Student Loan Debt: How Much is Too Much?
To our readers: How much students borrow continues to be a hot issue for college students, parents and the nation in general. Earlier today, GoodCall looked at the state of student loan borrowing. Now we address the question of how much student loan debt is too much.
During the past 30 years, college tuition has doubled, according to research from the American Action Forum. The increase far outpaces the level of national inflation, which tends to be no greater than 4 percent annually. The result is $1.3 trillion in student loan debt – and a generation of students with outdated information about how to afford their college degrees.
The appropriate student loan debt load
Financial planning expert Justin Chidester of Wealth Mode Financial Planning explains that students historically have been told not to let their student loan debt exceed their expected income after college. He now recommends “doing all you can to keep your student loan debt at 50 percent of your expected starting salary.”
Mark Kantrowitz, president of MK Consulting and a nationally recognized expert in the field of planning and paying for college, takes it a step further and recommends loans not exceed more than 15 percent of the projected gross annual income.
Failing to readjust loan limit expectations can result in an inability to pay off student loans and damage credit ratings. It can also lead to fewer financial options in the future.
The Bureau of Labor Statistics has a list of the fastest growing occupations projected through 2024. Looking at five of the occupations on the list provides insight into the appropriate debt load for students interested in pursuing one of these careers.
|Career||Median Income||Target Max Loan Debt|
|Home Health Aides||$21,920||$10,960|
The most recent data available from the National Center for Education Statistics estimates the cost of a single year of tuition and associated costs to be:
- Public Institutions – $15,640
- Private Nonprofit Institutions – $40,614
- Private For-profit Institutions – $23,135
The differences between the cost of tuition and the projected median annual income of careers with the most promising future are clear. Financing college entirely through student loans is not as financially advisable as it once was.
Debt influence on life choices
Choosing to ignore data and pursue a degree which is entirely financed using the old model of student loans can have long-term ramifications. Previous generations were fortunate to have lower tuition costs, which resulted in lower debt to income ratios. Higher costs and unmitigated borrowing can make graduates unappealing to potential lenders.
According to the most recent Life Delayed report, published by American Student Assistance, survey responders felt student loan:
- 28 percent – delayed their ability to start a family.
- 35 percent – found it difficult to purchase daily essentials.
- 52 percent – negatively influenced their ability to make large purchases such as a car.
- 53 percent – contributed to their final career choice.
- 55 percent – negatively influenced their ability to purchase a home.
- 62 percent – caused a delay in retirement savings and other investments.
Students typically approach college with excitement and can be unaware of the significant impact generating a large debt may have on their future. Considering the burden excessive debt can have on quality of life after graduation, it is essential students learn to minimize the amount of debt they have when they graduate.
Steps to minimize initial student loan debt
The Century Foundation points out the real cost of college is not limited to the amount students must pay for classes and books. These are the items typically covered by grants, scholarships and loans. In order to be fully prepared for the cost of obtaining a degree, other factors must be considered and placed into a budget. These may include:
- Failed classes
- Family emergencies
- Living and housing expenses
- Medical expenses
- Travel expenses
These expenses must be considered to create a realistic financial plan for attending college. After the entirety of the financial obligation is fully understood, college planning and financial aid expert Joseph Orsolini suggests, “Families should determine what they have available to pay for college and then find schools that fit that budget.”
There are many ways to reduce the cost of earning a degree.
- Attend a community college first.
- Live at home and commute to a nearby school.
- Choose a school that offers in-state tuition prices.
- Take time filling out the Free Application for Federal Student Aid early and accurately to receive the maximum non-loan benefits.
- Work part-time.
- Buy second-hand books and equipment.
With careful planning and the use of grants, scholarships, and loans, it is possible to walk away with a college degree and a manageable level of debt. However, students and their families must take the time to set a realistic budget, be flexible with school choices, and act proactively to find non-loan funding options.