What is the student debt rule?

[toptop]

I was wondering if there was a rule about the maximum amount of student debt that one should take on when getting their undergraduate degree. I know for a lot of money related things, there is a general rule that you should abide by. Is there also one for student debt? Like, is there a set maximum amount that somebody should never go above, or is it like two times your first job salary?

[AggieLife]

Hi toptop,

It depends who you ask. If you asked Dave Ramsey he would say you shouldn't have any student loan debt - ever.

On the other hand, I believe going over your annual salary when you graduate is too much. If you are set to make 50k your first year, then keep it under 50k.

Don't think you can do this? There are many ways to keep your debt down and even graduate with no debt.

Hope this helps.

[disneysteve]

The rule of thumb is to not borrow more than your first year salary after college.

Of course, that's tough to judge since most people have no clue what they'll make but you can get a ballpark idea if you know what field you will be going into and research starting salaries in the field.

[dczech09]

Generally speaking, you never want the minimum payment on all non-mortgage debt to exceed 10% of your income. Once you add housing (whether you rent or buy), you may find yourself over-extended.

If you borrow as much as your first year's salary, your student loan payments (assuming a 6% APR) will be about 11% of your gross which may be a little high.

Trying to keep payments less than 10% of income, or trying to keep student loans less than 1 year's post-college income are tough rules. No one knows with certainty how much they will make, especially with the job market as competitive as it is right now.

Student loans are always a gamble. Your ability to pay back student loans is always hypothetical until you land a job. Heck, a lot of people graduate and become under-employed while others have student loans but do not graduate. Kind of a spin of a roulette wheel, although you do have some control on where the ball will land.

[Weird Tolkienish Figure]

I was wondering if there was a rule about the maximum amount of student debt that one should take on when getting their undergraduate degree. I know for a lot of money related things, there is a general rule that you should abide by. Is there also one for student debt? Like, is there a set maximum amount that somebody should never go above, or is it like two times your first job salary?

The rule is if you're asking this question then you might have hit it. These things ruin lives, and there's no escape. I'd think long and hard about what your monthly payment would be with them. My wife luckily has federal only loans but they would be $873 per month if they were private. Do you want to pay $800 a month for 10 years after school?

Go to this site:

http://www.globalrph.com/gen_loan.htm

And calculate what you will owe per month at whatever amount you're looking at. Ask yourself what you're comfortable paying. Don't forget that in the real world you'll have tons of other expenses and most people won't want to live like a month while they pay off their student loans.

[disneysteve]

The rule is if you're asking this question then you might have hit it.

I don't think student loans are inherently evil. Yes it is possible to get through college debt-free, but it certainly isn't easy, especially if there is grad school involved.

The fact that OP is asking the question shows that he/she is being intelligent and responsible and thinking about it before doing it.

I listen to Dave Ramsey and Suze Orman regularly and there are frequently callers who have 250K or 300K or more in student loan debt. I don't know what the hell they were thinking, where their parents were when this was going on, or what the school's financial aid advisers were doing.

Borrowing a modest amount to complete one's education, assuming you are getting a degree in a reasonably marketable field, isn't such a bad thing.

[Weird Tolkienish Figure]

I don't think student loans are inherently evil. Yes it is possible to get through college debt-free, but it certainly isn't easy, especially if there is grad school involved.

The fact that OP is asking the question shows that he/she is being intelligent and responsible and thinking about it before doing it.

I listen to Dave Ramsey and Suze Orman regularly and there are frequently callers who have 250K or 300K or more in student loan debt. I don't know what the hell they were thinking, where their parents were when this was going on, or what the school's financial aid advisers were doing.

Borrowing a modest amount to complete one's education, assuming you are getting a degree in a reasonably marketable field, isn't such a bad thing.

I don't necessarily disagree, but it's hard to imagine anyone being ok with a payment over $750 a month, all the while with creditors harassing them, inability to get a mortgage or car loan, etc. living a great life.

My advice is to think long and hard about student loans, use the generic loan calculator and ask yourself how you would feel about paying that amount every month for a very long time. I could see paying a few hundred to be where I'm at career-wise right now, but $870 a month? Oh lord no. I'd rather work at Home Depot.

And by the way, if you screw up with regular debt, you get an escape hatch called bankruptcy. Not so with student loans. And from what I've heard with private loans, Sallie Mae is about as evil as you can get.

[disneysteve]

I don't necessarily disagree, but it's hard to imagine anyone being ok with a payment over $750 a month, all the while with creditors harassing them, inability to get a mortgage or car loan, etc. living a great life.

True, but it all depends on your income. When I graduated, I was paying about $1,300/month to my student loans because I wanted to pay them off early. I ended up paying them back in 12 years - the payment schedule was for 25 years. And even with that, I think we had a very comfortable life. Bought a house, drove decent cars, took nice vacations, saved for retirement, etc. You just need to have the income to support it. The big problem is all the folks who borrow substantial 6-figure amounts and then get jobs earning 50K.

