Ashley and Andrew enroll at UM at the same time as incoming freshman. They have the same goal of earning a bachelor’s degree in Journalism. They both apply for student loans to help offset the cost of enrollment. Both qualify for student loans totaling $12,500 per year. Andrew accepts the full amount. After he pays for essentials, he finds he has excess that he uses to pay for a spring break trip and a stereo. Ashley calculates a budget that allows her to borrow only half of what’s offered to her, or $6,250 per year. Her loans are spent on essentials like tuition and books and they help to offset her rent costs. Additionally, she works part time to supplement her borrowing and she finds creative ways to keep her living expenses down, such as cooking her own meals and sharing an apartment with several roommates.
Four years later, Ashley and Andrew graduate with identical degrees and they receive similar job offers from the local newspaper. The starting salary is $25,000/year. What differs is their student loan debt. Andrew starts his career owing $50,000 while Ashley owes $25,000. What does this difference mean in terms of their future lifestyle? Assuming an 8% annual interest rate and a ten year term to pay back their loans, Ashley will pay approximately $303/month on student loan debt out of the $2000.00/ month income. Andrew will pay around $607/month out of the $2000.00/month income.
Over the course of ten years, Ashley will pay back $36,360 including $11,360 in interest. In the same timeframe, Andrew will pay back $72,840 including $22,840 in interest alone.
Higher education can be a valuable investment because income and education remain highly correlated. It is, however, possible to over-borrow and mortgage your future earnings. Over-borrowing may infringe upon your ability to qualify for a home, auto and other personal loans. When the time comes to start your career and plan for your future, you’ll be glad you borrowed only what you needed to earn your degree.
Emma B. Lommasson Center
The University of Montana
Missoula, MT 59812