Feelings of shame surround the subject and parents hate talking about it.  It’s an awkward topic.  Are you ready to talk to your kids about… money and college? Financing a college education is a huge and important decision, that will affect your student (and her future life, family and financial health) for the next 15 to 30 years of her life, or more.

Let’s look at a financial aid award letter and turn it into a real life scenario.

Let’s say Joey Jr. has several colleges to choose from.  It’s a difficult decision.  Joey has been accepted into SUNY Buffalo (a public school located in upstate New York).  His award letter shows nine different award types.

(These figures are from an actual award letter for a student in Brooklyn, NY.)

Award Description	Fall Amount	Spring Amount	Total Amount
Federal Work-Study	1200		1200
Federal Pell Grant 1	2823	2822	5645
Federal SEOG Grant	200	200	400
Educational Opportunity Prog	1000	1000	2000
TAP Estimate	2500	2500	5000
SUNY Tuition Credit Estimate	298	297	595
Federal Direct Sub Loan 1	1750	1750	3500
Federal Direct Unsub Loan 1	1000	1000	2000
Federal Perkins Loan	500	500	1000

Breaking Down the Financial Aid Letter

Federal work-study enables Joey to earn some money towards tuition.  The next five financial aid sources are grants or other forms of free money.  In total, these awards total $14,840 for the year.

We will focus on the last three federal loans in the award description.  The federal loans are included in his financial aid package and have to be paid back.  In his first year he will receive $6,500. If he completes his degree in four years, he’s looking at a minimum of $26,000 in loan debt.  The actual amount will likely be higher since tuition increases over time and many students take more than four years to complete their degree.

This is not too far off from the “average” student.  About two-thirds of college seniors graduate with student loan debt.  The average debt load is about $27,000, not including other types of debt like credit cards.

Making Some Assumptions

Let’s assume that Joey will consolidate his loans when he graduates. We multiply each of the loan amounts by four (assuming four years to graduate).  and the result is that he will owe $14,000 in subsidized loans, $8,000 in unsubsidized loans and $4,000 in Perkins loans.  Let’s plug these figures into the Department of Education’s student loan consolidation calculator.

If you want to try out the calculator, for the purposes of this example, we’ve assumed the following interest rates:

• Subsidized loans: 3.4% (Category “D” in the online estimator)
• Unsubsidized loans: 6.8% (Category “L” in the online estimator)
• Perkins Loans: 5% (Category “F” in the online estimator)

Paying Back the Loans

If he chooses the “standard” repayment option, the minimum monthly payment will be $168.02 per month with an interest rate of 4.75%.  At that rate, it will take him 20 years to pay off the debt and he will end up paying more than $40,000 including interest.  If he wants to pay off the loan in 10 years, the payment would be $272.60 per month.  This would save him approximately $7,500 in interest charges.

As long as Joey Jr. gets a decent job when he graduates, $168.02 per month should not break his budget.  Keep in mind that these projected debt figures were for a state school and Joey is receiving a substantial amount of financial aid.  What if he picked a more expensive school?  On the flip side, what if he chose to go to a community college for the first two years?

Planning Ahead

To project future income and learn about different professions, check out My Next Move.  You can translate gross income into take home pay using this calculator.

Take things a step further.  What might his budget look like in the future?  Does he plan to have a car?  What does rent potentially cost?  Thinking about how things might play out should make a difficult decision just a tad easier.

If you and your child stop long enough to look at some of the numbers, you’re way ahead of the game. It’s essential for your budget — and for the knowledge and future financial health of your student and his potential family — to know the details on interest rates, projected loan payments, and the implications of a loan before they start college!

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