Figuring out how to pay for college has quickly turned into one of life’s most complicated financial decisions.
This is not because the decision involves the largest number of dollars, although it’s getting there for many families. Instead, it’s because of a number of confounding factors. There’s the uncertainty about a student’s future ability to pay back student loan debt or whether spending twice as much for some schools will lead to a future that’s twice as lucrative or happy.
But perhaps the biggest problem is that people don’t always know where to find good information and answers to questions.
High rates — While one type of federal student loan is available at a 3.4 percent interest rate, others cost 6.8 percent, and loans for parents and graduate students are 7.9 percent. Private loans from banks are often more costly. Also, the loans come with repayment options and loan forgiveness programs.
Refinancing — A reader from New York City consolidated a bunch of loans into a single loan more than a decade ago at 8.125 percent and cannot refinance the loan at a lower rate because of rules that prohibit this. The comment summed things up this way:
This, like student loans, is something only Congress can change, and perhaps it didn’t anticipate this problem or worry about it back when it thought it was doing students a favor by letting them consolidate debt at a fixed rate.
Forgiveness and taxes — Another reader posted a question about the income-based repayment plan, noting that she’ll probably have a large amount of debt forgiven at the end of her term and is worried about the tax bill she’ll face at that point, when she’ll be 70 years old.
Indeed, the amount of any debt forgiveness is often taxable income as far as the federal government is concerned. One big exception, however, is for people enrolled in something called public service loan forgiveness.
Safe amount of loans — And finally, the most difficult reader question of all: “How do you suggest families decide on how much borrowing is acceptable?’’
There are many variables here. It can depend on the career the teenager seems headed for or the willingness of parents to help.
Mark Kantrowitz, who runs the encyclopedic Finaid.org website, has developed one rough guideline: Students should borrow no more, in total, than whatever they think their first-year salary will be once they’re finished. A slightly more conservative approach may be to limit yourself to $31,000, the maximum amount of money the government generally lets undergraduates borrow in federal loans.
So how do we get to a point where any college is in reach for every student? It’s a question that no one has a realistic answer for yet.