A Worksheet for the True Cost of a College Degree Before You Sign Anything

If you bought a car the way most families buy a college degree, you would sign for it before the dealer told you the price, finance it at a rate nobody quoted, and learn the monthly payment from a letter that arrives after you drive off. Then you would be told that the car was an investment. That is not a joke about cars. That is how a seventeen-year-old with a pen and a financial aid portal often meets the largest purchase of her life.

The fix is not complicated. It is arithmetic. This post is a worksheet: six steps, one worked example you can copy line by line, and a few traps to avoid. The numbers in the example are hypothetical. They are chosen to be round enough to follow, not to describe any particular school, and you should replace every one of them with figures from the school, the lender and your own paycheck.

Three prices, not one

Most families hear one number, and there are three that matter.

1. Sticker price. The published cost of attendance: tuition, fees, books, housing, food and sometimes travel. It is the number on the website.
2. Net price. The sticker price minus grants and scholarships, money you do not repay. This is what you have to find in cash, savings, work and loans. Every school that takes federal aid must post a net price calculator on its site, and it is worth using before you apply.
3. Full cost. Net price is still not the whole bill. If you spend four years in a classroom, you are not spending them in a job, and the wages you give up are a real cost, whether or not any bill arrives. Full cost counts the money you pay and the money you do not earn.

Now we will compute all three for one imaginary student.

Step 1: write down the published price

Start with the school's own estimate, per year. Our hypothetical student's first year looks like this.

Add the lines: 20,000 + 1,000 + 12,000 = 33,000. Write down what you assumed about next year. Prices rarely fall, and the sticker price on the website is the first-year figure. Ask the admissions office, in writing, whether the price is guaranteed for four years or whether it can rise.

Step 2: subtract grants to get net price

Grants and scholarships are money you do not repay: a Pell Grant, a state grant, a school scholarship. Loans are not grants. Work-study is not a grant. They come later in the worksheet.

Suppose our student is offered $13,000 a year in grants.

Net price = sticker price − grants = 33,000 − 13,000 = $20,000 a year.

Over four years, if nothing changes: 20,000 × 4 = $80,000. That is the amount of money the family has to raise, from savings, income and borrowing, to get this one student through. Write it at the top of the page.

One warning. Look at whether the grant is for all four years or for the first year only. A school that lures freshmen with a large grant and then lets it shrink is not breaking a rule. It is doing the math you should have done.

Step 3: add the wages you give up

Economists call this the opportunity cost. A worker who goes to school gives up what she would have earned. For a worksheet you only need three numbers: what you could earn working full time instead, what you will earn while enrolled, and how many years.

Our hypothetical student could earn $34,000 a year in a full-time job. During school she works part-time and earns $6,000 a year. So the wages she gives up each year are 34,000 − 6,000 = $28,000. Over four years that is 28,000 × 4 = $112,000.

Now a correction that most online calculators get wrong. The housing and food line in Step 1 is a cost she would have in either life. A working person pays rent and buys groceries too. If you count the full $12,000 of room and board in your cost and count her full wages as lost, you count her rent twice. So for the full-cost figure, count only tuition, fees and books, minus grants.

Tuition, fees and books: 20,000 + 1,000 = $21,000 a year. Minus grants of $13,000 leaves 21,000 − 13,000 = $8,000 a year, or 8,000 × 4 = $32,000 over four years.

Full cost = 32,000 + 112,000 = $144,000.

Look at those two figures side by side. The family has to find $80,000, and the full economic cost is $144,000. The larger number is not a bill, and nobody will mail it to you. But it is what the choice costs, and it is the number you should compare against what the degree is likely to add to your income. If the school's own housing costs more than a modest apartment, add the difference.

If your student would not work full time otherwise, because she is leaving the Army or caring for a parent, put in the wages she actually could earn. The worksheet works only if the numbers are true.

Step 4: price the loan with the formula

Suppose the family covers $50,000 from savings and income and borrows the remaining $30,000. (Check: 80,000 − 50,000 = 30,000.) What will the loan cost?

For a standard fixed-rate loan with equal monthly payments, the payment is:

M = P × r ÷ (1 − (1 + r)^−n)

• P is the amount borrowed: $30,000.
• r is the monthly interest rate: the annual rate divided by 12.
• n is the number of monthly payments.

Our loan is at 6 percent over 10 years. So r = 0.06 ÷ 12 = 0.005, and n = 10 × 12 = 120.

1. Compute (1 + r)^n = 1.005^120 ≈ 1.8194.
2. Take the inverse: 1 ÷ 1.8194 ≈ 0.5496.
3. Compute 1 − 0.5496 = 0.4504.
4. Compute P × r = 30,000 × 0.005 = 150.
5. Divide: 150 ÷ 0.4504 ≈ $333.06 per month.

Total paid over ten years: 333.06 × 120 = $39,967.20. Interest: 39,967.20 − 30,000 = about $9,967. (A lender's unrounded schedule gives a few cents' difference.) Almost $10,000 for the privilege of borrowing $30,000 for ten years.

You do not need to trust my arithmetic. Any spreadsheet will check it with its payment function, and the Federal Student Aid loan simulator will do the same for a federal loan. But do it once by hand, because the formula shows you what the three inputs do.

Here is what happens when you change them, all on $30,000 and rounded.

Read down the last three rows. Stretching the loan from 10 years to 25 cuts the monthly payment from $333.06 to $193.29, a drop of $139.77. It also raises the interest from about $9,970 to about $27,990. That is almost three times as much. The longer plan feels cheaper every month and is dearer every year. The trap of a payment that is easy to carry and hard to finish is the subject of How a Federal Student Loan Works and Why the Balance Keeps Growing.

