As a financial planner, one of the worst things I experience is witnessing the financial regrets of my clients. We all make mistakes and make poor choices; however, some are more painful than others, and the single most painful financial regret my clients have is their student loan debt. This is not surprising to me, according to a recent AICPA study, 60% of recent graduates have some regrets as far as student loan debt is concerned.
The hard part about regret is that you cannot change the past; you can only manage through your present. High school students who are applying for college, though, have the opportunity to prevent a future of regrets that have led others to delaying homes and marriage, they have the ability to choose the right school from the beginning.
When I was applying for colleges, my parents encouraged me to apply for the best schools possible and assured me that they would find a way to pay for it. This list of private universities that I applied to 18 years ago, is the same list for other high school seniors looking to apply for the best; however, the tuitions are now two or three times more expensive than when I applied, and it will not be as easy for their parents to find a way as my parents did.
The more I see the financial statements of my clients, the more I realize that there needs to be a fundamental shift in the view of what the list of "the best colleges and universities" looks like. I understand that there is an argument about academic rigor; however, from a cost benefit analysis, to me the best university a student could attend is the public university of the state in which they live.
Right now, if a Florida resident and senior in high school applied to the University of Florida, and needed student loan finance to pay for some of school (let's assume 40%), in four years, this student would graduate with around $35,000 in student loan debt. The average monthly student loan payment would be $357 a month, and they would need to make $28,000 a year for this monthly payment to comprise 15% of their debt to income ratio.
Your debt to income ratio or DTI is the amount of debt you have to pay per month divided by your monthly income. When banks loan you money, they like to see that your DTI is less than 35%. There are some banks that would loan to people with a higher DTI, but not normally for purchases like a home. Because you may need to borrow for other needs in your life like a car or a home, you should try to keep your student loan debt to the lowest possible number.
A recent study attributed an $83 billion dollar hit on the housing industry due to student loans, and this is because the debt to income of many new home buyers is already elevated because of their student loan debt that there is no room to approve mortgage debt. I would imagine that many of these students attended a private college or university or received a graduate degree.
Going back to the cost benefit analysis, if a Florida resident and college senior decided to attend New York University, a private university, and needed to finance 40% of this education, this senior could expect to graduate after four years with $112,204 in student loan debt with a monthly payment around $1,100. This student would need to earn a salary of $88,000 to keep the debt to income ratio at 15%.
As a graduate of a private university, I don't feel as though the value is there now as it was 18 years ago. There is not a single school that can guarantee a student a job, let alone a particular salary. In addition, state schools tend to be larger in size which means there are more alums, which means more networking opportunities for new graduates. My clients who attended state colleges and universities seem to have fewer struggles with obtaining jobs versus their private school peers based on this networking opportunity alone.
As you or your child is applying for schools this fall, I hope that the state schools have made the list for top choices, and if they haven't, then I suggest that you carefully weigh the financial pros and cons of a state education vs. a private education so that you do not experience the same financial regrets as 65% of recent graduates.