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How Much Student Loan Debt is Too Much?

April 08, 2019

Understand the terms of your student loans and make a wise investment in your future.

Here at Edmit, we often hear from students:

“I can’t afford college unless I take out student loans—but I’ve heard such horror stories about student loan debt. How much student loan debt is too much?”

And from parents:

“I don’t want my kid to take out any student loans, and I don’t want to take out any loans under my name, either. How can we afford to pay for college?”

We Americans have a complicated relationship with student loans. For many students and families, student loans make the difference between getting a college degree and not being able to afford college at all. But alongside the access that student loans provide comes potentially crushing debt that can haunt students for up to 30 years after graduation (not to mention any other loans that parents may take out on their students’ behalf).

How can the average family use student loans to get that all-important access to collegebut not take on too much debt?

The solution comes in the prepwork: Student loans can be a useful and effective way to pay for college, if you approach what you borrow with an informed look at your future plans and use a consumer-focused mindset to compare college prices and financial aid packages. The sweet spot is to find a college that matches your academic and career goals while also offering an affordable price in your budget.

So it’s time for some soul searching and potentially tough conversations: What do you envision for your future career, and what dollar amounts are we actually working with (both now and over the next four years)?

Is It OK to Take Out Student Loans?

First things first (and take a deep breath, everyone): Student loans can be OK! If a student loan makes the difference between going to college and not going at all, go with the former.

“Student loan debt isn’t like credit card debt,” says Kathy Ruby, director of college finance at College Coach. “It’s not just purchasing or consuming things; it’s actually an investment in your future. If you’re borrowing because you’re going to get a college degree and you’re going to get all the tangible and intangible benefits that come along with that, that’s an investment.”  

Instead of approaching student loans with dread, parents can also utilize them as a way to impart accountability lessons. “We talk with parents who want their students to borrow so they can have some skin in the game ... and can recognize that this is an investment, not just a free ride,” Ruby says.

However, not all student loans are created equal (or are affordable). So to make an informed decision, you need to understand two key areas: your expected income and the terms of your student loans. When you know both, you’ll be able to determine affordability.

How Do I Calculate My Student Loan Payments?

Based on your specific budget and goals, let’s figure out what you might earn and what you might pay each month.

First, research potential salaries that you may be earning after graduation. “The Bureau of Labor Statistics Occupational Outlook Handbook is a great online resource because you can look up any career and get a sense of whether it’s a career that’s growing or shrinking, and what the average starting salary is,” says Ruby. “Sometimes that’s hard for someone who might be an undecided major, but in that case look at average starting salaries for a bachelor’s degree recipient—or whatever degree that you’re getting.”

Once you have your estimated salaries, “the next step is to project out for all four years what you think you’re going to borrow, and then compare it to what you might be making,” says Ruby. She cites a few standard best practices to determine student loan debt manageability:

  • Don’t borrow more than your starting salary during your first year out of college. So if you anticipate that you’ll earn $40,000 in your entry-level job after graduation, don’t take out more than $40,000 in total student loans.  
  • To address other debt you may have and maintain a manageable debt-to-income ratio, limit your monthly student loan payment to eight percent of your gross monthly income. For example, if your gross monthly income is expected to be around $3,300, your monthly student loan payment should be no more than $267.  
  • Don’t allocate more than 20 percent of your discretionary income toward your student loans. This guideline, recommended by Sandy Baum and Mike McPherson at the Spencer Foundation, is designed to enable borrowers to manage their student loan debt and repay their loans in a reasonable timeframe. Discretionary income, according to Ruby, “is essentially defined the same way that the government defines income-driven repayment plans: the difference between what your income is and 150 percent of the U.S. poverty guidelines for your household size.”

How Much Student Loan Debt is Too Much?

The answer to how much student loan debt is too much will be different for every family. Once you know what you can afford, you can quickly see which schools are offering attractive financial aid packages based on your budget and which colleges are out of reach.

At this point, you’ll want to determine which student loan types (e.g., federal subsidized, federal unsubsidized, or private) and types of lenders will make the most sense for you financially. Note that students and parents will most likely have different determinations here, based on personal finances and professional plans.

“Parents have to take a lot of different factors into account,” says Ruby. “Look at whatever other goals you have: for retirement, paying off your home. Look at how many kids they have, how many educations they’re going to have to finance. Believe it or not, we talk to families who are so concerned with getting that first child in and through college that they don’t quite realize the precedence they may be setting for their younger children. They have to look at the whole picture and entire household.”

With anything related to college financing, parents need to know exactly what they’re signing up for.

“I encourage parents to really sit down and do the math,” says Ruby. “One of the dangers of the federal direct PLUS Loan is that, when you get approved for that loan, they don’t look at your debt-to-income ratio or your FICO score. They pull your credit, but they’re just making sure you don’t have any adverse credit. So [the PLUS Loan] looks like it can be really manageable, but currently the interest rate is seven percent. If you take 25 or 30 years, you could end up repaying twice what you borrowed.”

So to manage expectations and avoid crushing debt, everyone needs to sit down and talk. “Parents really have to do the math and have conversations with their students about how the student may help them repay what they’re borrowing,” says Ruby. “The federal direct student loan [program] only allows the student to borrow, essentially, $27,000 over the course of four years in their own name. So anything else is either cosigned by the parent via private loan, or borrowed through the federal direct PLUS Loan. It’s up to parents to help students decipher what that will mean later on.”

When you sit down to discuss college financing as a family, go over all the fine print. “With any lender or financing, you want to look at what the interest rate will be,” says Ruby. “What are the fees? What are the repayment options, and how flexible are they? Usually to get a better rate on a private loan or even with the different state loan programs, you have to choose the shortest repayment term.”

Pay special attention to interest, even with federal loans. “Understand these loans are mostly unsubsidized, so interest is accruing,” says Ruby. “For parents who say ‘I’m not going to make payments on the student loan until my student is done with college,’ the loan will really grow while you’re not paying on it, so make sure that you can at least afford the monthly interest. In fact, if you can’t afford the interest on the loan that you’re borrowing while your child is in college, that probably means you’re getting in over your head.” And if you do plan to prepay during college, make sure there aren’t any prepayment penalties.

If you’ve done your prepwork, you’ll be able to make an educated assessment of which student loans make sense for you.

“Have conversations, look at the numbers, and be careful out there,” says Ruby.