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April 16, 2010
Financial Literacy Month: Award Packages and Student Loan Debt
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Deciding where to go to college is exciting. You were probably thrilled when you got your acceptance letter. But, the accompanying financial aid award letter might have left you confused. Debt is a big undertaking—it’s important to understand how it will impact you in the future.
What’s in an Award Package?
You award package can be broken down into 2 main types of financial aid:
- Money you repay, like federal student loans.
- Money you don’t repay, like scholarships, fellowships, grants, and forms of employment aid, such as work-study.
Scholarships and fellowships are typically awarded for academic achievement or extra-curricular involvement, while grants are typically awarded based on need. Loans, on the other hand, are awarded to most students who apply for financial aid. Being able to identify the different types of aid is important—especially when it comes to understanding your award letter.
In addition to the aid you can receive, your award letter will also include the college’s cost of attendance. When the financial aid you’ve been awarded is subtracted from that cost, the remaining amount is known as your expected family contribution (EFC). EFC is the amount of money you or your family will have to pay out-of-pocket, or through alternative funding like private loans.
Remember, you do not have to accept all of the financial aid offered to you. You may choose to accept none or part of your award. Before making your choice, consider how much debt you’ll be able to comfortably repay.
How Much Debt to Take On?
Knowing how much money you’ll make after graduation is often impossible—so figuring out how much you’ll be able to pay back without a struggle can be tough. One way to make it easier is to understand gross pay vs. take-home pay.
Below is an example calculation of income and expenses, based on a $40,000/year salary (annual take-home pay of $26,936.04) in Massachusetts. (Keep in mind that different states have different costs of living. To do calculations based on your actual salary and debt, use our Debt/Salary Wizard.)
| $3,333.33 gross monthly pay minus deductions: | |
|---|---|
| Federal tax | -$345.33 |
| Medicare | -$48.33 |
| Social Security | -$206.67 |
| MS state tax | -$145.00 |
| Health insurance | -$110.00 |
| Retirement savings (7% of gross, pre-tax) | -$233.33 |
| Net take-home pay monthly | $2,244.67 |
| $2,244.67 per month goes fast when you consider typical expenses: | |
|---|---|
| Rent: | $850 / month |
| Car payment: | $200 / month (for total $7,000 over 3 years) |
| Utilities: | $180 / month (electricity, heat, phone) |
| Food: | $250 / month |
| Student loans: | $265/month (average $23,000 debt with 6.8% interest in standard repayment) |
| Total | $1,215 / monthly expenditures |
When you look at the numbers, $40,000 doesn’t go as far as you might think. In this example, you would have about $500 per month for “extras” like saving, entertainment, vacation, car repairs, clothing, and prescriptions and medical co-pays. In order to make sure you’re not taking on more debt than you can reasonably expect to pay off, you need to be a wise borrower.
In addition to borrowing wisely, you’ll need to spend and save wisely, too. Creating a budget is a good way to begin each month. To get started, use our interactive budget worksheet (pdf, 0.34 MB) and budget calculator.
