“An investment in knowledge always pays the best interest.”

—Benjamin Franklin, The Way to Wealth: Ben Franklin on Money and Success

Financial Decision Making for College

As you progress through your college experience, the cost of college can add up rapidly. Worse, your anxiety about the cost of college may rise faster as you hear about the rising costs of college and horror stories regarding the student loan crisis. It is important to take control of your financial choices and the cost of your college experience. There is no one size fits all approach to making financial decisions in college, but keeping the following information in mind may help you make smart financial decisions for yourself as you work towards earning your degree.

Reflection Questions for Evaluating the Cost of School

Today’s colleges are in a competitive market for students. Thinking about the services you as a student need or want from a college environment can help define what is personally important and what you are willing to pay for. You may want to ask yourself the following questions to understand the expenses you may encounter in school.

• How much is the degree or certificate you want to earn going to cost?
• What factors go into the cost of the college?
• What costs are included in tuition?
• What costs are not included in tuition?
• What is college worth to you?
• How much money can you afford to spend on college?
• Where can you get financing for college if you need help paying for it?
• How much money do you think you could afford on a monthly basis to pay back a loan related to financing college?
• What is the current interest rate on student loans?
• Are interest rates all the same?
• What do you think your life will be like after college?

Setting Financial Goals

Setting financial goals for yourself is one of the best ways to track and manage your expenses both while attending school and afterward. The following strategies can help:

• Create SMART goals: SMART stands for specific, measurable, attainable, realistic, and timely. These kinds of goals are more manageable and can help you reach your final target more easily. For example, instead of setting a broad, vague goal of “paying for college,” you might set a goal of paying off your two college loans five years after you graduate. This more specific, measurable goal can help you keep track of your progress and whether you need to make changes to reach it.
• Monitor your spending: Try keeping track of what you spend money on during a one-month period. This can help you see where your money goes and where you may be able to save.
• Create a budget: Based on what you discovered after monitoring your spending, create a monthly budget you can stick to. While some expenses, such as food and transportation, are necessary, you may find that you can save money on both by riding a bike (instead of driving) to school and eating out less.
• Consider working: Some students have full-time jobs while attending college, whereas others may not have a lot of time to work if they’re taking a full academic load. Depending on your circumstances, it’s worth looking into employment opportunities both on and off campus. Even if you feel like only a couple hours of work per week are possible, part-time work could help you pay for something like books so you have one less thing to worry about when you graduate.
• Choose loans wisely: Many college students need some sort of financial support through loans. While loans are a good way to pay for tuition up front if you don’t have the money, remember that they accrue interest until you pay them off. That means that you will end up paying back more—in some cases, thousands of dollars more—than you initially borrowed. Make sure you investigate and apply for as many scholarships and grants as you can (since they won’t need to be repaid), and shop around for loans with the lowest interest rates and best repayment plans. Check with the financial aid office on your college campus—they can provide additional help.

These are only some steps you can take for creating college financial goals, but it’s important to find the right ones for you.

Matching Student Debt to Post-Graduation Income

Students and parents often ask, “How much debt should I have?” The problem is that the correct answer depends on your personal situation. A big-firm attorney in a major city might make $120,000 in their first year as a lawyer. Having $100,00 or even $200,000 in student debt in this situation may be reasonable. But a high school teacher making $40,000 in their first year would never be able to pay off the debt.

The amount of debt you take on should be tied to the income you expect.

Each field of employment brings with it an average income and assumed debt. This graph shows the impact of an attorney’s income versus debt, and then compares a teacher who took a $100,000 loan with one who took a $30,000 loan. Note the teacher’s income is the same in both cases. (Credit: Based on information from National Association of Colleges and Employers and US Bureau of Labor Statistics.)

Research Your Starting Salary

Begin by researching your expected starting salary when you graduate. Most students expect to make significantly more than they will actually make.^[1] As a result, your salary expectations are likely much higher than reality. Ask professors at your college what is typical for a recent graduate in your field, or do informational interviews with human resource managers at local companies. Explore the U.S. Bureau of Labor Statistics’ Occupational Outlook Handbook. PayScale also has a handy tool for getting general information based on your personal experience and location. Search websites and talk to employees of companies that interest you for future employment to identify real starting salaries.

Undergraduate Degree: 1 x Annual Salary

For students working toward a bachelor’s or associate degree, both forms of undergraduate degrees, you should try to keep your student loans equal to or less than your expected first year’s salary. So if, based on research, you expect to make $40,000 in your first year out of college, then $33,000 in student loans would be a reasonable amount for you to pay out of a monthly budget with some sacrifice.

You may need to adjust your college plan as circumstances change for you and in the job market. You can modify plans based on funding opportunities available to you and your location. You may prefer a community-college-only education, or you may complete two years at a community college and then transfer to a university to complete a bachelor’s degree. Living at home for the first two years or for all of your college education will save a lot of money if your circumstances allow.

Advanced Degrees: 1–2 x Annual Salary

Once you’ve graduated with your bachelor’s degree, you may want to get an advanced degree such as a master’s degree, a law degree, a medical degree, or a doctorate. While these degrees can greatly increase your income, you still need to match your student debt to your expected income. Advanced degrees can often double your expected annual salary, meaning your total debt for all your degrees should be equal to or less than twice your expected first job income. A lower number for the debt portion of your education would be more manageable.

Your goal should be to pay for college using multiple methods so your student loan debt can be as small as possible, rather than just making low monthly payments on a large loan that will lead to a higher overall cost.