And by the way, if you screw up with regular debt, you get an escape hatch called bankruptcy.

Very true. Student loan debt never goes away.

[lorraineb]

I've always heard that the general rule is that you should not take out more loans than 1x your anticipated first-year salary. I'm not sure where I heard this, but that came to mind as soon as I came across this thread. I think that it probably makes sense to try and stay well below this amount, but if you need to look at a maximum, I would feel uncomfortable myself to go to beyond this amount.

[Singuy]

There's a general rule of thumb you should stick to, but also think about this.

The more you make, the more you can afford to adjust the 1:1 salary:loan ratio.

Having a 100k loan while making 50k/year yields a pretty hard life. You have most of that money spoken for in the form of gas/tolls/food/rent/utilities/taxes. The fastest way you can pay this 100k off is probably 13 years. (Giving 10k/year toward student loans)

Now, with a 100k/year salary and a 200k loan..granted you have more to pay toward interest, but your basic form of living expenses can still be the same, so a greater portion of that money can go toward student loan repayments and also the long term benefits is more worth it than a 100k loan for a 50k job. The fastest way to pay off this loan is around 5 years(giving 50k/year toward loans)

The downfall of scenario 2 is that people starts to spend differently making 100k/year vs 50k/year despite of the loan amount. You know what they say, "mo money, mo problems." So if you have the dicipline to live flugally despite what you earn, then I say it's definitely worth it to take out 200k loans for 100+k health professional jobs.

(I wouldn't take out 200k loans in fields with gloomy job markets)

[Radix]

It matters far more how much interest you pay than the amount of the loan you take. Any rule of thumb is completely arbitrary all that matters is what your payments look like. If I can get low payments I would make paying student loans back a low priority compared to saving money.

[Singuy]

It matters far more how much interest you pay than the amount of the loan you take. Any rule of thumb is completely arbitrary all that matters is what your payments look like. If I can get low payments I would make paying student loans back a low priority compared to saving money.

Every dime you save ends up having an interest rate attached to it because you have outstanding debt. Never put debt into a low priority unless your investment superceeds your loan's interest rate.

Btw, student debt now has a 7.55% interest rate. So for every 10000 you save, you end up paying 755 in interest/year on that money (because your student loans could of been 10k lower for the year but is not).

Sometimes, saving is just a terrible idea(excluding EF).

[Radix]

Every dime you save ends up having an interest rate attached to it because you have outstanding debt. Never put debt into a low priority unless your investment superceeds your loan's interest rate.

Btw, student debt now has a 7.55% interest rate. So for every 10000 you save, you end up paying 755 in interest/year on that money (because your student loans could of been 10k lower for the year but is not).

Sometimes, saving is just a terrible idea(excluding EF).

It doesn't cost 7.55% to borrow money if you're getting an undergraduate as the OP is and you borrow subsidized, not to mention it's deferred and a top of the line tax deduction. COMPLETELY depends on who you borrow from. Second, it's not just the spread between your investments and your loan that matters, but also factor how much savings you have. If you don't have an emergency fund built up then that is far more important than paying off your loan unless the interest is sky high. Saving money can be and often is more important than paying off debt.

[Singuy]

It doesn't cost 7.55% to borrow money if you're getting an undergraduate as the OP is and you borrow subsidized, not to mention it's deferred and a top of the line tax deduction. COMPLETELY depends on who you borrow from. Second, it's not just the spread between your investments and your loan that matters, but also factor how much savings you have. If you don't have an emergency fund built up then that is far more important than paying off your loan unless the interest is sky high. Saving money can be and often is more important than paying off debt.

Misread what the op stated, I thought he wanted to know about borrowing in general in which most students end up borrowing the most in professional school.

[dczech09]

Anyways, back to the OP's question about rules of thumb...

We could see thing as two different rules to thumb:
1. 1X expected annual salary after college
2. Payments no more than 10% of expected annual salary after college

If you follow rule 1, your payments should be FAIRLY close to that 10% number (a little higher depending on your APR).

A key concept to really remember about student loans is opportunity cost. If, you spend $400 per month on student loan payments, by definition that $400 cannot be used for other goals such as saving, investing, or buying a house. So when you borrow a lot of money in student loans, you incur a lot of opportunity cost because there will be fewer things that you can do when all that money is servicing loans.

I really think this is the key that needs to be understood. Far too many people fail to consider the long-term consequences of taking on student loans. As a result, we have a lot of people graduating from private colleges with cruddy degrees and high student loan debts. And these same people want the engineers, accountants, and doctors to pay their debt. Could have been avoided if they would have actually taken the time to consider opportunity cost.

Another key to understand is how long you will pay on the loans and how much you will pay total. If you borrow $100k in student loans, then spend 20 years paying the loans back, your total costs was NOT $100k. It was $100k, plus the interest, and the 20 years of bondage.

If people keep this stuff in mind, they will be a lot better off.