The price of college has never been higher, and the total amount of student debt in the United States has never been higher. As these numbers continue to grow faster than the rate of inflation, more and more college students ask the same question: How much student debt is too much?
Unfortunately, there is no simple answer. There are several variables to consider…
Risk Aversion
What constitutes too much debt is a psychological question as much as it is a purely financial one. Some people are more willing to accept risk than others. If you are the type of person who looks to avoid any sort of financial risk, your maximum amount of college debt should be lower than others.
On the other side of the coin, if you thrive on a high-risk/high-reward situation, you might better be able to stomach a higher level of debt. College was once an excellent investment, no matter where you went. Today, it has become a riskier investment, but not necessarily a bad one.
Earning Potential
If you are attending Harvard Medical School, your earning prospects are probably pretty good. If you are doing a basket weaving degree, it might be wise to spend a little less.
One important aspect of earning potential that should be considered is your specific program of study. Looking at the average salaries of graduates from your school is a dangerous game. Some programs will earn far more than others just by the nature of the work. The more specific you can get, the more accurate your numbers will be.
One excellent tool for evaluating earning potential is the Department of Education’s College Scorecard. The Scorecard tracks a litany of financial aid records for colleges. Perspective students can see average debt levels by major as well as average starting salaries. It is an excellent resource for evaluating colleges, choosing a major, and determining how much you are willing to borrow.
Earning Floor
Just because you are in a program where people have very high potential salaries doesn’t mean you will be making the big bucks. What happens if you can’t find a job in your field? What happens if you don’t end up with an average salary? Colleges, especially certain for-profit schools, are masters of inflating employment statistics and making it seem like finding work is easy.
Most importantly, take a look at the lives being lead by recent grads. If you cannot afford your student loans on an entry-level salary, you are probably borrowing too much.
What do your other expenses look like?
Do you have kids? Will you be living in New York or San Fransisco? Is your lifestyle on the expensive side?
These are factors that only you will know. Make no mistake, paying off student debt involves some sacrifice. Massive student loan bills may make some of the “necessities” in your life unaffordable.
A Simplified Formula
Given the many questions that borrowers should consider, it should be clear that there is no simple answer to this question.
However, there is a good rule of thumb for borrowers to consider.
Borrowers should try to limit their total borrowing so that their total student loan balance is less than their expected starting salary. An MIT engineer may be able to get away with borrowing $100,000 in student debt if there is a six-figure job waiting at graduation.
Following this rule will not work in all circumstances, but it is a good starting point for evaluating borrowing limits.
Be Honest with Yourself
There is no specific number where debt becomes too much. It varies far too much from person to person. For some borrowers, $20,000 of debt is too much. For others, $15,000 per year might make sense.
The best thing to do is to make an honest assessment of your future prospects as well as your future expenses. Each new loan brings new obligations and new hardships. If you haven’t planned carefully, things could get ugly. If you don’t think you will be able to afford your future bills, it probably means that you are on your way towards too much student loan debt.
