How Much Student Loan Debt Is Too High?

Despite all the calls for free college education and widespread student debt cancellation, high school students will continue to borrow this summer to pay for their education. Sure, they can get a few scholarships, a grant or two, or help from mom and dad. However, the high cost of tuition (plus room and board) usually requires assistance from federal student loans.

But, how much student debt is too high? It really depends on who you ask. And really, the “right” amount of student debt depends on each borrower’s risk tolerance, goals, and the kind of lifestyle they want to lead after graduation.

In a perfect world, the average student debt would be $0 because college would be free. In the world we live in, however, each individual must decide how much to borrow and make decisions accordingly.

How do you decide where to draw the line? A few simple equations provide a good starting point.

Rule of Thumb: Borrow Less Than Your Post-College Starting Salary

According to student loan expert Mark Kantrowitz, who is also the author of How to Apply for More College Financial AidOne rule that can help you avoid excessive borrowing is to make sure you limit student loan debt to the amount you expect to earn in your first year out of college.

“If your total student debt when you graduate is less than your annual starting salary, you should be able to pay off your student loans in ten years or less,” he says.

“Otherwise, you will struggle to make student loan repayments and will need extended repayment or income-based repayment to pay monthly student loan payments. These repayment plans reduce the monthly payment by increasing the repayment term to 20, 25 or even 30 years.”

While it’s hard to know exactly how much you’ll earn in the first year of your career, you can get a general idea using tools like the Bureau of Labor Statistics Employment and Wage Statistics Portal. Once here, you can find out the median annual salary for a range of jobs nationwide. You can also filter your search to find salaries for different states and metro areas, or to find average salaries for the lowest-paid 25% in any job.

Do the math on monthly payments

Another strategy to help limit excessive borrowing is to make sure your monthly payment is consistent with your future income and budget. Scholarships360.org Founder Will Geiger said it makes sense because it helps students get an idea of ​​what their loan repayment might look like in the future, as well as how it might align with their future income. .

“For example, a higher monthly loan payment might be manageable for an accountant or an engineer, but might be difficult for a social worker or a musician to manage,” he says.

How can you determine your student loan repayment? In order to decide how much debt to take on, you should probably start by determining the payment on the standard 10-year repayment plan. A student loan calculator can help you do that.

Other ways to avoid excessive borrowing for college

While the two strategies outlined above can help you determine how much student debt you can tolerate, there are some strategies you can use to borrow less overall. For example, Kantrowitz says you’ll want to start with compare colleges using net pricewhich is the difference between total college costs and donations such as grants and scholarships.

“It’s the amount of money you’ll have to pay from savings, income contributions and student loans,” he says, adding that there’s a strong correlation between net worth and debt. student loan.

Once you’ve completed this analysis, you’ll know better which school you’re considering is likely the best deal.

“Your cheapest option will usually be an in-state public college,” he says.

Kantrowitz also says to only borrow what you need, not as much as you can. In other words, don’t take out extra student loans to pay for comfort or vacations or anything else unrelated to school. By borrowing less now, you can get a lower student loan payment that leaves you with more money to afford a better lifestyle later.

“Live like a student while you’re in school, so you don’t have to live like a student after you graduate,” Kantrowitz says.

Also, borrow federally first, as federal student loans offer low fixed interest rates and flexible repayment terms. In the meantime, sign up for autopay so that your monthly student loan payment is transferred from your bank account to the lender, Kantrowitz says.

“Not only will you be less likely to be late with a payment, but many lenders will reduce your interest rate by 0.25% as an incentive.”

Finally, be sure to take advantage of any work-related tuition reimbursement options available to you.

Kate Winget, Corporate and Participant Engagement Manager for Morgan Stanley at Work. points out that employers can provide up to $5,250 for eligible education expenses such as tuition assistance or student loan repayment each year. Not only is this benefit non-taxable for the employer, but also for the beneficiary.

The essential

When it comes to avoiding too much student loan debt, an ounce of prevention is better than cure. life becomes many easier when you consider how much you are borrowing for college before you start. If you wait until you are already in school, it will be too late to take many of the steps you could have taken to avoid getting into debt.

Your best bet is to research college costs, college options, and potential return on investment for college degrees before you even apply. College might be worth it, but you have to crunch the numbers to be sure.