How Much College Debt is too Much?

Here's a piece from Money Central that addresses the question of how much college debt is too much. Their key thoughts:

Obviously, the less borrowing you have to do, the better:

If you’re a student, your payments shouldn’t exceed 10% of your expected monthly gross income once you graduate.

If you’re a parent, all your debts -- including mortgage payments, credit cards, car loans and education loans -- shouldn’t eat up more than 35% of your gross pay.

I look at college as an investment. As such, I look at what it costs you (overall -- not just what you have to borrow), and what the payout is. This way, you can determine whether or not it's worthwhile for you.

According to my post Sell College to Your Kids, the difference between having a college degree and not having one is $23,669 per year in salary ($51,644 - $27,975). Over a 40 year career, this equates to almost $1 million in extra earning power you'll have because of your degree. Looked at this way, investing in a college education is a no-brainer -- it pays out easily. In addition, having a degree will allow most people to do something they are more interested in -- making them more satisfied and happy with their work life.

So getting a degree is a good deal under almost any conditions. Yet there are still steps you can take to make it an even better payoff. Here's what I recommend:

1. Be sure you go to a school that can get you a job. Before you decide to enroll, look at the school's success at placing people in jobs after graduation. Pay special attention to your major and the companies hiring, jobs available, and pay offered. Make sure you're going to see a payday at the end of four years.

2. Try to minimize the amount you have to borrow. I worked jobs (both in school and summers), held an assistantship, and got need-based and performance-based scholarships. They all worked together to substantially lower the amount I had to borrow.

3. Borrow from a cheap source of money. In my case, my grandmother loaned me the $5,000 (in total) that I needed for undergraduate and grad school. She charged me no interest.

4. Keep living like a student. Once you get a job, don't go out buying everything you've always wanted, charging like a fiend. Try to live like you did as a student (like you're poor) and take the money you save and put against your college debt. This should knock off big chunks of debt very quickly.

5. Manage your career. Keep learning, growing, etc. to make yourself a more valuable employee. If you do this, you'll put yourself well ahead of the pack and your salary will increase accordingly. Use any raises you get to pay off the rest of your debt.

Comments

[Elizabeth Aguilo]

My daughter will be going to college in a little over 3 years. Although I thought that I have done in saving for college for her, I recently learned that my savings would only pay for half of 1 year!!! at a local 4 year college. I'm trying like a fiend to pay off my credit card debt and car loan, but even if I manage to do that, my mortgage alone eats up almost 50% of my monthly income.

[Elizabeth Aguilo]

My daughter will be going to college in a little over 3 years. Although I thought that I have done well in saving for college for her, I recently learned that my savings would only pay for half of 1 year!!! at a local 4 year college. I'm trying like a fiend to pay off my credit card debt and car loan, but even if I manage to do that, my mortgage alone eats up almost 50% of my monthly income.

[r marie]

My daughter is supposed to be going to college in fall/but money is an issue. Despite a 30,000 scholarship for 4 years, she will have a balance of 38,000-- not counting books---she gets a small stafford loan her first year but would need 8000 dollars. We dont want to cosign on alternative loans, as the interest is high /and it would affect our credit via debt ratios right away -Any suggestions?

[FMF]

Any college financing experts out there who can help r marie?

[Jon]

stop complaining... I paid for college myself. I took out loans. I graduated in 4 years with 60k in debt. I got a good job that started at 50k and its been a year and the majority is almost paid off. I also have been stacking money in a 401k and Roth IRA my first year. I learned to be financially responsible, don't give everything to your kids if you can't... they can take on the loans themselves

[jkr]

I finished a 4 year program and have over $100k of student debt. I started with the assumption that my parents would pay for half, but after a nasty divorce they were unable and unwilling to contribute anything. I asked my grandmother to help me consolidate the loans by taking out a mortgage on her home, which she did after I spent about a year paying upwards of 8% on my loans.

Right now I live like I'm poor. I'm making about $100k in NYC, but I were 6 year old sneakers and rarely eat more than a PB&J sandwich for dinner. I max out my 401k, IRA, and roth IRA and will have the student debt paid back in about 3 more years. Until then I feel like a prisoner to it.

