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Paying for College Unit Plan

Student Loans: Friend or Foe? Lesson

NGPF Activity Bank

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How Much Should I Borrow For College?

PART I: Rule of Thumb

A “rule of thumb” is a broad rule or principle that can be generally applied to anyone. Everyone’s situation is different, but there are certain “rules of thumb” that experts will use to advise college students on how much student loan debt they should take on. One of the most popular “rules of thumb” is the following:

**Don’t take on debt that’s more than your expected first year’s salary**

Here’s the advice of Mark Kantrowitz, the Senior Vice President and Publisher of Edvisors.com and a nationally-recognized expert on student financial aid, scholarships and student loans:

PART II: Maria’s Student Loan Experience

Maria is a high school senior in the process of choosing which college she will attend. She is trying to decide between a few different schools, and wants an estimate of what her student loan debt would look like at each school after she graduates. Answer the following questions to help Maria make her choice.

  1. Maria knows that she wants to get a job in Education because she wants to be a teacher when she graduates. The average starting salary for someone in Education in their first year out of college is $35,000.
  2. Maria knows she will have to take out loans to pay for her college education. She wants to know which colleges will be affordable for her. To determine this, we will use the New York Times’ Student Loan Calculator, which shows the average debt for students at different colleges.
    Maria has three colleges in mind. Using the New York Times’ Student Loan Calculator, search** for each school and record the information on average student loan debt in the chart below.

**Note: Here is a screenshot of #1 - Ohio State University-Main Campusto help you become familiar with how to use the Student Loan Calculator.

College / #1 - Ohio State University-Main Campus / #2 - Virginia Wesleyan College / #3 - Pace University-New York
Loan Principal
Interest
Total
Average Monthly Payment (to be debt free in 10 years, with avg. interest rate)
**Note: Stafford Loans = Direct Loans
% of students who graduate with debt
  1. Based on the information about Maria’s colleges, answer the following questions:
  2. Which number should Maria be comparing against her projected average salary to determine if her loans might be too high? Click here to enter text.
  3. Are there any colleges that Maria should be nervous about attending because the average loan debt is higher than her projected average starting salary? Click here to enter text.
    Which college would be best for Maria if paying off student loan debt was the only factor she was considering? Click here to enter text.
  4. While it is an incredibly important factor, we must remember that student loan debt isn’t everything. What other factors could lead to Maria deciding on a school that does not offer the lowest student loan debt? Click here to enter text.
  5. Maria has decided to attend Ohio State University. She wants to see how much of her income each month will go towards student loan debt. Follow the directions in the table to determine how much of Maria’s gross income each month will go towards student loans.

Choice of College / Ohio State University
Average Gross Starting Salary
(From Question 1 of this section)
Monthly Gross Salary
(Avg. Gross Starting Salary) / 12
Average Monthly Student Loan Payment at your Choice of College
(From Question 2 of this section)
% of your Monthly Gross Salary Paid Towards Student Loans
(Avg. Monthly Student Loan Payment) / (Monthly Gross Salary)
**Multiply by 100 to make a %
  1. What is your reaction to the percentage of monthly income that Maria will spend on student loans? Does it seem like a little? A lot? Click here to enter text.
  1. Maria wants to see how potential choices in her college experience could affect her potential loan debt. Use the New York Times’ Student Loan Calculator to determine how Maria’s student loan debt will change based on her decision-making.
  2. Expected debt at Ohio State is $26,472. However, Maria also needs help to pay for student housing so she decides to take out an additional $10,000 in private loans (over four years, if Maria is a dependent undergraduate, she can borrow a maximum of $27,000 from federal loans). Assuming her interest rate and term stay the same, if Maria’s expected debt increases by $10,000:
  3. What would her new monthly payment be? Click here to enter text.
  4. How much of an increase is that from her previous monthly payment? Click here to enter text.
  5. Using the same steps as you did in Question 4 of this section, what % of Maria’s monthly income will now go to student loans? Click here to enter text.
  6. What would her new interest total be? Click here to enter text.
  7. How much more interest would she have off over the next 10 years? Click here to enter text.
  1. Since Maria had to take out a private loan to pay for her housing, her interest rate went up to 8% on her student loans (because private loans carry higher interest rates). If she has $36,472 in loans at an interest rate of 8%:
  2. What would her new monthly payment be? Click here to enter text.
  3. How much of an increase is that from her previous monthly payment? Click here to enter text.
  4. Using the same steps as you did in Question 4 of this section, what % of Maria’s monthly income will now go to student loans? Click here to enter text.
  5. What would her new interest total be? Click here to enter text.
  6. How much more interest would she have off over the next 10 years? Click here to enter text.
  1. Because taking out a private loan has raised Maria’s total debt, she’s now worried she won’t be able to make her monthly payments. Maria has calculated that she can afford to pay $300/month and stay within her budget. She knows this means she will not be able to be debt free in 10 years.
  2. Assuming her total debt is $36,472 with an 8% interest rate, change the “Term” to determine how many years it will take Maria to pay off her loans if her monthly payment must be lower than $300. Click here to enter text.
  1. How much would she have spent in total on her student loans over that time? Click here to enter text.
  1. How much would she have spent in interest? Click here to enter text.
  2. What do you notice about the relationship between her loan principal and interest paid?
    Click here to enter text.
  1. Based on helping Maria manage her student loans, what are two key takeaways that you learned? Please use specific examples from Maria’s experience to demonstrate your takeaways.
    Click here to enter text.