Responsible Student Loan Borrowing

Student loans may be good debt because they are an investment in your future, but too much of a good thing can hurt you.

Students who graduate with too much debt are often forced to delay “life cycle” events, such as buying a car, getting married, buying a home, having children, saving for their children’s college educations and saving for their own retirement. A May 17, 2012 Pew Research Center report, College Graduation: Weighing the Cost … and the Payoff, found that a quarter of student loan borrowers said that their student loan debt burden affected their career choice and made it harder to buy a home, and 7 percent said that repaying their student loans lead to delays in getting married and starting a family. A 2002 student loan survey by Nellie Mae, College on Credit: How Borrowers Perceive their Education Debt, reported that 17 percent of respondents changed career plans because of student loans, 38 percent delayed buying a home, 30 percent delayed buying a car, 13 percent delayed moving out of their parents’ home, 14 percent delayed getting married and 21 percent delayed having children.

There are several good rules of thumb for borrowing responsibly. These rules of thumb discuss how much to borrow (or how little to borrow) to ensure that the loan debt burden will be affordable.

• Total student loan debt at graduation should be no more than the borrower’s annual starting salary. If total student loan debt is less than annual income, the borrower will be able to repay his or her student loans in 10 years or less. If total student loan debt is more than the borrower’s annual income, the borrower will struggle to repay the loans and will need an alternate repayment plan to afford the monthly loan payments. Alternate repayment plans, such as income-based repayment and extended repayment, reduce the monthly payments by stretching out the term of the loan and, hence, paying more total interest over the longer period of repayment. This means that the borrower will potentially still be repaying his or her student loans when the borrower’s children enroll in college.
• Live like a student while you are in school, so you don’t have to live like a student after you graduate.
• Before using student loan money to buy anything, ask whether it would be worthwhile at twice the price. Every dollar of spending with student loan money will cost about two dollars by the time the debt is repaid. For example, if a student buys a $10 pizza a week, that will total about $2,000 over a 4-year college career. If the student uses student loan money to pay for the pizza, it will cost about $4,000 by the time the debt is repaid. That’s a lot of pizza.
• Don’t treat loan limits as targets. Borrow as little as possible. Every dollar spent repaying student loans is a dollar that is not available for other priorities.
• Devoting 10 percent of monthly income to repaying student loan debt is manageable. Devoting up to 15 percent of monthly income is the practical stretch limit, if the borrower adopts an austere lifestyle. Default rates increase as the debt burden increases as a percentage of income.
• Parents should borrow no more for all their children than they can afford to repay in 10 years or by the time they retire, whichever comes first.

To estimate debt at graduation, multiply first-year debt by the length of the educational program. This figure should be within about 15 percent of the actual total. For example, if a student borrows $7,500 during the freshman year in college, the debt at graduation will be around four times as much, $30,000 plus or minus $4,500, when the student graduates with a Bachelor’s degree in four years.

To estimate income after graduation, use the median income figure for the occupation in the statistics published by the Bureau of Labor Statistics. The U.S. Census Bureau has also publishes statistics on income by undergraduate major. This data has been analyzed by the Center on Education and the Workforce (CEW) at Georgetown University. In particular, the CEW report The Economic Value of College Majors provides charts mapping from undergraduate majors to income after graduation and the report Hard Times (2013 update) adds data on unemployment rates by undergraduate major. The National Association of Colleges and Employers (NACE) publishes annual surveys on starting salaries for college graduates.