I feel like I have a spending problem - besides food, I do not buy anything! Most of my furniture has been found on the street, and I don't have cable or internet. I wear suits all the time because I don't have any casual clothes. But at least I'll be debt free in a few years, and at this savings rate, I'll be a millionaire by 35.

[Dani]

stop complaining... I paid for college myself. I took out loans. I graduated in 4 years with 60k in debt. I got a good job that started at 50k and its been a year and the majority is almost paid off. I also have been stacking money in a 401k and Roth IRA my first year. I learned to be financially responsible, don't give everything to your kids if you can't... they can take on the loans themselves

Excuse me, something is truly wrong with YOU and your idiotic statement. You need to get a life and, stop thinking that your parents not helping you for whatever reason, is something to voice as good or normal. Please, you sound like an idiot. Think about what you are saying and you certainly do not sound like a hero to me. But, keep telling yourself that you are with your great job etc. I come from a third world country with a lot less pay than your parents probably had in their entire lives, and trust me, people would probably think your parents are losers where I come from. As for you, get over yourself. I do hope that you do not carry this mentality when you have your own children.

[Russell Bailyn]

Good post. I can say from experience that many kids agree to borrow money to attend expensive, private colleges and don't consider the reality of paying back such loans. I find that borrowing for more than 1 year of a 4 year college is too much. 1 year might run a couple hundred dollars a month but 2 years starts becoming a financial burden which is more likely to interfere with renting an apartment, gathering money to start a business, etc.

[Emily]

Actually I think everyone needs to calm down a bit here. College can be a bit confusing when trying to figure out finances and how it will affect you and your life. Not that I agree with the post from the person who stated "Stop complaining" but some aspects are true. This year I will be a senior in college, and will be graduating with about 58K in loans. I have gone through my entire career in college with nothing but these loans, and some scholarships. I have found from personal experience, that a lot of the kids in school who are not responsible for their own finances and debt after school, tend to act a lot more irresponsibly than the people who know how much these classes are actually costing them. This is not true for all people, but quite a few, and I'm making an understatement.

Also, I am not exactly sure who this person is that is saying "only 1 year of loans is enough, and 2 is too much" but obviously they have some other way of financing their education that most people do not.

In all honesty, if parents don't have the money, and you don't have scholarships you pretty much HAVE to take out some loans...pretty much everyone does it in some form, and it is a big help...without it I would never have been able to go to college.

I think the biggest things to consider before even worrying about loans is the fact if the college is right for your child, and if it is reasonably priced for the quality of the program that your child will be entering. Also consider the career path of your child. If your child is pursing an education degree, where jobs are not plentiful or well paying, you may want to consider alternative funding options seeing as though loans will need to begin their payback soon after graduation. I was lucky, and pursued a nursing degree which is always guaranteed a job with a higher salary and often has loan payback perks from the hospitals on sign up.

Hang in there...and be smart with your financing choices!!

[StoppedClock]

For college, I had a very good experience going to "State U", plus working summers and the winter break between semesters. I did not work while classes were in session. I was able to get one small scholarship (not that hard to do), a little financial help from my parents (a few thousand over four years), and filled in the gaps with loans. Realize that the school year is typically only about two 16 week semesters, which leaves about 20 weeks for some work, which can help a lot. I lived frugally, always had room mates, no car, rode the bus, and no fancy vacations for spring break.

I think that many students who don't make a substantial contribution to financing their college education waste the opportunity. Many students are not very motivated and do mediocre work; when this is the case you can bet their parents are paying for it. I think I could argue that parents who provide too much for their kids aren't really doing them any favor. Some help is great, but I don't think it should be a parent's responsibility to pay for the whole thing, which treats 18 to 22 year olds as if they are children.

