How Much Student Loan Debt is Too Much?
"So, my student loan payments are more than my monthly rent?" exclaimed my sister-in-law, Kari. "More than a mortgage payment, to be honest," I replied.
Kari is finishing up her junior year of college in May and was curious about what life after college would like like. She brought her student loan balances and I brought my financial calculator. Within minutes I had drawn up a mock budget, the results of which were sobering. Student loan payments represented her biggest monthly expense, and certainly would create a strain on her finances should she move out on her own.
The good news is that my sister-in-law is ahead of the curve. She still has time to make plans to deal with her loans before they start caving in on her. Many college graduates wait for their first loan bill before they become aware of the size of their student loan payment.
According to a recent study by NERA Economic Consulting, 40 percent of college graduates with federal loans couldn't recall receiving any consultation with regards to their student loan debt. One of the most stunning findings was that respondents thought they understood their finances while in college, but their understanding deteriorated upon graduation.
Too many students walk into the financial aid office, receive a promissory note, and assume a future starting salary will be more than enough to cover repayment. However, loans are granted with the expectation the borrower knows how much debt is too much. Before you start taking on loans to pay for your degree, you need to know how much student loan debt you can afford.
Your Budget with $25,000 in Student Loans (72 percent of student loan borrowers). While no one wants to pay student loans, $25,000 in education debt is manageable for the average professional earning $30,000 to $40,000.
Depending on a student's eligibility, most (if not all) of this debt would be in government loans. Based on a 20-year term, installments would be around $150 per month. Looking at consumption data from the Bureau of Labor Statistics, it's about the same amount the average household pays in a year for a used car. It's slightly more than one-tenth of the average housing expense.
Your Budget with $50,000 in Student Loans (16.5 percent of borrowers). This is where graduates really start to feel the burden of student loans. Monthly payments are around $450, largely because private loans are necessary above $31,000 in tuition costs.
It would be a tight budget for someone earning between $40,000 and $50,0000. Student loans would be a large portion of the budget. You'd be paying about as much for loan payments as you would for food. Food is usually the third largest category in a household's budget. Your monthly loan repayment would be about a third of what you are paying in housing costs.
Your Budget with $75,000 in Student Loans (6 percent of borrowers). The average college graduate would probably need to move back in with mom and dad at this point. It's either that or find lots of roommates.
You would likely be paying about $750 per month in student loans. The average graduate with a four-year degree earns about $43,000. At this income level, your loan payments would be your second-largest expense next to housing, and would be close to what you are spending in food and transportation combined. You would need to take drastic action to make loan payments, probably by foregoing any retirement savings and cutting back on entertainment. Even so, you might not be able to find ways to make ends meet. Someone earning around $60,000 could probably afford this payment more comfortably.
Your budget with $100,000 in Student Loans (almost 2.5 percent of borrowers). If you are taking out $100,000 in loans, you had better be a doctor--or remodeling your old bedroom at your parent's house on mom and dad's dime. Monthly loan payments would be up around $1,075 and could easily eat up at least half of the average graduate's take-home pay.
At this point, you are essentially making a second rent or mortgage payment each month. While you may have a place to live, you have no money for other important things like food, transportation, and clothing. Since it's a choice between paying student loans or rent--and student loan payments are not optional--you are definitely headed back to mom and dad. Keep in mind, the shortest loan term is 10 years, which means you are going be 32 before you move out.
You'd need to earn between $80,000 and $90,000 to afford this payment comfortably.
Your budget with $150,000 in Student Loans (almost 2 percent of borrowers). Even a third job likely wouldn't be enough to ease the burden of the average graduate who'd amassed $150,000 in student loans. Monthly payments would be around $1,7000 or most of your take-home pay. You'd easily need a six-figure salary to fit this expense into your budget.
The bottom line: Easy access to student loans is a good thing. Most people need to take on debt if they are going to graduate and reach their full career potential. However, the availability of student loans is a double-edged sword, as many borrowers take on debt levels that far exceed the reality of future starting salaries.
If you are borrowing or plan on borrowing for college, make sure you've thought long and hard about how much you can borrow based on a reasonable starting salary. It's that--or pray your parents don't change the locks.
JP is a writer for the money blog 20's Finances. He is an MBA and the financial officer for a nonprofit organization.
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