How Much Should You Borrow for College?

Summary

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WSJ Your Money Briefing

Episode Summary: How Much Should You Borrow for College?

Date: September 8, 2021
Host: J.R. Whalen
Guest: Cheryl Winokur Monk (WSJ Contributor)

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Overview

This episode takes a practical look at how much students and families should borrow for college, emphasizing the importance of financial planning, budgeting, and informed decision-making about higher education expenses. Wall Street Journal contributor Cheryl Winokur Monk shares insights from financial experts, discusses key planning tools, and breaks down strategies for managing borrowing and repayment, including considerations for loan forgiveness and graduate studies.

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Key Discussion Points and Insights

1. The Scale and Prevalence of College Borrowing

• Widespread Borrowing:
  • 55% of families plan to take out student loans this year, with over half borrowing between $10,000 to $40,000 and 23% expecting to borrow $75,000 or more.
  • Quote (Cheryl Winokur Monk at 02:21):

    "That's a pretty large number. And of those families, slightly more than half say they expect to borrow $10,000 to $40,000 in loans, and 23% said they plan to borrow $75,000 or more."

• Massive National Debt:
  • The aggregate U.S. student debt is about $1.6 trillion.

2. Importance of Early Planning

• Start Early:
  • Families should start budgeting and college planning at least a couple of years before applying.
  • Quote (Cheryl at 03:37):

    "At least a couple years, because you want to know when you're applying to schools, that you're applying to schools that you can actually afford."

• Budgeting:
  • Lack of planning can lead to overwhelming college bills without manageable repayment strategies.
  • Notable Moment (Cheryl at 01:09 & 03:08):

    "A lot of people make the mistake of not planning and then they end up with a $300,000 college bill."

3. Tools for Estimating College Costs and Aid

• Net Price Calculator:
  • Available on college websites for estimating true costs after aid.
• Expected Family Contribution Calculators:
  • Found on the College Board’s Big Future site to estimate what your family is expected to pay.
• Career and Salary Projections:
  • Research intended career salaries using sources like Salary.com, Glassdoor, Bureau of Labor Statistics.
  • Quote (Cheryl at 04:40):

    "Do some research, see what you know, you know what you like potentially. So see what you like and see what those careers could pay."

4. Budgeting for Loan Repayments

• Consider Post-Tax Earnings:
  • Calculate take-home pay, factoring in taxes, living costs, and other debts.
  • Quote (Cheryl at 05:18):

    "People often do forget about taxes, and that's a big issue. So say you're in New York and you're a single person and you're making $50,000. Great, I'm making $50,000. Well, after taxes, you're really only making $39,000 and change."

• Recommended Allocation:
  • Safely allocate about 8–20% of take-home pay to student loan repayments, with the amount depending on other costs and local expense levels.
  • Notable Guidance (Cheryl at 06:08):

    "Between 8 percent to 20 percent, depending on the other numbers... can be safely allocated probably toward student loan payments."

5. Digital Tools and Simulators

• Educate to Career Tool:
  • Non-profit resource to test scenarios by adjusting intended major, possible scholarships, savings contributions, and post-grad location.
  • Quote (Cheryl at 06:29):

    "You can play around with a different number... and you don't have to do it just one time. You can try it as a biology major, you can try it as a teacher..."

• Federal Student Loan Simulator:
  • Estimates repayment schedules and monthly payments under standard and income-driven plans.
  • Quote (Cheryl at 07:25):

    "This is actually a really great tool to help you estimate the size of your monthly payments under different repayment options... you can compare it and you can see, you know, what your financial outcome may be."

6. Considering Graduate School Upfront

• Plan for Graduate Studies:
  • Many undergrad majors require further schooling. Average grad school debt: $71,000 (as of 2015–2016).
  • Quote (Cheryl at 07:57):

    "You absolutely need to think about it in advance because many majors today do require grad school."

7. Student Debt Forgiveness: Promises vs. Reality

• Public Service Loan Forgiveness:
  • After 120 qualifying payments (10 years) in eligible public service work, federal loans may be forgiven.
  • Caution (Cheryl at 08:33):

    "There's a lot of contingencies, but assuming that you meet all requirements, then you would have your federal debt forgiven. So... if you're not 100% sure, you really shouldn't, you shouldn't count on it, because... you're still on the hook for that debt."

• Broader Loan Cancellation:
  • The episode notes that widespread forgiveness is discussed but not a guaranteed or reliable plan for most borrowers.