Just my 2 cents! Cheers ... StoppedClock

[mmhmmm]

I agree! It's really nice to have something from your parents to help you when you're very low on cash, but the kids that I know who have had their parents finance their education usually go to some high priced University their first year, flunk out, their parents say they won't pay anymore, so they go to a community college to get their grades up(like they should have from the beginning because it saves an insane amount of money and is the best financial decision I've ever made)and then the kids realize how expensive college is now that they're stuck paying for it and they straighten themselves out and then the kids begin to understand that college is too expensive to not do well in or waste time repeating courses. If you're a kid paying for your own college education it can be very stressful, BUT I do believe that it has definitely made me more responsible and more motivated than my peers who have had parents that funded their whole education. I think Paris Hilton is an example of what happens when you give your kids too much. They never have training in becoming responsible because they always have you as a safety net when they make mistakes and they in turn become responsibility challenged/retarded. I think it's good for kids to pay for their own education.

[Ashley]

I am a freshman at a private university and it is barely the second semester. I am researching debt issues for my communications class and i came across this website. I issued the class a survey to find out what each persons financial status is. Half of my class has taken out loans and about 85% of them plan to attend college for 4-9 years. I have paid for my first year and i was required to take out a 10k loan and my school assisted me with over 30k in financial assistance. When i received the loan confirmation papers in the mail i choked when i had read i would have to pay back over 40k in eight years. I am currently contemplating whether or not college is really worth it. I am going pre-law and im hoping that being a lawyer will pay off in the long run. The only advice i would give to anyone is to make sure you read the fine print before you sign for a loan. Make sure you apply for scholorships and work as many hours as you can while you are on breaks.

Good Luck

[DJH]

Thank you for this site. It has been helpful and insightful. We are the parents of a graduating senior and she will be attending school in the fall. Nothing fancy mind you, it's not private it's a UC school that will cost $26,000 a year.

We are taking a loan out for that amount for one year to give her a a jump start. Actually, co-signing a loan. After that, she knows she has to either be a Resident Advisory or do something to bring that cost down. Tuition is $11,000. It's $15,000 for the room and board.

We're hoping with this first year experience under her belt she will meet friends that she can then move out of the dorms and live with several girls in an apartment.

Right now she has a job she works at after school and on the weekends. She will work all summer and save her money.

Of course, she will not have the $26,000 she will need...so my question to this board is:

How does a student get the money to attend college, in particualr at least the $11,000 tuition, without having the parents as co-signers.

She does not qualify for an federal loans. We make too much money for her to qualify for that but we cannot afford to be co-signing for 4 years at a cost of possibly $60,000 or more.

We also have another daughter at home that will be attending college in 4 years.

We are trying to minimize our co-signing indebtedness.

Any suggestions???? We could really use the help and advice.

[anna]

I think you really want to talk to someone in Financial Aid: you can't guarantee that your daughter will get the RA job in year 2, and even if she does, the assistance might well be deducted from her grant aid, not her loan aid, or specifically from her room and board, but not her tuition.

See if there is any way to get her exempted from the living on campus requirement, because that 15k is honestly 3 years worth of room and board, and if this is the biggest expense, cutting it will be a big help.
Really, for 15k, she could get a beater car, insurance, and commute, and still have $$ left after 2 years.

[FMF]

DJH --

Read the posts in my college archive here:

http://www.freemoneyfinance.com/college/index.html

There are several money saving tips there, though you're in a tough spot since college is already upon you and one of your main options (saving in advance) is limited at best.

Good luck.

[Aida Barr]

As a recent graduate with a Master's degree, it is not easy paying back 138,000.00 dollars in school loans, especially, when there are no jobs in your major. My major is school counseling. I have bad news on two fronts, I have to take 2 tests which will cost an additional $700.00, which I do not have the money to do. Second, there are no jobs in my field, which is going to make it extremely difficult to pay back the school loans. I feel that the private Universities should be up front with the students and inform them of the likely hood of finding a job in that particular field once they graduate.
This is really sad.
I am not crying, but rather seeing the realistic side of have a Master's Degree and not be able to to anything with it!!!!!!

[Reality]

Aida,

Why should it be the responsibility of the University? Why can't you do the research yourself before picking a major? The only one you have to blame is yourself.