One more thing about real federal loans: interest can accrue while you are still in school, and it can be added to your balance if you do not pay it. The worksheet above assumes you start repaying the full $30,000. If you borrow each year and interest builds up, your starting balance is higher than the sum of the checks.

Step 5: test the payment against a paycheck

A payment is only large or small compared with income. Our graduate's hypothetical starting salary is $48,000 a year, which is 48,000 ÷ 12 = $4,000 a month before taxes. The payment is 333.06 ÷ 4,000 = 0.0833, so about 8.3 percent of gross pay. After taxes, the share is larger.

Two rules of thumb, and they are only that. First, many advisers say total student debt should not exceed what you expect to earn in your first year. Here 30,000 is less than 48,000, so we pass. Second, look at the payment as a share of take-home pay and ask whether a sudden expense, a layoff or a baby would break the budget. The paycheck worksheet in a paycheck worksheet that shows where every dollar of your pay goes shows how to get from gross to take-home, and the amortization idea is the same one that sits under a mortgage, as in a mortgage worksheet that shows what two points of interest really cost.

For the expected salary, do not use the school's brochure. Use independent sources. The Bureau of Labor Statistics Occupational Outlook Handbook lists median pay and the typical education for hundreds of occupations. The Education Department's College Scorecard reports earnings of former students by school and in many cases by program. If your intended major leads to a job with no median pay you can find, that is information.

Step 6: compare against a trade path

The last step is the one most families skip: compare the degree with a different road, such as a registered apprenticeship, in which you are paid while you learn. The longer comparison among all the options is in College, Apprenticeship or Trade School, How to Compare Your Options. Here we only do the break-even math.

Assume, hypothetically, that the apprenticeship pays the same $34,000 a year used in Step 3, so that the full cost of the degree path is the $144,000 we computed. After finishing, the graduate and the journeyman earn the following.

• Degree holder: $62,000 a year.
• Journeyman: $50,000 a year.

The gap is 62,000 − 50,000 = $12,000 a year. The break-even time is full cost divided by the annual gap: 144,000 ÷ 12,000 = 12 years. The degree path takes 12 years of working before the extra earnings repay the head start the other path had.

Now change one number. Suppose the degree holder earns $52,000 instead. The gap is 52,000 − 50,000 = $2,000 a year, and 144,000 ÷ 2,000 = 72 years. The degree never pays back. Change another: suppose big grants wipe out the tuition and the only cost is the $112,000 in lost wages. Then 112,000 ÷ 12,000 = about 9.3 years.

This is a crude calculation. It ignores taxes, raises, interest on the loan, benefits, unemployment and the fact that many careers are open only to graduates. It also ignores things you cannot put in a column, such as whether you want to do the work. But it shows how sensitive the answer is to one number, the earnings gap, and why a family should find that number in real data and not in a guidance counselor's cheerful assumption.

Two variations that change the answer

The worksheet is most useful when you re-run it with one input changed. Here are two that families often face.

Variation one: two years at a community college first. Suppose, hypothetically, that the first two years are spent at a community college where tuition, fees and books come to $5,000 a year, with $2,000 a year in grants. The net on those items is 5,000 − 2,000 = $3,000 a year, or 2 × 3,000 = $6,000 for the two years. The student then transfers to the university for the last two years at the same $8,000 a year net on tuition, fees and books we found in Step 3, which is 2 × 8,000 = $16,000. The total on tuition, fees and books is 6,000 + 16,000 = $22,000, compared with $32,000 for four years at the university. The saving is 32,000 − 22,000 = $10,000. It comes with a condition that has sunk many plans: the credits must transfer and count toward the major. Get the transfer agreement in writing from the receiving school before the first class, not after the second year.

Variation two: the student leaves after two years. This is the case no brochure runs. Suppose the student borrowed half of the $30,000, which is $15,000, and left without a degree. The payment formula is proportional to the amount borrowed when the rate and term are the same, so the payment on $15,000 at 6 percent over 10 years is half of $333.06, or $166.53 a month. Total paid is 166.53 × 120 = $19,983.60, and interest is about $4,984. The debt is smaller, which is good. But the wage premium that was supposed to pay for it never arrives. That is why Trap Four, below, is the one to ask about first.

Four traps to avoid

• The first-year price. Ask for the four-year plan, and whether tuition is fixed for your cohort.
• The "average" debt. Average borrowing says nothing about your program. Ask for the median debt and the median earnings of graduates of your major.
• Counting loans as aid. A loan is a bill with a delay. When an award letter adds grants, loans and work-study into one "aid" number, subtract the loans and work yourself.
• The unfinished degree. Debt with no diploma is the worst combination. Ask what share of students who start this program finish it, and what happens to the ones who do not.

If a school will not give you these answers in writing, treat that as an answer. The price system only works when buyers can see the price, which is the problem behind Does Federal Aid Raise Tuition? The Bennett Hypothesis Tested.

The bottom line

• Sticker price, net price and full cost are three different numbers. Compute all three before you sign, with the school's own figures.
• Use the payment formula once by hand: M = P × r ÷ (1 − (1 + r)^−n). A $30,000 loan at 6 percent over 10 years costs $333.06 a month and about $9,970 in interest.
• A longer repayment term lowers the payment and raises the total cost. Choose the shortest term you can carry.
• Test the debt against a real salary from the Bureau of Labor Statistics or the College Scorecard, and run the break-even against a paid training path.
• If the numbers say the degree will not pay back, that is a reason to look at other roads, not a reason to feel ashamed.