Finaid.org has a great tool for prospective students to use when deciding whether or not to attend a expensive college program. The program calculates the monthly payment that has to be made by the borrower in order to fully pay off the loan. Here is an example by using $120,000.00 as the loan amount, assuming a 25 year loan term.
Loan Balance: $120,000.00
Loan Interest Rate: 7.50%
Loan Fees: 0.00%
Loan Term: 25 years
Minimum Payment: $0.00
Monthly Loan Payment: $886.79
Number of Payments: 300
Cumulative Payments: $266,036.49
Total Interest Paid: $146,036.49
Notice that the total amount of interest paid is actually greater than the original loan amount. In addition, given that not all of the loans will have the interest subsidized while you are attending college, the loan amount will be even bigger. Thus, on a 120k loan, expect to pay somewhere around $900 to $950 per month for 25 years. In the event that it takes a graduate a good 2 years to get a decentpaying job, the loan balance will have grown even larger as the interest accrues on a DAILY BASIS!
Many naive students believe that $1,000 per month in loan repayments is perfectly reasonable to manage. Guess again. If you get a job earning $45,000 per year, after taxes of 22% your net earnings are $35,100 or $2,925 per month. Take out the $1,000.00 for the loan and your left with $1,925.00. How about rent? Lets assume some real cheap rent in the amount of $800 (assuming roommate or partner to help pay) plus utilities and your left with $1,000.00. How about a car payment or a flat tire, busted brakes, oil change, blown transmission? Then you have to eat, pay for a phone, and all the other necessities of life and you will be flat broke. Lets go back to what the loan calculator said about $120,000.00 in student loan debt:
It is estimated that you will need an annual salary of at least $106,414.80 to be able to afford to repay this loan. This estimate assumes that 10% of your gross monthly income will be devoted to repaying your student loans. This corresponds to a debt-to-income ratio of 1.1. If you use 15% of your gross monthly income to repay the loan, you will need an annual salary of only $70,943.20, but you may experience some financial difficulty.This corresponds to a debt-to-income ratio of 1.7.
On a salary of 45k you will be devoting nearly 25% of your gross income to debt service. And if you think I'm using a low salary base as an example just take a look at many of the entry level positions out there as they are paying far less than 45k.In fact, many entry level positions pay less than 30k a year. There are entry level lawyer positions that pay minimum wage at times. For numerous examples take a look at shitlawjobs.com.
It is imperative that all college students fully understand the implications of student loans on their future finances. The other day I spoke with a recent college grad who owed $200k in loans. When I told him he was looking at $1,500 a month for the next 30 years he said "that's not too bad." I look forward to his response a year from now.