Answer: No real surprise here. They are abysmal at it.

Here’s an explanation of this scatter plot (see below) from the recent Sallie Mae report on How America Pays for College:

Separately, students seem not to be fully cognizant of how much they will repay. Students were asked to estimate their future monthly student loan payments based on the amount of loans they currently have. Similarly to 2008, a scatterplot of responses indicates little correlation between the amounts students reported borrowing and their estimated monthly payment amount.

So, students with low student loan amounts, left side of the chart, consistently overestimated the monthly payment as their guesses are above the yellow line which represents what their monthly payment SHOULD be. It is strange to see that data point showing that a student with about $2,000 in student loans had estimated their monthly payment to be $1,000! What’s more damaging are those examples of students with $35,000-$40,000 in debt who significantly underestimated their monthly payment.

I remember asking someone in their 20s with a mountain of student debt, what might have prevented them from getting into their predicament. Their response: If I only knew what my monthly payment would be relative to my income!!!!

__________

This NGPF Activity: ANALYZE: Student Loan Repayment has students estimate what their student debt might be and has them calculate their monthly payment amounts under various repayment plans.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

More posts by Tim