How to Calculate the Cost of College

It's not uncommon for a teen to have an offer to attend a college the family can afford, only to have the teen pining over their "dream school." Having this conversation long before the college list is made can prevent a lot of heartache, tears, and parents from hocking their investments so that little Suzie can get what she wants. (Yes, there's definitely sarcasm here.)

I don't subscribe to the dream school concept. I believe it's a made-up marketing gimmick by pricey colleges. There is no evidence that having a degree from an expensive college equates to more success or more income. Unfortunately, "dream school" and "top school" have come to mean the same thing. Money. It's gonna cost you. The question is "how much?" So how do you figure that out, and how do you know if it's worth it?

It's all in the numbers so grab a spreadsheet and let's start doing a little math.

In my example, Alice had an offer to attend a very reputable college with a scholarship, and her mom could afford the balance. Alice would graduate debt free. But Alice's dream school would cost more than a quarter of a million dollars for the 4 years of college. This college does not offer scholarships. She has to foot the bill for the entire thing. (Oh, and let's not forget, mom would have to co-sign for that puppy.)

So let's say mom does co-sign. In order to have a good idea of what Alice will have to pay as her monthly loan payment, we need a few things. First, we need a student loan calculator, much like a mortgage calculator. To use the calculator you also need to have an idea of the interest rate on that student loan. This site has accumulated some of the current student loan interest rates on different types of student loans. Although there is a range of fixed interest rates, what you will end up paying is based mostly on your credit score. So within a given range, you'll have to give it your best guess as to what you might be offered. For our calculations, we'll stick with something in the middle and go with a private loan at 6% interest. 

Put the numbers into the student loan calculator:
      Loan Amount: $250,000
      Term: 10 years
      Interest Rate: 6%
And hit "calculate", she will have a monthly loan payment of $2,775,51
If we change the term to 20 years, which is the maximum term, the new note would be $1791.08 per month.

Can she afford to pay that amount?

How do you know?

In order to discern if your teen can afford to pay back their loan, you have to know what their entry-level salary will be. Notice, I did not say median salary. Your teen does have to begin paying the note 6 months after college graduation. To get an idea of the entry-level salary, google "entry-level salary for (x) college major." There will be several sites that come up. One is Payscale.com.

In this scenario, Alice's entry-level salary for her chosen career is $35,000/year. Hopefully, without doing the math, you know this is a bad idea already. After taxes, her take-home pay will be less than $2500/month. We have not budgeted for living expenses, gas, insurance, cell phone, internet, or anything else. Regardless of how she plays it, she will be living on her mama's couch and may even need a second or third job to pay the note.

These are the discussions that are necessary with your teens.

Buying a car is a financial decision, not an emotional one. College should also be a financial decision, not an emotional one. 

If you start the process early, and by early I mean as early as middle school, your teen could have multiple offers for scholarships from colleges and private scholarships as well. 

               "College Doesn't Have to Be a Debt Sentence."~Denise Thomas

Let's get on a call to see if Cracking the Code to Free College is right for your family. https://calendly.com/getaheadoftheclass/45-minute-college-planning-assessment-call?back=1&month=2022-11

 

Close

50% Complete

Your Details