1. Put the students in small groups of three to five. Students will take the Student Debt Quiz, discussing each question before answering as a group. Encourage students to discuss examples of friends and family members to help guide their answers. After students have had 5-10 minutes to work on the quiz, go over the answers.
View Interactive Activity
Student Debt Quiz
The average amount of debt per undergraduate student borrower in 2014 was:
a. $ 8,000
b. $16,000
c. $27,000
d. $31,000
e. $43,000
True or false: Student loan debt can be discharged in bankruptcy .
True or false: You don’t have to repay your student loans if you don’t graduate.
True or false: You don’t start paying interest on your loans until after you graduate.
What is the percentage of 25-year-olds who hold student debt?
f. 8%
g. 18%
h. 35%
i. 43%
j. 57%
True or false: Students who owe less than $5,000 in student debt have higher default rates.
2. In the Hidden Costs of College lesson, students calculated the cost of attendance for two different schools and realized that they may need to take out student loans to cover part or all of their college expenses. In recent years, student loan debt has significantly increased, so it is very important for students to consider not only the cost of college, but the income they can expect to earn in their career after college. If students intend to enter a career which pays a lower income than others, they will need to determine whether borrowing large sums of money to attend their dream college is appropriate.
Show the students the graph below on consumer debt and ask them the following questions:
- What do banks mean when a loan is 90+ days delinquent ? [The loan payment is more than 90 days late.]
- Which type of loan had the highest rate of delinquency in the first quarter of 2004? [Credit card]
- Which type of loan had the highest rate of delinquency in the first quarter of 2015?[Student loan]
3. Ask students to read the article The Student Loan Landscape, which summarizes research on student loan debt by staff members of the Federal Reserve Bank of New York. Then discuss their answers to the following questions:
- What happened to the amount of student loan debt between 2004 and 2014? [Tripled]
- How much is the average student debt per borrower? [$27,000]
- Why has the amount of college debt increased? [More students attending; students staying longer; less expensive to take out loans; increased cost of college]
- Why is the student loan repayment rate low? [Deferring payments; income-based repayment plans; can’t afford it; cannot be discharged in bankruptcy]
- Is the student loan default rate increasing or decreasing? [Increasing]
- Why are some borrowers, who are making their payments, seeing their loan balance continue to increase? [Their payments are not keeping up with the accruing interest]
- How does significant student loan debt affect a person’s credit score? [Reduces it]
- Why is a credit score important? [It affects the ability to get a home mortgage, an auto loan, or use credit cards.]
- How can the high amount of student debt affect the macro economy? [Students and their parents who are repaying the loans cannot use that money for consumer purchases, which can hurt the macro economy]
- Why is a college degree still a worthwhile investment? [College graduates earn 80% higher income than non-graduates, and graduates are less likely to become unemployed]
4. Tell students that a good rule of thumb is to avoid taking on more debt than they expect to earn in their first year of work. Also, discuss the opportunity cost of these loan payments–what students may have to “give up” in order to make loan payments. Students with significant debt may find that they don’t have enough money for a new car or a down payment on a house.
CASE STUDIES
Armed with their background knowledge about student debt, students will read case studies of hypothetical students and advise them regarding a manageable amount of money to borrow.
For the first two case studies, have students use one of the following websites to find the salaries the students in the case studies can expect to earn: https://www.bls.gov/oes/current/oes_nat.htm or http://www.careeronestop.org/toolkit/toolkit.aspx . Have students divide annual income by 12 to determine monthly gross income.
For all four case studies, have students use the interest repayment estimator to determine the monthly student loan payment: https://studentloans.gov/myDirectLoan/repaymentEstimator.action
Click “Add Loan,” select “Direct Unsubsidized Loan,” and type in the amount to be borrowed. Use 4.29% as the interest rate. This is the interest rate for https://www.investopedia.com/personal-finance/federal-direct-loans-subsidized-vs-unsubsidized/ federal student loans initiated in 2015-2016. Use the Standard Rate as the monthly repayment cost.
Have students compare the monthly income to the monthly student loan repayment. How would the students advise each student in the case studies?
- Jason wants to become an elementary school teacher. His dream school is out of state, which will require him to borrow $191,560. [His monthly loan payment would consume more than 40% of his monthly income. He should look for less expensive schools.]
- Alex wants to become a welder. She can complete a one-year program at her local community college, which requires her to borrow $14,523. [Her monthly loan payment would consume less than 5% of her monthly income. It is a reasonable loan debt.]
- Shawn spent his first year of college partying and skipping classes. As a result of his poor grades, he will now have to attend a fifth year of college in order to obtain his four-year degree. He will have to borrow an additional $23,032 for his fifth year. Assuming a $40,000 income after graduation, by how much will his monthly loan payment increase for the next ten years? By how much will his total loan increase, including interest? [$236] [$28,378]
- Sam took several AP and dual credit courses in high school, which will allow her to graduate one semester early. Assuming a $40,000 income, if one semester’s cost of attendance is $12,530, what is the total amount she will save in loan debt? [$15,439]
5. Discuss with students ways they can reduce college costs, reducing their reliance on student loans.
- Complete your FAFSA form and apply for as many scholarships as possible — even the little ones
- Take AP or dual credit classes while in high school
- Carefully compare your options for housing and meal plans; consider what you can afford
- Graduate on time; work with your adviser early to select courses and keep up your grades
- Buy or rent used textbooks
- Buy only what you need; you don’t need every college sweatshirt, towel, and hat
- Check to see whether local businesses offer discounts with a student ID
- Pay bills on time to avoid paying interest charges and late fees
- Work at least part-time while in school to reduce the amount you need to borrow