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Notable Quotes & Memorable Moments

• “A lot of people make the mistake of not planning, and then they end up with a $300,000 college bill, and then now what?”
  – Cheryl Winokur Monk [03:08]

• "[Borrowing] actually affects a lot of families.... it's a big problem."
  – Cheryl Winokur Monk [02:21]

• "You absolutely need to think about it in advance because many majors today do require grad school and the average student loan debt for a graduate degree was $71,000."
  – Cheryl Winokur Monk [07:57]

• "If you're not 100% sure, you really shouldn't, you shouldn't count on [loan forgiveness], because... you're still on the hook for that debt."
  – Cheryl Winokur Monk [08:53]

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Timestamps for Important Segments

• 00:56 — Episode topic introduction and guest welcome
• 02:21 — How many families are impacted and average borrowing amounts
• 03:08 — The importance of financial planning and budgeting
• 03:37 — When to start college financial planning conversations
• 04:30 — Overview of online cost calculators and planning tools
• 05:18 — Realistic budgeting using after-tax income
• 06:08 — Safe percentage of take-home pay for loan payments
• 06:29 — Overview of career/major simulation tools
• 07:25 — Federal repayment calculators explained
• 07:57 — Factoring in graduate school costs
• 08:33 — Loan forgiveness programs and their limitations

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Summary Takeaway

Families should approach borrowing for college with careful, early planning, frank budgeting discussions, and use of available online tools to estimate real costs and future earning potential. Borrowing decisions must fit overall life and career goals—while helping to ensure debt loads will be manageable relative to anticipated income. While programs like loan forgiveness exist, they have strict qualifications and cannot be counted on by most borrowers. The overriding advice: plan early, research thoroughly, and borrow conservatively.

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Transcript

[A]

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[B]

Here's your money briefing for Wednesday, September 8th. I'm J.R. whalen for the Wall Street Journal. This year's freshman class is just getting settled into their first year of college, but next year's freshmen are not only finalizing where they're going to attend college, but how they're going to pay for it. Many families plan to borrow through student loans, but financial experts say that planning process should have already begun.

[C]

A lot of people make the mistake of not planning and then they end up with a $300,000 college bill. You're planning for your financial future starting with college, and so budgeting is really important.

[B]

So how far ahead of entering college should students and families start planning for what's likely to be one of the biggest expenses they ever take on? And how should they allocate funds now for paying off the loan after graduation? We'll talk with WSJ contributor Cheryl Winokur Monk about that after the break.

[A]

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[B]

Americans currently hold more than one and a half trillion dollars in student debt and families of students planning to enter college next year are in line to add to that. For many families, having to borrow is a no brainer. But how much should they borrow and what's the best way to map out paying it back? WSJ contributor Cheryl Winokur Monk has been our go to contact for the college loans picture in the US she's been speaking with financial experts about this topic and she's here to talk about it. Cheryl, thank you for being with us.

[C]

Thanks for having me.

[B]

So Cheryl, borrowing money for college is a huge undertaking. How many families with college age students are affected?

[C]

It actually affects a lot of families. So a recent survey by College Ave Student Loans, which is a provider of private student loans, found that 55% of families plan to take out student loans this year. That's a pretty large number. And of those families, slightly more than half say they expect to borrow $10,000 to $40,000 in loans, and 23% said they plan to borrow 75,000 or more. So we're not talking small amounts here, and especially when you consider the huge amount of debt that this country has, the aggregate debt, 1.6 trillion or so, it's a big problem.

[B]

Now, you've spoken to a lot of people who work in the area of financial decisions regarding college. What do they say about the planning process for taking out a loan?

[C]

You really can't plan enough. A lot of people make the mistake of not planning, and then they end up with a $300,000 college bill, and then now what? But really, you need to be planning all and say it's just like doing a budget, right? You're going to work and you're paying for your expenses, but in this case, you're planning for your financial future, starting with college. And so budgeting is really important.

[B]

Okay, so how long before a student applies for colleges, should the family start having these conversations about budgeting?

[C]

Well, at least a couple years, because you want to know when you're applying to schools, that you're applying to schools that you can actually afford. So what you can do is you can go to school's website. There's something called a net price calculator there. And you can also use expected family contribution calculators, which are available on the College Board's Big future website. And to give you a sense of how much you might be able to get in aid, you put in your figures, your financial figures, and you'll get a sense of how much you might get in aid and how much you might need to borrow. And if you're looking at schools that seem way out of the ballpark, you may have to reconsider. I mean, do keep in mind that some schools will meet your full financial need. So it is an estimate. But at the same time, if it seems like you have to borrow way too much for your comfort level, then you really need to take a step back and say, is this something that's going to be worth it for me?

