Back to school: Student loan danger

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By Jennifer Thomas By Jennifer Thomas

PHOENIX -- The price tag for a college education can be staggering and some students are getting in over their head trying to pay.

The average cost to go to a four-year university is $10,000 a year. That's just for tuition and fees. Add in dorm room and food and it's closer to $20,000.

And kids are paying it with student loans.

Before you take out a loan, think about what it will do to your finances first.

“People do have to be careful how much debt they take on in the name of education and they have to make sure they apply the debt they take on for education to education,” said Michael Minyard, a CPA and financial adviser in Phoenix.

Minyard said student loans can be a great resource. But how much of a loan is too much?

“They need to evaluate the income that they are going to get with that education, they need to determine how much of that income is going to be available for them to spend, and then they need to allocate no more than 5 percent of that spendable portion to service educational debt,” he said.

About 85 percent of student loans are between $25,000 and $50,000.

That's a lot of money to repay and students may not think about what it will take to pay it back.

Here's the breakdown:

If you take out a $25,000 loan, your average monthly payment will be about $300.

Financial experts say to pay that, your new job is going to have to pay between $37,000 and $45,000 a year.

For a $50,000 loan, expect to pay around $600 a month and your income will have to be between $74,000 and $90,000 (source: MSN Money, Liz Pulliam Weston).

Not many college graduates earn that kind of money right out of school.

Keep in mind, most student loans are on a 10-year term so financial experts say to be smart and be realistic.

“Understand what the education is going to qualify in terms of income and how much of that education they can afford to put into paying that debt for the next 10 years,” Minyard said.

Student loans are so easy to get that kids don't put pencil to paper and think about how they're going to pay this all off when they're out of college.

The other problem is that borrowers use student loans to live off of, for example pay rent or buy groceries. It's a horrible habit and it's leaving college students in a hole.