Engulfed in student debt

Financing decisions drive school choice

One of the biggest decisions students make when entering college is how they will pay for their education. Some receive help from their parents, grants and scholarships, but a majority of students attending college in the United States have to take out student loans.

There are currently 44.2 million Americans with student loan debt, totaling up to $1.48 trillion — surpassing credit card debt for the first time in 2014, according to Studentaid.ed.gov.

“Over the last three or four decades, college tuition has risen a lot, and one of the main reasons that’s occurred is not so much from schools increasing their budgets, but really because the states have taken away funding from the state colleges,” Karyn Neuhauser, LU associate professor of finance, said. “When I was in school, tuition was much cheaper, and even when you adjust for inflation it was much cheaper because the states were funding a huge percentage.

“The other day I looked at Lamar’s funding and it was surprising because somewhere around 10 percent of the budget comes from the state. Ten percent is a lot of money but percentage wise it’s very low. That leaves schools with the only option to make up for what the states are cutting by raising tuition, which in debt is to live below your means,” Neuhauser said. “Just because this amount of dollars is available, doesn’t mean you necessarily need to accept it.”

Neuhauser said students need to make informed decisions about their career paths, and the universities they choose, in order to make the best financial decisions.

“I read an article a few days ago, and it was about three or four people and their experiences with debt,” she said. “There was a girl that went to Harvard and got a degree in drama and graduated $160,000 in debt.

“Theater is wonderful, but that degree doesn’t really lead you to a high-paying job — not right out of college — so to take on that kind of debt and then not be able to afford the payments isn’t necessary. Students need to think about how much they take out versus what their reasonable salary expectations upon graduation will be.”

It’s better to take out loans and graduate than take out loans and not graduate, Neuhauser said.

“Suppose you end up with the average amount of student loans, but because you didn’t graduate you are only making $10 an hour — and let’s face it, you may well be making less than that since the minimum wage in Texas is still $7.25,” she said. “A single person who makes $20,000 a year will end up with a take-home income after taxes of about $1,470 a month.

“Now, the average student loan payment ($351) is taking up 24 percent of your take-home pay. If you make less, this only gets worse, and it becomes harder and harder to repay.”

Neuhauser said that another reason students default on their loan payments is because they become overwhelmed by other types of debt.

“Suppose our student, who makes $50,000 a year and has a take-home of $3,500 a month, buys a car that costs $40,000 and moves into an apartment that rents for $1,400 a month,” she said. “Those two items alone will take up about $2,100, or 60 percent, of their take-home pay a month.

“If they spend another $800 on food, gas and utilities, and $200 in credit card payments, that only leaves $400. If they pay their student loan, there is nothing left for any ‘incidentals,’ which come up all the time. So, what’s going to happen is that the other stuff gets paid for and the student loan doesn’t.”

Neuhauser said a situation like that could be avoided by buying a $20,000 car and renting a $1,000 a month apartment so that there would be money left over for rainy days and savings.

“It is okay to take out a reasonable amount of student loans if you graduate college with a degree that is in demand and had made decent grades,” she said. “Stay away from other types of debt, especially credit card debt and payday loans.”

The LU office of scholarships and financial aid has a page on lamar.edu dedicated to tips on managing student loan debt, including resources to help students calculate their loan repayments.

For more information, call 880-7011, visit 200 Wimberley Building, or visit debt.org for student loan management information.

Free tools for managing student debt:Debt Payoff Planner and Calculator

This free app offers loan calculations including balance, APR and minimum payment amounts while also providing easy-to-read graphs.

iontuition

This website offers assistance with student loan management and helps organize financial aid debt as well as personal finances with support from loan counselors. http://www.iontuition.com/ Colleges

Student Loan Hero

This website gives students an overview of all of their finances, making it easy for students to stay organized and pay their loans back quicker. http://www.studentloanhero. com/

Unbuy.me

This program offers two different methods of paying off student loan debts — the avalanche (highest interest rate) and the snowball (lowest principal) methods.

Story by Olivia Malick, UP managing editor

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