The internet is rife with people having student loan issues or having $120,000 dollars in debt, or having $500,000 in student loan debt. For many middle class and lower-income families they get tied up in student debt very easily as means to pay for their college tuition. This doesn't need to be the case. I'm going to make the argument why people shouldn't get student loans and how to avoid them.
My friend had a mother growing up in San Jose, CA who made $55,000 a year to support him and herself. His Mom worked very hard, but she couldn't pay for his tuition. Your parents' income will be a deciding factor in whether or not you will receive student loans from a University or get grants. Most people don't know, but it's extremely hard to get grant money unless your parents income bracket deems it that you will get grants.
Difference between Grants and Student Loans:
Student Loans: loans given out to you by the government or another institution to finance your education usually has a 5% interest rate on it that accrues each year you don't pay them back.
Grants: free money given out by the government or other organizations to study. Usually you need to be a specific race, gender, or low income to receive them.
If your parents are earning $55,000 and you're an only child you will most likely not receive grant money and you probably will get student loans. Unless you are exceptionally bright student. For most students they will be middle of the road students, so I will focus on that in this article.
Going to Berkley if live in LA might be a dream. You could go there and get great education. The costs would be $15,000 for tuition and roughly another $15,000 for housing and food.
That's $30,000 for one year in the scenario above if you want to go to Berkley. If you went to a CSU California State University like SJSU it would be $7,000 for tuition and about $15,000 for housing, so $22,000 a year.
If you could live at home and go to CSU Long Beach and pay $7,000 for tuition and live at home you cut down your costs a lot. But if you can into Berkley you probably could get a full scholarship to go to a CSU because they are generally easier to get into than UC schools in California.
Cost break down with loans at each loan amount living at home vs dorming in Berkley / SJSU / CSU LB living at home:
Berkley Housing + Tuition: $120,000 in student loans a 10 year loan brings the amount to pay back to the government $159,869 with a 6% interest rate. You would need to pay $1,332.25 for 10 years to pay it off fully.
SJSU Housing + Tuition: $88,000 in student loans for a 10-year loan brings you to a total after interest to $117,237 for your loans at a 6% interest level.
CSU Long Beach Tuition living at home: $28,000 for the loans and interest puts you at $32,479 for your 4 years which is way lower than the other schools because you are still living with your parents not having to take out loans for housing.
Now everyone wants to move away from their parents' house and go off to college like in the movies going into a dorm room and meeting new people. Sometimes it's fun and can be a great way to become more independent, but you need to look at the long term in terms of finance.
In the above scenario if you go to Berkley then you will get a top education, but if you major in Psychology and want to go into that field with a Bachelor of Arts you will earn $40,000 per year in that field. This is the harsh reality of that field.
Berkley Psychologist:
$40,000 per year earns you $2406 per month after taxes. Your student loans to pay them back would be $1300 a month for the next 10 years. Now you can do income-based repayment, but your loans will be following for the next 10 years minimum because the 10-year forgiveness rule has not set in for you. I'll talk about this later.
SJSU Psychologist is the same $2406, but you need to pay $976 per month for you loans for 10 years.
CSU Long Beach: $2406 and you have a 5-year loan which at 6% comes out to $541 per month for 5 years.
Clearly in the above scenarios it makes the most sense to live at home and get a Psychology degree. This person will save money and have less loans and have a more manageable loan repayment payment. If you can stick out at home after you graduate you could knock down the loan amount faster studying while living at home and having a part-time job could cut your loan down even further for a much better outcome financially for the psychologist major.
$1500 ($15 per hour with 25 hours per week worked: I worked 36 hours per week, so 25 hours per week at a CSU is doable) is earned per month as a part-time worker for the Psychologist. $18,000 per year could be earned by the part-time worker and they could finance their entire CSU education at CSU Long Beach. And not need to get student loans by just getting a part-time job while in school.
Now everyone's situation is different you may want to go to a fancier school, but the debt could be soul-crushing once you get out of school.
Right now you might be saying to yourself I don't want to be a psychologist, but a Computer Science Major. This improves your odds of paying back loans, but it is still difficult to do if you have a large loan amount.
You would make $4288 per month after taxes as an Entry-Level engineer and be making $80,000 per year as a Engineer in the Bay Area.
If you went to CSU Long Beach for your degree this would be your cost of living break down as an Engineer if you had $28,000 in loans:
- $1400 for a room in a 2-Bedroom Apartment
- $541 for your loan repayment
- $600 on food
- $500 on transportation if you live close to your workplace
- $100 Utilities: gas, electric, trash, water
Total: $3141 for monthly expenses
Income $4288 - $3141 = $1147 saved per month probably would only save half of that to be honest
Even as an entry-level Engineer with the minimum amount of loans you are still probably only saving $500 to $1150 in the best case scenario. This is only going to happen if you don't go out to bars or clubs much and can stay disciplined in not buying things you do not need.
Now if we run the numbers with the Berkley repayment of 10 years below if year 1:
- $1400 for a room in a 2-Bedroom Apartment
- $1332 for your loan repayment
- $600 on food
- $500 on transportation if you live close to your workplace
- $100 Utilities: gas, electric, trash, water
Total: $3932 on monthly expenses
$4288 - $3932 = $356 saved per month probably you are living paycheck to paycheck for a good 3 or 4 years to get your finances in place and need to change a few jobs to increase your salary significantly.
Going further lets break down expenses year over year saying you could increase your salary as an engineer for 4 years by $10,000 more each year you switched jobs.
Year 2 savings:
Salary per month 90K = $4738 after taxes - $3932 (Expenses for Berkley BS + cost of living) = $806 saved per month as a single person living on $90,000 per year
Year 3 savings:
Salary per month 100K = $5178 after taxes - $3932 (Expenses for Berkley BS + cost of living ) = $1246 saved per month
Year 4 savings:
Salary per month 110K = $5662 after taxes - $3932 (Expenses for Berkley BS + cost of living) = $1730 saved per month
Now it depends on your job, but QA Engineers and Front-End UI engineers may max out their pay at $110,000 per year, so for the next 10 years you'll be saving maybe $1730 per month if you are ver frugal. And this is an assumption you can keep your cost of living expenses in line at the same rate each year, which of course is hard to do, but a necessary assumption on my part.
It's a pretty bleak path to home ownership if you are married or single. In the Bay Area having the expenses above will never get you on a path to buying a home unless you win the lottery. $1730 per month for 10 years if you do it gets you $207,000 and that is what you need to put a down payment on a $1 Million dollar house in the Bay Area. By the time a millennial gets $207,000 they will have paid of their loans only to be setup for another 30-year loan for their house...
My word of advice is to avoid student loans at all costs. Live at home with your parents. It sucks and is not as fun and you won't have an American Pie style college experience, but you will be way better off doing this than going out into the world on your own struggling paycheck to paycheck as Engineer for 10 years.
Get a job and live with your parents if this is an option or another family member. If you can work even part-time to wipe away your college expenses do it. You will be living more comfortably and have a better chance at success for buying a home and or a car or other expensive things you may need in the future.
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