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Does Our National Conversation about College Debt Adequately Take Interest into Account?

Question.  When it’s written or said that a person has taken out, say, $30,000 in student loans, is it usually assumed that $30,000 is the total to be paid back, with interest already factored in?  Or is interest generally not yet accounted for, meaning the borrower is on the hook for measurably more than $30,000?  I may be wrong, but after reading a lot about student loans for Great Jobs Without a Four-Year Degree, my sense is that most references to student loan debt ignore the reality of interest, thus underplaying how difficult paying back loans may be.

Perhaps more young people than I think is the case are fully alert to how they will be responsible for more than simply the face value of college loans when they sign on dotted lines, and they also know exactly what that extra expense will be.  But even if that is true, our national conversation about how student debt is a big problem for many young (and not-so-young) men and women is rarely explicit about the added burden of interest, even if rates are reasonably low.

Here are what various interest rates and resulting monthly payments look like for $30,000 in student loans.  These calculations along with other pertinent and helpful information can be found on the FinAid website here.

  • A $30,000 loan at 5.0 percent, repaid over 10 years, would result in monthly payments of $318, totaling $38,183. Or $8,183 in interest.
  • A $30,000 loan at 6.8 percent, repaid over 10 years, would result in monthly payments of $345, totaling $41,429. Or $11,429 in interest.
  • And a $30,000 loan at 7.9 percent, repaid over 10 years, would result in monthly payments of $362, totaling $43,488. Or $13,488 in interest.

These three interest rates are not imagined of whole cloth, but rather are fixed rates for Federal Perkins Loans (5.0 percent); Federal Stafford Loans (6.8 percent); and Federal PLUS Loans (7.9 percent).

None of this is an argument against young men and women taking out loans to help underwrite their education, and hence their careers.  It is an argument, however, for prudence as well as for digesting all print before signing on dotted lines.  My rule of thumb is that it’s perfectly reasonable to go into debt for the same amount as if one were buying a modest Ford, as I would like to think most people seeking four-year degrees value them at least as much as four good wheels.

As it happens, a new Ford Fusion can be had for between $20,000 and $30,000.

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