University of Virginia

The Shocking True Cost of Student Loans

What does your student loan cost you? The conventional answer is to look at the monthly payment times the number of months and get the total. If you graduate with $20,000 in Stafford Loans, paying them back at $230/month for ten years, you’ll pay right around $27,600 total. But there is a huge flaw with this logic.

What will you NOT be doing with that $230 per month while you are young and working? Answer: saving and investing it. Compare two graduates, Susie Stafford with the loan payments shown above, and Nellie No-loan graduating debt free. With plenty of time to retirement, they can each have aggressively invested portfolios. Each invests similarly.  How do they fare when they are 65?

Susie Stafford will have $600,000 less in her retirement account than Nellie No-loan will, given the same return assumptions (available upon request.) In reality, it may be worse than that because Susie will have to be exposed to more risk in her portfolio as she ages than Nellie will.

When you think about the true cost of borrowing money for college, remember to include the opportunity cost of the money you will NOT have to invest for your retirement.