No one decides how much debt you take except you. Recommendations from teachers, parents, counselors, colleges, and advisors are just that; recommendations. In the end, the one paying back these loans is you. In the U.S., student loans are non dischargeable which means student debt will follow you even through bankruptcy. When you take a car loan, it’s a loan on your car, when you take a home loan, it’s a loan on your home. But when you take student loans, it’s a loan on your education. It’s not something that can be taken back or sold or repossessed.
Most student loans are paid back over a 10-15 year period after graduation. Most people are 35-40 by the time they finish paying off student debt. These are the years in which most people decide to make big life decisions like getting married, buying a home, having kids, or traveling the world. Finding the right balance of student loans and the value of education (so you can have a higher income) is key. College degrees can give you higher potential to earn more money in the future, but the student loans you take to make that happen will also follow you into the future.
The strategy I recommend is taking 50% of your first year’s salary in student loans. This will leave you with 9% of your annual take home pay being given to pay off student debt for the next 10 years in my example below:
Using georgetown.edu, you can find your expected first year salary by career or major. Since your first year salary is lower than the average, you will find your expected first years salary in the 25th percentile. For a Civil Engineer, this number is about $60,000 annually. Unfortunately, this Civil Engineer only keeps about 75% after taxes and withholdings. I found this estimate by using the smartasset.com Federal Paycheck Calculator. Remember, you don’t get to keep all $60,000 you make, you have to pay Federal and State taxes along with Social Security and Medicare at almost all U.S. employers. What you take home after taxes and withholdings is called your net pay and in the example, our Civil Engineer takes home $45,000 net pay annually. Let’s say this Civil Engineer takes on 50% or $30,000 in student loans. We can use this number to calculate monthly payments, and we can find what percent of your annual salary these payments would be. Using the student loans calculator by FinAid.org at 6% interest over 10 years shows that our Civil Engineer would pay about $340 per month toward his or her student loans. This is 9% a year of the take home/net pay. 9% may not seem like a lot, but remember you still have to provide yourself a place to live, food to eat, transportation, healthcare, entertainment, etc. It adds up very quickly, and as I talked about in my Why 50% page, most Americans live paycheck to paycheck and struggle to pay their large amounts of student debt. Previous generations were told to take 100% of their first years salary in student loans and now have to pay 18% of their take home pay toward student debt. Through my Why 50% page, you can see the largely negative effects this recommendation has had. That elusive balance between loans and value of education has made it obvious that 100% of your first year’s salary is simply too much and doesn’t retain its value in your future career when you are trying to pay it off.
If you find that you can’t stay within the 50% window, I recommend that you consider ways to increase your estimated earnings or ways to reduce the amount of debt you take! Making educated decisions now will make your debt easier to handle in the future.