# Understanding College Debt

Every spring, high school seniors across the U.S. are thrilled to open emails from colleges bearing the message, “Congratulations, you have been accepted!” But the excitement wanes as students and their parents ask, “How much college debt can we handle? How do we figure out how much we’ll need to pay?”

College is expensive and student debt is staggering at $1.3 trillion. And of course, the longer students are enrolled, the higher the price tag. The average student now spends six years completing a bachelor’s degree, with each additional year averaging $18,000 at public universities and $41,000 at private colleges. Many students expect to pay off federal student loans within ten years; however with rising costs and extended enrollments, reports show that it is typical for graduates to continuing owing money well into their forties. This leaves students and their parents wondering how to calculate the entire cost of tuition and what their chances are of paying it all off in time for retirement.

### Step 1: Determine what your “Net Price” is by College

First, every college has a Net Price Calculator that they use to determine how much tuition each student will be charged. This is based on family income, grades, test scores, and other factors. Use this to figure out what the college is going to charge you. This “free money” from the school comes from two basic sources:

- Need-based grants via federal student aid—via the Free Application for Federal Student Aid, or FAFSA
- Merit scholarships typically awarded on the basis of academic, athletic or artistic merit, in addition to special interestsWork-study programs

### Step 2: Look for outside help.

Once you know what the college is going to charge, then you can look for additional help. First determine amount of family contributions from income, savings or college saving plans. Then find other sources of scholarships and grants (“free” money that does not have to be paid back). Where, specifically, does scholarship and grant money come from?

From sources outside the college:

- Scholarship Search Tools—there are $6 billion worth of scholarships given away each year, accessible through a scholarship search tool. Innate’s scholarship database includes thousands which can be narrowed down based on your profile and interests.
- Family-related scholarships – look for scholarships offered by parent’s workplace, associations, fraternal organizations or clubs.

### Step 3: Determine what needs to be financed.

The amount left is what must be financed through federal or private student loans. When considering how much debt is too much debt, consider not only how much you’ll need, but also how long it will take to pay off. If you are heading for a career that pays $30,000 per year, then taking on $80,000 in debt might not make sense. It will take you a very long time to pay it off! Ultimately, each person needs to decide what they are comfortable with. At Innate, we recommend a target debt amount equal to 10% of your expected income over ten years.

**For Example**

For example, University of San Francisco lists the annual cost of attendance at $66,000. An average middle-class family qualifying for federal student aid may be awarded $10,000 from USF in grants. The student also wins USF scholarships for good grades and extracurricular activities totaling $25,000. She still has to foot the $31,000 balance, so she applies for multiple small scholarships and earns $11,000 more. This leaves $20,000 to pay or finance. With the 529 College Savings Plan her parents started for her and savings from summer jobs, she is able to contribute $10,000, leaving a $10,000 bill for her freshman year.

Assuming the student will earn an equivalent in grants and scholarships in subsequent years, she simply multiplies times four—and adds yearly tuition increases (inflation plus an average increase of $270) for a four-year estimate. At about $11,190/year for the next three years, her total cost comes to $43,570.

With an accurate estimate in hand, parents and students can be realistic about how to finance the bill. Keeping the end in mind, the student should weigh the cost of attending a particular college against her future earning potential, using the rule of thumb that 10% of her future salary will go toward student loans. If she wants to be a software developer, she can safely assume that she will earn enough to pay back loans within ten years. If she wants to be a social worker, she may need to consider another school.

Either way, parents and students can minimize debt by ensuring that students graduate in four years and by maximizing aid and scholarships. In addition, by aligning future earnings with college debt, they can realistically face the prospect of paying back loans.

**Interested in learning more?**

“Average Rates of Growth of Published Charges by Decade.” *Average Rates of Growth of Published Charges by Decade – Trends in Higher Education – The College Board*, College Board, 2017, trends.collegeboard.org/college-pricing/figures-tables/average-rates-growth-published-charges-decade.

Lewin, Tamar. “Most College Students Don’t Earn a Degree in 4 Years, Study Finds.” *The New York Times*, 1 Dec. 2014, www.nytimes.com/2014/12/02/education/most-college-students-dont-earn-degree-in-4-years-study-finds.html.