You have heard that it costs a lot of money to send a child to college, but you also know that the benefit is well worth the sacrifices your family makes. The advertised amounts you see online are seldom what most families end up paying, though.
To determine the impact paying for a college education will have on your family, start with a general idea of your costs. These include the cost of applying to college, which is sometimes higher than many parents expect. When you add up the costs of campus visits, tests, application fees, and outside professional advice, you could be out several thousand dollars before the first acceptance letter even arrives. Then there are the actual costs of attending.
Out-of-Pocket College Costs
The cost of attending college can also drive up out-of-pocket cash flow. Even students who receive a “full-ride” scholarship need to have a certain amount of money available for personal expenses.
You’ll need to take into consideration travel expenses to and from the college, voice and data plans, books, living, and food expenses if your student doesn’t stay on-campus. Travel-abroad programs, entertainment options, out-of-pocket medical costs, and myriad other small items can quickly add up to a substantial amount of money.
The Cost of Borrowing for School
Then there is the cost of the education itself. Although the amount of financial aid received can reduce the “sticker” price considerably, any remaining amounts are usually covered through student loans.
Although it might feel like these loans are “free” because payments are “out of sight, out of mind” during the college years, the amount due rears its head shortly after graduation. If your student drops out, takes longer to graduate, can’t find a job, or doesn’t earn enough, amounts do add up quickly. Let’s look at how student loans affect the cost equation.
With federal student loans, undergraduates are eligible to borrow between $5,500 to $12,500 in Direct Subsidized Loans and Direct Unsubsidized Loans per year, depending on their financial situation and year in college. Graduate students are eligible for up to $20,500 in Direct Loans. Parents can also borrow money separately under the PLUS loan program. Over the course of four to five years, those amounts can really add up, and the student could graduate with the family in debt for over $50,000, not counting any private loans that might have been accessed.
Student Loan Fees
Most families don’t look at the cost of fees associated with student loans. Loan fees for Direct Subsidized and Unsubsidized Loans are at 1.057% as of 2020. Fees for PLUS loans are 4.228%. Private student loan lenders may have different fee structures. While an extra $10 in fees per $1,000 borrowed doesn’t seem like a lot, it adds hundreds of dollars to the amount you borrow.
You must determine whether interest is being added to your loan during the college years. For Direct Subsidized Loans, the federal government is covering that cost. But, for Direct Unsubsidized Loans, PLUS, and most private student loans, that interest is building and being added to the amount you owe. Interest rates for 2021-22 are 3.73% for undergraduate federal student loans, 5.28% for graduates, and 6.28% on PLUS loans. Add between $27 and $53 per $1,000 borrowed each month your loan is outstanding, and you’ll see how quickly these amounts can build.
Late Fees and Penalties
Once you start making payments, there are also late fees and penalties that can be assessed for missing payments or not paying on time.
Penalties for missed payments on federal student loans have been canceled and interest rates have been set to zero through at least Sept. 30, 2021, due to the COVID-19 pandemic. This means you will not be penalized for late payments, and any amount you do pay will be applied directly to the outstanding principal.
The Bottom Line
The average class of 2021 graduate is expected to hold $36,900 in student loan debt, with an average monthly student loan payment of $433. Paying over $400 every month out of your take-home salary can severely limit your post-college options. You might not be able to attend grad school, you may need to live with your parents longer, or you might be forced to put off buying things you’ve always wanted. It will certainly be more difficult to save and invest your own money.
Put student loan costs together with the costs of applying and attending, and it could be a real eye-opener. Look carefully for steps you can take to lessen out-of-pocket costs such as extra forms of income, family savings accounts, and private scholarships.