with contributions by Jaimie Martinez

AUDIENCE / This blog post is for students.

If you’re making plans about attending college, you’re also likely thinking about how to fund your education. With average yearly cost for public 4-year colleges hanging out at $22,000 for in-state students, and $13,000 for public 2-year colleges, it’s not surprising to learn that 70% of college students graduate with student loan debt.

If one of the factors you’re considering in your college decision is student loans, read on to learn a few frameworks that will help you determine what responsible borrowing looks like for you. We draw many of the perspectives below from Texas OnCourse’s handout on student borrowing. We highlight a few of these and add a few more for you to think about.

Career Choice

While one of the wonderful things about college can be discovering a career path, if you already have a general field or job function in mind as you go into college, you can consider whether the salary you are likely to receive upon graduation will allow you to pay back the student loans you are considering.

Here are some resources to help you determine what kind of salaries are common in various fields:

  • O*Net: This federal resource contains information about occupations, employment trends, skills required, and salary ranges
  • Texas Reality Check: This tool from the state of Texas can help you understand how much income you may need to maintain your desired lifestyle

Once you get an idea of salary in your career area of interest as well as how much income you would need to earn in order to maintain the lifestyle you want, factor in how much your monthly student loan payments will be. The U.S. Department of Education offers a loan simulator to help you estimate your loan repayments before you take on debt. We encourage you to go through the simulation as though you were entering your loan repayment period 6 months after you leave college.

Student Loan Forgiveness

You may be wondering what happens to your student loans if you experience financial hardship after college, or if you don’t finish your degree. If you take out student loans and do not finish your degree, you will still be responsible for repaying the loans you took out while you were in school.

If, in the future, you encounter personal financial difficulty and file for bankruptcy, you will still be responsible for repaying your student loans. If you want to have the bankruptcy court consider discharging you of your student loan debt, you will need to enter a separate process while you file for bankruptcy to demonstrate that repaying your student loans would cause you and your dependents undue hardship. This process does not guarantee, however, that you would be relieved of your student loan debt even if you file for bankruptcy.

Depending on the job you take after college, however, you may be eligible for forgiveness of your Direct federal student loans. For instance, if you work for a non-profit organization full-time, make a set number of payments on your Direct Loans while working for that organization, and submit the appropriate paperwork, you may qualify for loan forgiveness after a set period of time (generally 10 years) on your remaining loan balance.

Time Value of Money

Finally, we want to ensure that you have a general understanding of the time value of money as you learn about what options are available to you to pay for college.

What is time value of money? Let’s imagine that you take out a $1000 loan to pay for school in the fall of 2020, and you don’t start repaying that loan until fall 2024. The person or institution who gave you the loan doesn’t get to use that $1000 for those four years. Where else could they have spent that $1000? They could have invested in a successful company and grown that amount to $1300 during those four years. Therefore, you, as the borrower, pay interest on top of the amount you originally borrowed to account for the lender’s inability to invest that money elsewhere.

To give you an example, if you borrow $1000 for your first semester of college at a 6% interest rate that accrues during the four years you are in school (see difference between subsidized and unsubsidized loans), in four years’ time, that amount will have increased to $1262. If you take out another $1000 for your second semester of college and enter into repayment three and a half years later, your loan amount for your second semester will then have grown to $1226, and so it continues for each semester you take out a loan. Further, since it’s unlikely that you will be paying off the full amount of your student loans at once when you enter repayment, interest will continue to apply to your loan amount while you are in your repayment period.

So now that you have a broad understanding of the responsibility that comes with taking out student loans, you may be asking, “Won’t a college education help me make more money in the long-run, making it worthwhile for me to take out student loans?” The short answer is, “Yes, but there are some additional factors to consider” — to read more on this topic, stay tuned for our upcoming blog post, “Is College a Good Investment?”

For more information about responsible borrowing, check out this video on responsible borrowing, and text ADVi at 512-829-3687. We’re happy to help!