Congrats to everyone going to college in the fall! Now that acceptance letters have gone out, it’s time to re-evaluate the cost. Many families — even those in the high-income brackets — opt for student loans. After all, a small loan can teach young people the importance of paying your way in life, budgeting and building up a good credit score. The average student loan amount is now around $25,000 through graduation. While this may not seem like a huge amount, it’s important to realize just how burdensome student loans can be.

First of all, private market student loans are pricey: their interest rates are similar to those of junk bonds. While your student is probably a much safer bet than a debt-ridden company, the interest rate they’re both being asked to pay now is close to 7%. That’s understandable, since about 20% of students default on their loans. However, unlike junk bond issuers, students with loans cannot get out of them by filing for bankruptcy. They’re stuck with the loans for life.

On a $25,000 10-year student loan at 6.8%, the monthly payment will be about $280 (the interest will keep accruing while the student is in school). An extra $280 a month may not seem like a big deal. In fact, many people’s car payments are higher than that.

So why should students – and parents — care about the amount of student loans?

For a young person with an entry-level job, $280 less each month can be a setback for life. It’s $3,360 less each year for investments that provide a lifetime advantage: a house purchase, continuing education, a new business venture, pension contributions. Studies show that recent grads with student debt are less prone to contribute to a 401(k) plan at work. If a company offers to match pension plan contributions, they’re leaving money on the table, especially since the most effective time to save for retirement is when you’re young, allowing compounding returns to work in your favor.

Student loans can even follow you into retirement. Up until retirement, the US government can garnish wages to pay off student loans. For Social Security recipients with unpaid student loans, the loan payment is deducted from benefits. So yes, student loans can be quite the albatross.

Student Loan Do’s

It’s very important for parents and students to take a hard look at how much student debt they can realistically take on, and to understand how the debt will impact their lives. Here are some suggestions:

• Assess how much you should expect to pay for college. Most college websites, including the University of Washington, have a “Net Price Calculator” that provides a rough financial aid estimate based on basic inputs like family income, debt, assets. There’s also the “Expected Family Contribution Calculator” on the College Board’s website.
• Plan ahead and include less expensive options for college, such as Canadian universities, Running Start program in Washington State, or first two years at a community college.
• Consider other types of loans tied to family assets, which have much lower interest rates. Parents can take out a home equity line of credit or refinance their primary home mortgage, although both these options also have their drawbacks.
• Consider an intra-family loan, if there’s a willing lender within the family or extended family. The rates on intra-family loans are especially low right now, and they can be a great deal for everyone involved, as LNWM’s Kristi Mathisen explains in this article.
• If you opt for student loans, start with federal government loans, whose interest rates are around 4.3% for up to $23,000 – $31,000 borrowed over four years, and only then consider private loans co-signed by parents with rates of around 6.8%. Also, keep in mind that certain federal government programs forgive student debt if you work in public service for a number of years.
• Before signing for a student loan, look carefully at the terms – interest rate, monthly payment, how long repayment will take. Then consider how much you’re likely to be earning out of college or grad school.