Study: Finishing College a Year Late Can Cost Graduates Up to $17,300 in Savings

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As the COVID-19 pandemic swept the nation, college students weighed the pros and cons of attending both in-person and online classes.

But a college education can be a sizable expense, and early-life financial decisions can have an outsized impact on retirement, especially when it comes to compound interest. So graduating a year late is just as much of a financial question as it is an educational and career one.

In this study, Student Loan Hero researchers compared the earnings of college graduates and high school graduates to estimate the lost savings by taking a year off college.

Table of contents

Key findings

  • San Jose, Calif., ranks first, as graduating a year late from college can cost $17,300 over 40 years of saving. This is a result of the difference in earnings between college and high school graduates for that year, accounting for 7.5% of it to be invested for those 40 years with 4% annual returns.
  • Another California metro with high incomes ranks second: San Francisco. The average bachelor degree holder in San Francisco earns $41,200 more than the average high school graduate. Assuming they saved 7.5% of that and invested it for 40 years, it could balloon to $14,800.
  • In Bridgeport, Conn., taking a year off and graduating late could cost $14,700 in potential lost savings, the third-highest amount in the study.
  • Florida cities secure the bottom three spots, as Cape Coral, Lakeland and Deltona are among the 100 largest metros where putting off graduating costs the least in terms of potential lost savings. In each of these metros, the potential lost savings from graduating a year late is less than $5,000.
  • Across the 100 metros analyzed, college graduates earn an average of $54,200, while high school graduates earn $31,500 — a difference of $22,700.
  • Metros that rank the highest tend to be in higher cost-of-living areas. San Jose, San Francisco, Washington, D.C., New York and Los Angeles — all in our top 10 — are also in the top 10 most expensive metros.

Comparing earnings and cost of living among metros with biggest potential lost savings

The divide between earnings and cost of living is telling when it comes to affordability. Not only are the earnings differences between those with a bachelor’s degree and high school degree significant, but it’s the income that comes from having a job requiring a bachelor’s degree that makes many of these metros more affordable to call home.

The top 10 metros with the biggest potential for lost savings also rank highly among the most expensive metros to live in the U.S., except for two metros:

  • Bakersfield, Calif.
  • Detroit

For context, both cities have high poverty rates (18.5% for Bakersfield and 36.4% for Detroit), compared with the national average (10.5%). And Detroit also has a low median household income of less than $29,500, according to U.S. Census Bureau data.

Return on investment can heavily impact potential lost savings

This study looked at the potential lost savings from taking a year off, assuming a 7.5% personal savings rate invested for 40 years with 4% annual returns. This is a relatively conservative estimate on annual returns.

However, we also ran the calculations for the top three and bottom three metros, assuming a 7.5% personal savings rate at a 10% annual returns rate over 40 years. Here are our findings:

Potential lost savings after finishing college a year late
RankMetro7.5% personal savings rate, invested for 40 years with 4% annual returns7.5% personal savings rate, invested for 40 years with 10% annual returns
No. 1San Jose, CA$17,300$162,900
No. 2San Francisco, CA$14,800$139,700
No. 3Bridgeport, CT$14,700$139,000
No. 98Deltona, FL$4,900$46,500
No. 99Lakeland, FL$4,800$44,900
No. 100Cape Coral, FL$4,100$38,200

Time and the desire to save early in life can have massive impacts on your finances, especially if you live in an area where having a bachelor’s degree makes a big difference in earnings.

But these figures can be changed by a host of mitigating factors, including degree type and location. So the question of whether it’s worth it to take a year off isn’t going to have the same answer for everyone.

Considering a year off? 4 factors to consider

There are many factors that will impact whether a gap year is a good idea or an untenable expense. Here are four factors to consider.

No. 1: Financial aid
No. 2: Existing student loans
No. 3: Motivation for taking a gap year
No. 4: The potential upsides

No. 1: Financial aid

A student’s financial aid may be adversely affected by a gap year. For example, if they have a grant that requires satisfactory academic progress, taking time off could result in losing that grant. Timing can also have an impact. With federal loans, there is a 120-day period during which students can cancel their loans without penalty.

“The best way to take a gap year is to plan for it in advance, not to embark on one impetuously,” said Andrew Pentis, Student Loan Hero senior writer for student loans. “With lead time, students can ensure that they make the most of their gap year while also not harming their finances or their ability to return to school the following year.”

Students should talk to a financial aid counselor or representative to understand how taking a gap year would impact their financial aid.

No. 2: Existing student loans

Taking a year off could trigger higher student loan payments to begin. That’s because, in most cases, there’s a six-month grace period once you go below a certain course load threshold or leave school. And it doesn’t make a difference whether that’s because of graduation or a gap year. So it’s important to look into those loans and see what your payments would be during that time, and make sure that you can account for those.

Student loans could make a big difference in whether a student can comfortably take a gap year,” said Pentis, adding that the type of loan will also make a significant difference. Those with federal loans, for example, could take advantage of income-driven repayment plans to lower their monthly payments. Exit counseling is a good resource to look to when figuring out options.

No. 3: Motivation for taking a gap year

It makes sense that the coronavirus pandemic would prompt questions about whether to take a gap year, but it’s still important to make sure that the reasons for doing so still make sense given the circumstances. Some questions you might want to ask include:

  • Will you be able to find employment during your time away from campus?
  • Will you be able to contribute to your family’s finances while also repaying previously accepted financial aid for college?
  • Will you be able to formulate a financial plan for returning to school a year from now?

“These are hard questions to answer, so students should have good answers before deciding to leave school,” Pentis said.

No. 4: The potential upsides

Taking off time can be a good idea in the right circumstances, and for those who can take advantage of it and be strategic with that time, it’s an even better opportunity.

For example, it could allow a student to establish residency while working a part-time job in the school’s state, which could lower the cost of attendance and help them save for their first semester back. Or they might look into beefing up their extracurricular activities that would make them more likely to earn additional scholarships.

“Beyond financial aid, students should make a financial plan for their year away from campus,” Pentis said. “By estimating their expenses and income, students can ensure they’ll be able to get by.”

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