Lord of the Flies

by William Golding

The Hired Girl

Laura Amy Schlitz

College Loan Debt:
How Much Is Too Much?

College Loan Debt:</br> How Much Is Too Much?

college-loan-debt-60second_RecapHow much college loan debt is too much? The bad news: Maybe less than you might think.

Now for the good news:

You can figure how much college debt you can reasonably afford, and you can do it in about five minutes. You can do it by the time you reach the end of this article. Armed with this knowledge, you'll be in control of your life.

You can plan for a college experience you can afford. Or, you can reconsider your existing plans and think about a higher-paying career, one that might allow you to take on more student debt (careful, though!). Or, you can explore scholarships, grants, and other creative means to finance your educational dreams.

You'll be ready for that in about three minutes, after you've completed our fun and easy, three-step...

College Loan Debt Quiz

Step One:

Answer this question: What do you want to do after you graduate from college?

current student loan debt clock

Tick-Tock: With each second, the nation's pile of student loan debt gets bigger. Watch it grow in real time, here.

If you don't know what you want to do, you might want to start reading about careers projected to grow fastest over the next decade. That might spark an idea, and the present is not too soon to get prepared for the future.

But if you really don't have any idea about what you'll end up doing after you graduate, assume you'll make the average college graduate salary—right now, that's a bit over $45,000—and proceed directly to Step Three.


Step Two:

If you know what you want to do after you graduate from college, great! You can come to an informed conclusion about how much college loan debt is enough, and how much is too much. So go on over to PayScale.com and create a free account and log in. PayScale has a salary calculator that walks you through a series of "what if" questions about your future.

For example, what if you're planning to get a job as a graphic artist in Chicago, Illinois, with expertise in Photoshop and a Bachelor of Fine Arts degree? How much would you make?

Within a few seconds, PayScale spits out the answer: The gross median annual salary of a freshly-graduated graphic designer in Chicago is currently $33,000.

(It's called "gross" because "gross" is the adjective that accountants use for income before expenses, including taxes, are deducted.)

Or what if you plan to get a job as a computer engineer in San Francisco with expertise is C++, HTML, and .NET, and a Bachelor of Science in engineering degree? On Payscale you'd find that the median annual salary of a freshly-graduated computer engineer in San Francisco is currently $95,000. And you'd be ready for the final step!

So now you're ready for the final step. (See how easy this is?) Let's have some fun.

Step Three:

try it yourself_2

Here's where you figure out what's known as your debt-to-earnings ratio—the amount you’re paying each month to pay off your debt, expressed as a percentage of your monthly income.

Banks have a rule rule of thumb: They say you don't want to be paying more than 15% of your gross salary toward student loans. That's because banks have a hard-and-fast rule about the amount of debt they'll allow you to have if you want to buy a home—which, someday, you might. And when that someday comes, the banks say you'll be really glad that you kept your student loan payments below 15% of your salary.

We say banks love debt because that’s how they make money, and that their guidelines would have you in a lot more debt than you’d probably enjoy. Think about it: 15% of your salary before taxes and expenses like—oh, like rent and food—is closer to 30%, perhaps more, of your take-home pay. And if you check the infographic on the right, you'll see we've calculated the average college expense-related debt-to-income ratio for graduates of the class of 2013 at just over 10%.

Honestly now: Do you want to start you professional life with more debt than your average classmate? So let's assume 10%.

The Rule of Ten:

OK, we're almost there. Before you figure how much college loan debt is too much college loan debt, you need to think about how long you want to take to pay that debt off. If you read our conversation with David Rusenko, recent Penn State grad and Weebly CEO, you probably noted his advice: Sign up for only as much college loan debt as you can pay off within ten years. "You don't want to be paying off your student loan debt for the rest of your life," Rusenko says.

Reason: Debt ties you down and limits your options. So let's assume you're going to take David's advice, and pay it all off in 10 years. Then here's what you know for sure about the assumptions your making about your future right now:

a) You know your projected annual starting salary.
b) You know how long you're going to take to pay off your loan.

Congratulations! You've got a clearer sense of where you're headed then vast majority of your classmates. And you're almost done with our three-part College Loan Debt Quiz.

Now, take that gross annual salary you got from PayScale, divide by 12 to get your gross monthly salary. Now multiply that monthly salary by .1.

There. You now have your maximum allowed monthly debt payment—in other words, 10% of your gross monthly salary.

If you're the Chicago-bound graphic designer, your monthly gross income is $2750. If we take 10% of that, we get a $275 a month loan payment.

Now for the fun. Your interest rate.

By statute, subsidized federal student loans won't go any higher than 8.25%, a figure the Congressional Budget Office says we won't see for a decade. Right now they're at 3.9%. Private loans can have lower initial interest rates, but those can (and will) cartwheel higher than federal interest rates a few years down the line.

What's a good, safe interest rate assumption, then? One that will stand up not just for the next ten years, but really the next 14 years? (14 = ten year loan term, with payments beginning in four years, once you've graduated from college.)

Six percent sound OK?

Six percent it is! Now plug in the numbers: $275/month, at 6.00%, over 10 years and, volia! Your maximum college loan debt total is...$24,770. In other words, any college loan debt over $24,770 is too much college loan debt.

Or, if you're aiming to be the San Francisco computer engineer, the same process yields a maximum college loan debt total of...$71,302.

So there it is: The maximum amount of college loan debt you'll probably want to carry. If that number doesn't fit with your plans, you may want to consider making different plans.

You might also be interested in: Forbes "30 under 30": Colleges they don't talk about. 

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