College Debt: The Best Ways To Pay For College | Burning Money Questions | MONEY
Hey guys. My name is Kaitlyn Mulhere. I’m a writer at Money. Welcome to Burning Money Questions, a new series from MONEY where we answer all your questions about personal finance. In this episode, we asked you to send us questions about paying for college. Here’s what you guys wanted to know. Why do students rack up debt they can’t pay off? There are a lot of reasons students take on debt they can’t pay back. For some, overborrowing really starts when they choose to attend a school they can’t afford. This happens I think with teenagers who want to attend a specific dream school and have no real concept of what borrowing $10,000 or $20,000 a year will mean for their monthly budget when they have to pay it back. Other students have debt they can’t pay back because they attended a low quality school where their degree, or worse their lack of a degree if they’ve dropped out, doesn’t actually earn them the higher wage we associate with college graduates. The majority of people who default on their loans, those are the people who haven’t made a payment in nine months, they typically have very low balances. They tend to be students who attended for profit colleges or students who never finished. But I really want to stress this point. Most of the students who borrow and graduate with a bachelor’s degree are able to keep up with their payments. If the school you’re looking at requires you to borrow a lot more than the federal limit of about $30,000 for undergraduate students, that’s something you should be wary of. How do I consolidate multiple private student loans after graduation? If you have a lot of private loans, there’s little risk in refinancing them into a single loan if you can find a lender who will give you better terms than you already have. Refinance companies and banks use different underwriting models, so one may offer you better rates than another. The first thing you’ll want to do is shop around to see what you qualify for. I’d check out a marketplace like Credible.com to get an idea of what you qualify for. A heads up though that some refinance companies have notoriously high standards for who they approve. You’ll need a credit score in the high 600s just to get approved. And you’ll need an excellent one to qualify for rates that are lower and can actually save you money. Remember that if you have federal loans, there are a lot more things to consider before refinancing. How much does an Ivy League education cost? We estimate that the average price of a degree at an Ivy League college ranges from about $160,000 at Princeton to $225,000 at Brown University. That’s a price for the full degree, all four years, and it includes tuition, room and board, books, and miscellaneous costs like transportation, and it also accounts for the average scholarships awarded. But that doesn’t actually tell you how much it would cost for you personally. If you’re a full paid student for example, a degree at any of the 8 Ivy leagues will cost around $280,000. But if you qualify for financial aid, many of those colleges are among the cheapest schools you can go to. A student from a family earning up to $75,000 could pay less than $7,000 a year to go to Harvard, Princeton, Yale, or Dartmouth. Even families earning $150,000 or more qualify for discounts. We already have college savings plans for our kids. Is there anything else we can do to prepare for college? 529 plans are a great way to prepare for paying for college. Your investments will grow tax free, and you don’t have to pay taxes on withdrawals as long as you spend the money on college expenses. Now it’s hard to predict how much you’ll need to save for your kid’s higher education. But one popular rule of thumb is to aim to save about a third of the total price. Once you’re on track for that, I just encourage your students to do well in school. Good grades and test scores can pay off by either helping your student gain access to the country’s more selective schools, which tend to also have the biggest budget for scholarships, or by making your student more competitive for merit scholarships from a college or community organization. And one last reminder you should only be putting away money for your kid’s college if you’re already on track for your own retirement. What’s the best way to go about paying off loans after college? Something we all ask ourselves. In an ideal scenario, you’ll be able to afford the monthly payment on the standard plan which is a 10-year repayment plan. If that’s the case, just paid that amount to start and then focus on building up an emergency savings account and putting money into a retirement fund. I know it can be tempting to just focus on getting rid of that debt because it’s such a weight on your shoulders, but you’ve really got to divvy up your money between those three goals to set yourself on a strong long term plan. Now if you don’t earn enough to afford the standard monthly payment, do not use forbearance to postpone paying. Instead you should enroll your federal loans in a repayment plan that will set your payments based on how much you earn. And finally, if you’ve got private loans prioritize paying off those as soon as you can. They likely have a higher interest rate than the federal loans, and they don’t have the same flexible income based repayment plans. How do I get a decent scholarship? If you’re looking for a merit scholarship from a college, your best bet is to apply to schools where you’re at the top of the academic profile. That means you want your GPA and your SAT scores to be well above the average for the students they admit. For other scholarships, the truth is there’s no real shortcuts. Applying for scholarships takes time. For a lot of rewards, you’ll need good grades and an excellent essay. That said there are all kinds of scholarships out there. You can use a search tool like Scholly to find ones that fit your interests and strengths. With any of those types of platforms, how well your matched with scholarships will depend on how well you fill out your profile, so don’t rush through that part. Make sure you include all your achievements and activities, and then don’t overlook smaller community-based scholarships from places like local rotary or kiwanis clubs. They’re not worth as much as the national awards, but there’s also less competition to win them. Once you’re in college keep applying. A lot of academic departments have scholarships specifically for current students on campus. What are the biggest expenses while you’re in college? You’ve no doubt heard about how much college tuition has increased in the past generation, but what you may not realize is that tuition only makes up about half of the total cost of going to college full-time. On campus room and board is anywhere from 30 percent to more than 50 percent of the total cost. And then there are also expenses like books and classroom supplies, which colleges estimate will cost about $1,200 a year. And there are less obvious expenses, too. Costs tied to doing an internship, whether that’s traveling to a different city or buying professional clothes, and there’s plenty of optional expenses like joining a Greek organization or studying abroad. Dues for sororities and fraternities can cost hundreds or thousands of dollars per semester. And while some schools offer financial aid for studying abroad, in most cases you’ll still likely have to pay to get there.