How Much Debt is Too Much Debt?
For most young people, it can be difficult to put student loan debt into perspective. You may be thinking, “$30,000 sounds like a lot of money, but won’t it be easy to pay off when I get a good job, thanks to my shiny new degree?” The answer is, it depends; a college degree isn’t the key ingredient to success that it once was thanks to “credential inflation”, and the return on investment (ROI) of a college degree varies depending on what field you go into.
Students also have anxiety around their major: “Can I make a living and pay back my loans if I go into this field? Should I switch my major to something else?” To answer these practical questions, students can use the following debt-to-income calculation:
1. Create a Table
Create a table like this one to fill out:
2. Look up Potential Careers
First, go to the U.S. Bureau of Labor Statistic’s Occupational Outlook Handbook, look up your major, and pick out a few careers that interest you. If you are thinking of switching your major, pick out a few careers from that field as well. *Note: pay attention if these careers require extra schooling beyond a bachelor’s degree.
For example, let’s say you are an English Literature major interested in becoming an Editor, but you are also curious about switching to Informational Technology and becoming a Computer Programmer.
3. Look up Potential Incomes
Next, use job sites like Glassdoor to look up entry-level salaries for the jobs you selected. This is also a good time to see what majors jobs require.
For example, if you’re from Texas and looking to move back there after graduation, entry-level Editors there make about $50,000 per year and entry-level Computer Programmers make about $60,000 per year.
4. Calculate Gross Monthly Income
Next, break down the annual salaries into gross monthly income.
For example, Editor - $50,000 / 12 = $4,166 per month and Computer Programmer - $60,000 / 12 = $5,000 per month.
5. Calculate 5% of Gross Monthly Income
It’s a good rule of thumb to keep your student loan payment to 5% or less of your gross monthly income. So, calculate what 5% would be for each income scenario.
For example, Editor - 5% of $4,166 = $208.30 per month and Computer Programmer - 5% of $5,000 = $250 per month for a student loan payment.
6. Use Calculator to Find Maximum Student Loan Debt
Finally, plug in that maximum monthly student loan payment into a student loan calculator like this one, using a 10-year payment period and the current average interest rate of 5% to keep things simple.
For example, Editor - a $208.30 monthly student loan payment would mean taking out a maximum of $19,638.81 in student loan debt and Computer Programmer - a $250 monthly student loan payment would mean taking out a maximum of $23,570.34. So, an English Literature major looking to be an Editor should aim to not borrow more than $19,638.81, and if they switch to a Computer Programmer major, they should aim to not borrow more than $23,570.34.
If you put these different scenarios into the table above, your results should look something like this:
Of course, this is not an exact science, as these numbers may change based on your cost of living, what industry you go into, and how much more income you can expect once you gain more experience. However, hopefully this exercise will give you a ballpark idea of how much student loan debt you can reasonably afford. Once you begin looking at loans, you can use the same tools to calculate your total interest over time and get a realistic idea of what your future monthly student loan debt payment will look like.
Keep in mind, too, that this exercise isn’t meant to deter you from lower-paying jobs, but to have a realistic idea of how much debt you can take on based on your future potential income. If you are looking to become a teacher, social worker, or another profession that serves communities, you may also qualify for debt forgiveness programs.
In conclusion, students debating their career path can use this exercise to balance their student loan debt and chart a realistic path, both academically and financially.