Take Another Look at Student Debt Consequences

College loans can take years to pay off, so choose them--and your school--wisely.

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In last week's post, "Remember the Student Debt Factor," we discussed the importance of thinking about your educational debt burden as one of the key factors in deciding where to go to college. This week, we'll take a more in-depth look at the long-term fiscal consequences of being burdened with a large amount of educational debt.

Jane Median and Sam Spendthrift are fictional college students. Both did very well in high school and were accepted at a wide variety of schools. Jane Median chose to stay in state and attend a four-year public university. She will graduate with $24,000 in educational loans. Sam Spendthrift chose to go to a well-known four-year, private university. In addition, he used his loans to pay for spring break, rarely cooked at home, and bought a new laptop with his loan money. As a result, he will graduate with $52,000 in student loans.

  Subsidized Stafford Unsubsidized Stafford Private Total Loans
Jane Median $19,000 $4,500 $500 $24,000
Sam Spendthrift $19,000 $8,000 $25,000 $52,000

Jane Median and Sam Spendthrift are both interested in public service work after graduating: Jane would like to work for an environmental nonprofit organization and Sam would like to teach. How will their educational debt burden affect their choices?

[Get tips and tools for managing student loans.]

Assuming the interest rate on all her loans averages 6.8 percent (the rate for subsidized and unsubsidized Stafford loans first disbursed on or after July 1, 2012), Jane Median would have to pay $276 monthly under a standard 10-year loan repayment plan. When she has finished paying her loans, she will have paid $9,143 in interest for a total payment of $33,143. To make these payments comfortably, Jane would need an annual salary of at least $33,000. Depending on where she lives, that salary may or may not be achievable.

Fortunately for her, since she borrowed only $500 in private loans, she can reduce her monthly payments significantly by using Income-Based Repayment. If she continues to work at a qualifying public interest job for 10 years, she would qualify for Public Service Loan Forgiveness and have any remaining loans completely forgiven.

Sam is in a more difficult position. Again assuming an interest rate of 6.8 percent, Sam will have to pay $598 per month under the standard 10-year repayment plan. When he has finished repaying his loans, he will have paid $19,810 in interest for a total of $71,810. To make these payments comfortably, he will need an annual salary of approximately $72,000.

Even worse, Sam took out $25,000 in private loans. If he pursues a public interest career and takes advantage of Income-Based Repayment on his federal loans, he can lower the payments on his federal loans, but he will still have to pay $288 monthly on his private loans alone under a 10-year repayment plan.

To lower his private loan payments, he would need to extend the repayment plan. Extending to a 20-year repayment plan would reduce his monthly loan payment by $97, but it increases the interest he will pay by $11,278—a whopping 118 percent.

[Think twice about taking out private student loans.]

In summary, while Jane is going to have to make some sacrifices to pay off her debt, she will probably have the financial ability to accept the job of her dreams by leveraging the powerful tools of Income-Based Repayment and Public Service Loan Forgiveness.

Sam, on the other hand, is going to have fewer choices. He will either need to find a higher paying job, or, if he does take a lower paying job, he will probably spend 20 or 30 years paying off his loans and he will pay far more in interest.

The moral of this story: think about your potential debt burden before you choose a school, and make sure that you take out federal loans whenever possible.

If you are considering colleges now, do some of these calculations yourself. The U.S. Department of Education has some very informative financial aid resource publications. And you can find a wide variety of online financial aid calculators at the Department of Education website and at finaid.org.

Finally, we will devote a future blog post to answering questions from our readers about student debt. If you have a question, E-mail studentloanranger@usnews.com. Even if we don't publish it, we will answer your question!

Isaac Bowers is the senior program manager for Educational Debt Relief and Outreach at Equal Justice Works. He was previously an attorney at Shute, Mihaly & Weinberger LLP in San Francisco, where he focused on environmental, land use, and planning issues. A graduate of the New York University School of Law, Bowers also has extensive experience in nonprofit advocacy and outreach.