It’s very easy to see how rapidly the costs of higher education are increasing. But that shouldn’t deter you from seeking an education. There are a number of benefits to completing your degree, and even if you have to take out student loans in order to make it happen you can still benefit. Here is some of the quick math when it comes to taking out student loans and how that will help you with your taxes next time you file.
Costs of Higher Education
Education can be incredibly expensive if you let it. However, there are ways to get a degree without paying outrageous prices. Even if you attend a private university, where the costs are the highest, you can still get by with very few loans if you get to know the right people. Here is what it looks like for an education per year:
- Private University/College: $30,000
- State Schools – Resident: $8,900
- State Schools – Non-resident: $22,200
Now keep in mind these are national averages, so wherever you live those could be vastly different. But suffice to say that the costs of tuition and fees (not to mention room and board) range from $35,600 to $120,000 for a four year degree (assuming no cost increases during your tenure). That is a lot of money to owe when you get done; and there is no guarantee of a job. But that’s another topic for another time.
Paying Back Your Loans
Currently interest rates on your loans are fairly low. For undergrad degrees, the rate (until July 1st when it readjusts) is 4.66%. Even though this is a pretty low interest rate, it also means that you will be paying back quite a bit over the next 20 years.
- $35,600 loan: Your monthly payments will be $228.31, and pay a total of $19,194 in interest.
- $120,000 loan: Your monthly payments will be $769.58, and pay a total of $64,700 in interest.
That is a lot of money to pay back over the next 20 years. So how does one justify taking out a loan?
Incomes With and Without a Degree
There are a lot of variables that go into determining income. For instance, there are a number of very high paying jobs that do not require a degree at all. And there are some jobs that require a degree, but pay hardly anything. When you take everything into account, we can determine the average incomes for various educational levels (statistics are for the year 2012).
- Average annual income with a Bachelor’s Degree: $46,900
- Average annual income with a high school education: $30,000
Let’s suppose that you go to a state school and get out with just $35,600 in loans, and you are able to land a good job right away. You will be making an additional $16,900 over your peers that have just a high school education. How does that look for the next 20 years (ignoring raises and promotions)?
- High school education: $600,000
- College Degree: $932,000
Even after you deduct the cost of the education ($35,600) and the interest that you paid ($19,194), you have still made $877,206; or $277,206 more than if you had skipped the degree. Factor in raises and promotions that allow you a larger income over those who did not get the degree and you have an even greater advantage.
Using Student Loans
Getting your degree without the help of parents, scholarships, or other means is still possible with student loans. The good news is that the interest that you pay on those loans is tax deductible. This means that while you are repaying those loans you get to experience a lower tax bill because of your write-offs.
If you are in need of simple tax preparation services, we can help you maximize the deductions available for student loans and others. Practical Taxes is a full service accounting firm with services ranging from payroll, to business planning, to tax needs.