Getting that degree can help you boost your lifetime earnings, but the last thing you want to do is borrow so much that you put your entire financial future at risk.
To start the New Year off right, make sure you understand what and how much you are borrowing before you take out the loan.
Here’s some alarming facts:
- A major study by the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business found that more than half of student borrowers did not try or did not know how to figure out what their future monthly payments would be before taking out the loan.
- Later on, when they realized the true cost, many regretted borrowing so much, and said that “if they could go back and redo the process of taking out loans, they would do things differently.”
“Taking out student debt without first understanding how you’re going to get a return on your investment can be a disastrous financial decision,” said Douglas Boneparth, CFP® a partner at Longwave Financial in New York, who works with millennial clients.
So here’s some good advice to start the New Year off right:
Before signing on the dotted line for a student loan, calculate how much you’ll owe in monthly payments once you graduate.
Payments can be higher than you anticipate because student loans are often paid off over a shorter period of time than other types of loans (typically 10 years, much shorter than the standard 30-years for mortgages). My 25-year old daughter has what I consider to be a tiny student loan, but because of that short ten-year payback period, it still results in a $250 monthly loan payment. On her bare-bones budget, that’s a tough payment to make.
Make sure your future job will pay enough to justify the investment in your education (one rule of thumb: your loan balance shouldn’t exceed your first year’s income). One client’s daughter racked up over $100,000 in loans preparing for a teaching position that paid $35,000. That’s an error in judgment that will haunt her for years.
Reality check. Make sure you’re willing to scrimp on other expenditures if needed to make the payments. Like all smart investments, an investment in your education will pay off handsomely over time, but you might need to put the fancy car and Cabo vacation on hold for a few years!