Over the past decade, one of the most resounding political and social issues in the United States has been the controversy surrounding student loan debt. While almost everyone agrees that student loan debt has grown out of hand in North America, you will find many differing opinions on what the solution to this problem might be. The biggest news stories around the student debt issue have chronicled the enormous default rates and hefty monthly payments. Still, many experts argue that the student loan issue isn’t as bad as everyone’s making it out to be. So, how much student loan debt is too much?
Student Loan Debt Basics
As a student, you might feel like you should go to the best, most highly-ranked college you can get into. However, that may not always be the best option, in practical terms. When all is said and done, the one most important factor to consider when you’re choosing a college is the return (happiness, ability to reach your goals, and money) on your investment (time, effort, and money). In dollar terms, this calculation usually boils down to one thing: how much money you should take out in student loans.
The average student loan debt in 2016 was $37,172, which may seem insurmountable to some and fairly inconsequential to others. The truth is, there is no one-size-fits-all number when it comes to student loan debt.
Instead, the amount of student loan debt you should or should not take on depends on multiple factors:
- Your earning potential during and after college
- Your repayment plan
- Loan type
- Family support and scholarship assistance
- Your goals and dreams for the future
While you can’t predict the future, you can create an education financing plan that is complete with accurate, up-to-date numbers and figures. Compare your (realistic) starting wage potential with the degree of your choice, with the cost of earning that degree. A basic rule of thumb to follow is that your total student loan debt shouldn’t exceed your expected starting salary.
Estimate Your Starting Salary
To find the starting salary for your degree, make sure to research your region specifically. (The starting salary of a high school teacher in Oregon will differ from that of a teacher in New York City.) Use tools such as PayScale.com to help you determine how much you think you may earn upon graduation.
Another important factor when researching starting wages is checking the availability and demand of workers with your degree. If the local job market is saturated with high school teachers, it’s going to be much harder to find a job in your first year after graduation. You may have to adjust your student loan budget to account for a move to another area where work is available, or a break between graduation and your first salary payment.
Consider Employment During College
Another important aspect to consider in the category of earning potential is your ability to earn during your college years. What marketable skills do you have? Or, just find a typical job that most college students have.
If you’re certified in a trade, like welding, your earning potential could be greater than if you’ve never worked a job before.
Also, take into consideration your college schedule. While you can’t know your schedule in specifics very long ahead of time, you can gain an idea of how much free time you’ll have to work a job based on your prospective degree program. For example, economics degree programs tend to be less hands-on than medical doctorate programs
Consider Employment After College
If you plan on working in the public sector, taking on a larger student loan burden might not be a terrible idea. With the emergence of forgiveness programs, such as the public service loan forgiveness program, some borrowers will have much of their loans forgiven.
Working as a teacher might allow you to have up to $17,500 of your student loans forgiven after 5 years of work. These can be considered when trying to determine how much student loan debt is too much.
Type of Student Loan: Subsidized vs. Unsubsidized
The amount of debt you take on can vary greatly depending on the type of loan. The US government offers assistance to students in the form of subsidized loans, where the government agrees to subsidize, or pay, a portion of the loan interest. This type of loan is available to undergraduate students who can to display financial need, and is based on the school which you plan to attend. A subsidized loan can be acquired by completing a FAFSA form.
An unsubsidized loan, on the other hand, does not offer many of the benefits offered with subsidized loans. Make sure you know the difference between subsidized and unsubsidized loans, and what benefits and drawbacks they may offer based on your specific situation.
Before you sign on the dotted line, make sure you read all of the fine print. One of the most important aspects of your student loan is the repayment plan. You need to know the following information in no uncertain terms:
- Interest rate
- Repayment term (length of time it will take to repay the loan)
- Monthly payment amount
Family Support and Scholarships
Another factor that can separate a too-high debt burden from one that is reasonable is your level of family financial support, as well as your ability to earn scholarships. Scholarships are essentially free money based on merit, financial need, and other factors, and the more you earn in scholarship money, the more you can subtract from your overall student debt number.
Early in the application process, you may not know how much you’ve been able to earn in scholarship funds, so it’s best to air on the safe side and plan for the lowest amount. Then, when your scholarship acceptance letters come in, you can adjust the budget.
Family support, on the other hand, is something you likely have much less control over. If your parents have high yearly earnings and a high credit score, they may be better able to contribute in different ways. For example, your parents may be able to contribute directly by paying some of your tuition and housing costs up front. If not, they may be able to cosign on a private loan and support you in paying back the loan if you’re unable to.
A general rule of thumb is that if your parents can offer support, your debt amount should not exceed your parents’ yearly salary. Of course, not everyone has this type of support, but it’s something that will affect how much debt and what type of debt you choose to take on.
Where Do You See Yourself?
Finally, your borrowing limit should depend on where you see yourself five years, ten years, and 20 years down the line. Forbes refers to this X factor as the “happiness factor”, and it’s arguably more important than any dollar figure. Ask yourself if the degree you’re pursuing will lead to lasting happiness over the coming decades, and whether that desired result is worth X amount. If that level of contentment and satisfaction is worth that amount, you’re going to feel the burn a lot less when making those monthly payments. In other words, you don’t want to end up with a debt for which you got nothing meaningful in exchange, even if the debt is relatively minimal.
Taking out any amount of student debt is a big decision and one that shouldn’t be taken lightly. While a degree is still valuable when applying for jobs in the United States, the benefits of higher education or less cut-and-dry now than they’ve ever been. Make sure you read the fine print and nail down the numbers before you sign on the dotted line.
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.