Sunday, April 27, 2008

Borrow Less to Pay for College

As the credit crunch progresses, college loans are becoming harder to get and more expensive, even though the Federal Reserve keeps lowering interest rates. The reasons vary, ranging from indigestion in the asset-backed securities market to migraines in the auction rate securities markets. Whatever the reasons, the Great Credit Contraction of the 2000s is making it harder to borrow the money needed for college, and loans cost more if you're able to get one. Common sense tells you that when something becomes more expensive, you should think more carefully about whether or not to pay for it. This is true of loans as well as anything else. Let's look at the math.

If you go to a private college and graduate with $100,000 of debt bearing interest at a rate of 9% per annum, paying $800 a month will repay the loan in about 31 years, with about $196,851 in interest payments. If you boost the monthly payment to $1,000, you'll pay off the loan in about 15 and 1/2 years, with about $85,532 in interest paid. No matter how you look at it, though, $800 to $1,000 is a lot of moola out of a young college grad's monthly income.

If you go to a state university and graduate with $50,000 of debt bearing interest at a rate of 9% per annum, you need make only a $400 monthly payment in order to pay off the debt in 31 years, and you'll pay about $98,425 in interest. A $500 a month payment will repay the loan in 15 and 1/2 years, with about $42,766 in interest paid. These payments are nothing to laugh at, but are a lot easier than $800 to $1000 a month. And the much smaller amounts of total interest paid leave you with more money to invest for retirement.

There isn't much of a relationship between the college or university a person attends and that person's career success later in life. How hard and effectively you work is much more important to your career success than the sheepskin hanging on your office wall. A CEO of an S&P 500 company is much more likely to have a college degree from a public university than an elite private college. One public school, the University of Wisconsin at Madison, can count as many or more S&P 500 CEOs among its alumni as any Ivy League or other elite private college. And it's quite a bit less expensive, even if you're paying out of state tuition.

Go to college, by all means. People with four-year degrees or more generally have good careers with incomes that keep pace with inflation. People with less education usually struggle. But when college costs are as astronomically high as they have become, it makes sense (and cents) to borrow less. You'll have only a finite amount of lifetime income, and spending a big pile of it on interest charges will sharply reduce your chocolate budget. Here are a few ways to make less money for the bank.

Go where your total costs are lowest. Apply to several schools, all of which you consider acceptable. Then go to the school that will cost you the least. Factor in any scholarships offered, and any other assistance that you don't have to pay back, such as work-study programs. Even if you don't end up at your top choice, you may be better off in the long run. A diploma from a school with a fancy reputation may give you a sense of status. Less debt will let you live better.

Work while attending college. In the 1930s, another time of economic stress, many students worked part or full time while attending college. Those working full time took night classes, and needed a number of years to graduate. There's no law that says you have to earn a college degree in four years. Ten years after you graduate, you won't care very much whether it took you four or eight years to get the sheepskin. But you probably will care a lot about a heavy debt load.

Become a state resident. If there's a good public school you'd like to attend, enroll for the freshman year and then find out what it takes to become a state resident. You may have to work a year between your freshman and sophomore years. But that would be a year well-spent. Not only could you save some money from your job, you'd lower your college expenses a whole lot.

Supercharge your course load. Take an extra course each semester. You may be able to graduate a semester earlier this way, thus saving a semester's expenses. You may think you need to be an academic star to pull this off. But the GIs who returned from World War II often took extra heavy courseloads to make up for "time lost" during the war. Many of your grandfathers did just this, and you can do it, too.

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