Personal Finance

How Much Should You Borrow For College?

School loans are a reality for many who attend college so here is a rule of thumb on how much you should borrow to pay for your education.

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I graduated from law school with $55,000 in school loans. It took me nearly 20 years to pay off that debt. And here’s the really crazy part of it all--many in my class had far more in loans, some exceeding $100,000. And this was in the early 1990′s!

While my law degree has been valuable, this experience has caused me to look at a college education very differently than I did years ago.

A few years ago, my daughter informed me that she planned to attend The Ohio State University. Now I'm a diehard Buckeye. I grew up in Columbus, and both of my parents graduated from OSU. I have fond memories of my dad taking me to see the likes of Cornelius Greene and Archie Griffin play in The Horseshoe. But we don't live in Ohio anymore, and my daughter won't be going to OSU. Why?

The cost of out-of-state tuition, room and board at OSU is $34,974. As much as I love OSU, it ain’t worth that kind of money.

And that raises an important question--how much, if any, should you borrow to attend college? My wife and I have recently tried to answer this question for our own children.

So today I want to cover two related issues. First, we'll look at a couple of rules of thumb on how much you should borrow for college. And second, we'll take a quick look at how much certain degrees are actually worth.

The Borrowing Rules of Thumb

Before we dive into the rules of thumb, a quick note: We are talking here about how much you’ll borrow for college. This isn’t necessarily what you’ll pay in total, and it’s certainly not the sticker price of the college in question. If you have your eyes on an expensive Ivy League school, don’t avoid applying. You may qualify for more debt-free aid, like scholarships and grants, than you think. So keep that in mind as you’re deciding where to apply for school.

But when it comes to borrowing, there are a couple of common rules of thumb.

An Older Rule of Thumb: First Year’s Salary

When we first published this article, a common rule of thumb for college borrowing was to not let your loans exceed the amount of your first year of income after graduation. The idea here is that the standard repayment period on a federal student loan is 10 years. By keeping your debt under one year’s salary, you won’t have to put more than about 10% of your income towards student loan payments.

This rule may be a bit outdated, though. That's actually quite a high percentage to devote to student loan payments, especially if you're expecting heavy housing costs. So you might want to look at the second rule, instead.

Newer Rule: No More Than Eight Percent in Payments

This rule allows for less debt based on your income, but it works off of the actual repayment rate for your student loans. Mapping Your Future has a calculator that shows you how much you can afford to take in student loans, based on your projected future salary.

This option is better because it includes interest on your repayment plan, but also limits your debt to a smaller portion of your income. With increasing housing, food, and transportation costs possible, you’ll want to be sure you can afford your student loan payments on your future salary.

Newer Rule: No More Than Eight Percent in Payments

Remember, with these rules of thumb, we are talking about the maximum you'd want to borrow for your given degree. But you'll have more financial freedom if you borrow less--or nothing at all--to get your degree.

Less money in outstanding student loans means lower monthly payments. And that means you can afford to do things like take a lower-paying job that’s more rewarding, start your family sooner, or buy a home more quickly. So always be sure you’re tapping out your non-loan resources, including savings, scholarships, grants, and more, before you take out student loans.

Some Degrees Just Aren’t Worth The Loans

The amount of student loans you can take on depends largely on the field of work you're looking into. If you're going into a higher-paying field, taking on more debt for a prestigious degree could be worth it. But if you're going to squeak by working for a very low salary, you'll want to avoid debt if at all possible.

As parents, we're often great at encouraging students to pursue a career they love. But we're not so good, often, at helping them figure out what their lifestyle will look like as a result of that choice. There's nothing wrong with going into a high-reward but low-pay field. You just need to be prepared to live with a lower income, and to pay less in student loans as a result.

You’ll also want to research which schools are the best for your chosen degree. Some schools are known for their departments of engineering, science, or education. Just because a university has a good reputation broadly doesn’t mean it’s the best fit for your chosen career pursuits. You’ll get much more bang for your buck if you choose a college or university that’s well-known in your particular field, especially if your field is competitive.

Not sure what you want to do or how much you can expect to make? You can always check out average earnings and career options through the Bureau of Labor Statistics. But to get you started thinking about the majors and pay the most and least, here's the latest data from PayScale:

Worst-Paying College Majors in 2017-18

1. Early Childhood Education

Starting Salary: $32,100

Mid-Career Salary: $40,400

2. Child and Family Studies

Starting Salary: $32,000

Mid-Career Salary: $42,100

3. Veterinary Technology

Starting Salary: $31,800

Mid-Career Salary: $43,600

4. Early Childhood and Elementary Education

Starting Salary: $35,000

Mid-Career Salary: $43,600

5. Child Development

Starting Salary: $32,300

Mid-Career Salary: $44,000

Best-Paying College Majors in 2017-18

1. Petroleum Engineering

Starting Salary: $94,600

Mid-Career Salary: $175,500

2. Actuarial Mathematics

Starting Salary: $56,400

Mid-Career Salary: $131,700

3. Actuarial Science

Starting Salary: $61,200

Mid-Career Salary: $130,800

4. Nuclear Engineering

Starting Salary: $69,200

Mid-Career Salary: $127,500

5. Chemical Engineering

Starting Salary: $70,300

Mid-Career Salary: $124,500

The bottom line here isn’t to choose a career based on salary, necessarily. If you love working with kids, then go for that degree in early childhood education. Just be smart about how you obtain that degree. For instance, you might work your way through an associate’s degree at a community college. Then, find a job at a high-quality daycare center that gives you funding for continuing education, as many do these days. That way, you can get your degree with little to no debt. So you can work at something you love without drowning in unfeasible debt.

But if you want to be an engineer, consider a high-quality school with a good reputation, even if that means taking on a large chunk of student debt. As long as you finish your degree and start off well in your career, you can likely pay back the debt quickly and efficiently.

And whatever you do, take the time to research potential salaries for your chosen major or field--before you start signing those student loan promissory notes!

If federal student loans aren’t sufficient to cover the cost of your education, investigate private lenders. Some will lend up to $500,000. Ascent is one route - the company offers both non-cosigned and cosigned loans for undergraduate and graduate degrees. And if you find yourself in a tight spot and need a temporary break on repayments, Ascent has several options available to apply for deferment and forbearance.

Another way to find loans is through Credible-- an online student loan marketplace where you can get quotes from multiple lenders. That will not only improve your chance of getting the student loan financing you need, but also at the best pricing. And if you already have student loans, you can also use Credible to refinance or consolidate those loans.


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