Think Hard Before Borrowing for College

You might be better off deciding on a cheaper school instead

By Eugene L. Meyer
Posted 2012

College Debt Advice
College Debt Advice

Amanda Nazario turned down what she describes as a “phenomenal package” of financial aid at Syracuse University—only minimal federal loans involved—to attend George Washington University in the nation’s capital. She graduated in May without regrets, but with $37,000 in debt and no idea how she’ll pay it off.

Like many of her peers, Nazario, a native New Yorker who would like to go to law school and become a sports attorney, is just now gaining a concrete idea of how the rising cost of college has affected her. A recent College Board report puts today’s tuition and fees for public four-year schools at more than 3.5 times the level of 1981, after adjusting for inflation. And costs at private four-year colleges are almost three times what they were 30 years ago.

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The most recent widespread tally reveals that 2009 graduates of four-year colleges who had borrowed had an average debt of $24,000, according to the Institute for College Access and Success (TICAS), a nonprofit research and advocacy group; other estimates put the 2011 load at more than $27,000. Students at some institutions take on much more: Last year, borrowers who graduated from Holy Names University in Oakland, Calif., owed an average of $48,800.

The amount of borrowing worries many experts; more than a few suggest that college-bound students in need of big loans seriously consider less costly schools. “There has to be some kind of reality check,” says Mary Malgoire, a Bethesda, Md., financial adviser. Parents, she says, need to ask themselves, “’What are our resources? What will that get us? How much should be a burden on our children, on our own retirement?’ Sometimes you have to ramp down expectations. We’re no longer in an economy where the sky’s the limit.”

Rather than automatically accept all the student loans to which they’re entitled, and perhaps also borrow privately to cover part of the family contribution, “I encourage students to borrow the minimum they need and live like a student in school, so you don’t have to live like a student after graduation,” says Mark Kantro­witz, publisher of and, free websites providing comprehensive information about financial aid.

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He thinks attending an in-state public university is one of the best ways to save on college costs; if you’re serious about learning, you can expect “a very good return on your investment.”

Research released in February by economists Alan Krueger at Princeton University and Stacy Dale of Mathematica Policy Research reaffirmed their finding of a decade ago suggesting that eventual earning power depends pretty much entirely on student qualities—talent, drive, ambition, and confidence, for example—rather than on the prestige of the chosen college.

A 2010 FinAid analysis of government data on student aid, moreover, shows that those graduating debt free are 70 percent more likely than people with loans to go on to graduate school. Granted, it’s a balancing act. “Modest federal student loans can help you go to college full time without dropping out and limit your work hours so you have time to study and sleep,” says Lauren Asher, president of TICAS.

A good rule of thumb, in Kantrowitz’s view, is to limit your total debt to no more than your expected starting salary. By the end of October, U.S. colleges will be required to post a “net price calculator” on their websites to allow prospective students to see an estimate of the true amount they’ll owe and will have to borrow.

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Though financial aid budgets have been sorely strained in the tough economy, more than 70 schools have instituted no-loan policies for their low-income students—typically those with family incomes below $40,000 or $50,000. Half a dozen schools extend the policy to all students, and a number cap the amount offered in loans to higher-income families.

But “no loan doesn’t necessarily mean no cost,” Asher stresses. At Appalachian State University in Boone, N.C., even families with incomes around $20,000 were expected to come up with $850 themselves in 2010-2011. At elite Amherst College in Massachusetts, the no-loan policy applies to all households, regardless of income. But expected contributions for dependent-student families who brought in between $90,000 and $120,000 a year were about $17,000 of the $54,000 sticker price in 2010-2011.

Parsing the college financial aid letter is key to calculating what the true load will be. It may seem obvious, but a loan doesn’t lower your cost of college; with interest, it increases it. It’s not always easy to tell from the aid letter which awards are grants and which are loans, so when in doubt, ask.

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What are your borrowing options? Experts advise always seeking a government loan first because they are cheaper, the rates are fixed, and you have an option of different repayment plans. The government pays the interest on subsidized Stafford loans until graduation for families who qualify based on need. For dependent students, total borrowing is limited to $23,000 in subsidized loans and $31,000 in unsubsidized loans (minus what they receive in subsidized ones).

Interest rates on new subsidized loans awarded for this fall have fallen to 3.4%; the rate for unsubsidized loans is fixed at 6.8%. Parents can take out government PLUS loans up to the cost of tuition minus any student loans awarded. The rates are fixed at 7.9%, and there is a 4% fee. Private loans may offer currently competitive rates, but they’re often variable, with no cap on rates or fees.

With federal loans, you might get a break on repayment, too. Several income-based repayment plans allow borrowers to make monthly payments based on their earnings and family size, and extend the term from the standard 10 years to 12 to 25 years. Graduates may also qualify to have their balances forgiven after 120 payments and 10 years of public service. But student loans are very difficult to extinguish by bankruptcy; wages, tax refunds, and even Social Security can be garnished to pay for them.

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The experience of Lindsay McAfee, 29, a tax lawyer in Washington, D.C., who grew up in Des Moines, might be instructive. Though she had some help from her parents, she bore most of the cost of a bachelor’s from George Washington University and a law degree from the University of Iowa, and is now paying off $165,000 in student loans at $1,100 a month. The payment is a “big burden, very, very painful,” she says. She does not take lavish vacations. She does not own a car.

As her youngest sister was finishing high school this spring, McAfee passed along some of her insight. “I think you have to take a hard look at what you think you will earn with what you’re studying,” she told her sister. “I wouldn’t trade my experience for anything, but I also would like not to have that debt.” As luck would have it, McAfee’s sister preferred Iowa State University.

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Originally posted on on September 20, 2011

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