of graduate education has also skyrocketed. I didn’t realize how much until I talked to a mentor who graduated from the same business school I will be attending. His tuition in 2003 was half of mine. Disregarding the impact of inflation, tuition increased by 100% in 10 years. Ouch.
Then I received my student loan letter, which details what I have been approved for for the 2012-2013 school year:
- $20,500 in Federal Stafford Unsubsidized Loan, with a 1% origination fee and a 6.8% fixed interest rate.
- $44,000 in Federal Direct PLUS loan, which has a whopping 4% origination fee and a 7.9% fixed interest rate.
- That’s almost $65,000 for ONE year! And I even got a small scholarship. If you had to pay everything out of pocket, cost of attendance would be somewhere in the high-$70,000 to low-$80,000 range.
- With both loans, interest would begin accruing on Day 1 of disbursement (i.e. when I receive the loans).
Even though I’m planning to rely on savings for this year, morbid curiosity got the best of me and I plugged in the numbers into the FinAid loan calculator. For the Stafford Loan, borrowing $40,500 means that I would have to pay $476.00 per month for 10 years. I would have paid $57,191.20 in total and $16,191.20 of that would have been purely interest. The Plus Loan’s higher rates mean my monthly payment is $1,102.51 ($132,300.47 over 10 years, with $44,300.47 going toward interest).
This means that if I took out all the loans I am able to, I’d be paying over $1,500 per month for 10 years. By the end of the decade, I would have paid $60,000 in interest.
That’s a sobering, sobering reality check.
Truth be told, without the personal finance blogosphere, I think I would have been much more sanguine about student loans. After all, almost every recent graduate – law, medicine, business – I know have them. We are all going to make enough to service those loans. We are all going to be fine. Or so the thought goes. A few years back I thought that I’d be satisfied if I can graduate with under $80,000 in loans. Then I crunched some numbers, drank the PF kool-aid, and thought, why the h-e-l-l am I taking out ONE penny more of debt than I have to? My “comfortable number” moved down to $50,000, and now, to $10,000, and maybe even to a hopeful number of $0. I love my money too much to give it all away to Uncle Stafford or Auntie PLUS!
In fact, a Harvard MBA just paid of $90,000 of his student loans in less than a year. I’ve been following his blog since the beginning and it has definitely inspired me to not only pay off my debt sooner, but also to minimize the loans I’d have to take out in the first place.