[B]

There are a few online tools that can help people map out a student's financial picture regarding paying off loans. How do those work and what sorts of information and numbers do they work into that equation?

[C]

First, you're going to want to think about what you might want to do after you get out of school. Now, certainly that's really hard you know, most 17 year olds don't know what they want to do when they're, you know, applying to schools. But take a reasonable guess about some, you know, possible careers. There's nothing saying you have to pay. Pick that exact career. But do some research, see what you know, you know what you like potentially. So see what you like and see what those careers could pay. And once you get an idea on that, you can use an online tool such as, you know, salary.com or glassdoor for that. And then also the Bureau of Labor Statistics also has some data on, you know, salaries. But once you do that, you should not forget about taxes because, and people often do forget about taxes, and that's a big issue. So say you're in New York and you're a single person and you're making $50,000. Great, I'm making $50,000. Well, after taxes, you're really only making 39,000 and change. So you really have to figure that into your calculations. And that's only going to be say 3200 and change a month. And then you have to figure in rent and food and other debt you might have. So you really have to weigh that all out, which is why budgeting is so important. In terms of how much a student loan payment should be in your overall budget, there's no definite number, but just, you know, between say 8% to 20%, depending on the other numbers. If you're living in a really high area where your rent is like this crazy amount, then you may have to budget a little less for student loan debt. You have to think about that. But between 8 to 20% of take home pay, and that's after taxes, remember, can be safely allocated probably toward student loan payments.

[B]

And there's a lot riding on these decisions. People's education, their finances, their life after college. So what other tools are available to help people through the whole decision process?

[C]

So there's a free tool developed by Educate to Career, which is a nonprofit that helps families in the college planning process. And it's actually a pretty cool tool and it can help you kind of see how much you might be able to afford. And you can play around with a different number. So you can, you can run simulations based on things like what your intended major is, where you want to go to school, or where you think you're going to go to school, where you think you're going to live after you graduate, how much your family plans to control from your savings, how much you might get in scholarship. There's a whole bunch of Things that you can play around with and you don't have to do it just one time. You can try it as a biology major, you can try it as a teacher, you can try it as a whole bunch of different things and just see how the numbers come out. There's also the federal government's student loan simulator. And this is actually a really great tool to help you estimate the size of your monthly payments under different repayment options. So there's a standard repayment option which is 10 years, and then there's something called income driven repayment, which is based on your income and your household size. And the tool can help you determine how even taking on more debt can affect your total repayment obligation. And this is also really important to do. And you can run this for each school and just see how much if it X school you think you're going to need to take on, you know, y amount of debt. And then you can compare it and you can see, you know, what your financial outcome may be.

[B]

Now I also want to ask about graduate school. Is it too early in the process of planning out your undergrad finances for a student to think about whether they might want to go to grad school?

[C]

You absolutely need to think about it in advance because many majors today do require grad school and the average student loan debt for a graduate degree was 71,000, and that was in 2015, 2016. So you really do need to plan ahead for what could be a long haul.

[B]

Now, we've heard some talk about the potential for widespread student debt forgiveness, but so far not a lot has really come of that. But there is a scenario where a student who takes on a lot of debt could actually have it forgiven after graduation, depending upon the kind of job they take. How would that work?

[C]

So if you're in applicable public service jobs and you work in that job for 10 years and you make 10 years of qualifying payments, it's 120. But it really, you know, assuming you're doing it all along, it's really 10 years of qualifying payments for an approved public service job. There's a lot of contingencies, but assuming that you, you meet all requirements, then you would have your federal debt forgiven. So Most people at 17 don't know what they want to do for the rest of their life. So to say that you're going to be working for a public service job for at least 10 years after graduating, it may be a bit of a stretch for some people. Now maybe some people are so, you know, they're so sure of what they want to do with their life, and this is what they're going to do. And they really expect to be in public service for the next 10 years. And if that's the case, well, okay, maybe the debt conversation becomes a different one. If you're not 100% sure, you really shouldn't, you shouldn't count on it, because the problem is, is you're still on the hook for that debt.

[B]

All right, that's Wall Street Journal contributor Cheryl Winokur. Monk. Cheryl, thanks for being with us on the show.

[C]

Thanks for having me.

[B]

And that's your Money briefing. I'm J.R. whalen for the Wall Street Journal.

[A]

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