College in America Blog

Is the “Rule of Thumb,” “It is reasonable to take out student loans equal to your targeted starting salary,” a good guideline?

Taking out student loans equal to your targeted starting salary is a very bad idea.
I have written about this extensively on this blog. The short answer is to limit your student loans to HALF your targeted starting salary.
Let’s look at the issue from two different perspectives, using an example of a $50,000 a year job.

If your targeted job (upon graduation) has a starting salary of $50,000, is it reasonable to take out $50,000 in student loans?”

The obvious answer to that question is a resounding, “NO!”
Because you are gambling:

  • That you will graduate. (Forty percent don’t.)
  • That you will graduate with the projected, marketable major. (Multivariable calculus has turned many a presumptive engineer ($65K) into a high school math teacher ($40K).
  • That you will graduate on budget, in the number of semesters estimated.
  • That your targeted job is available. (Ask those who graduated into the headwinds of the Great Recession of 2008.)
  • That you will be a successful candidate for that job. (Forty percent of college grads end up underemployed.)

Now, do you understand why there is a student loan crisis? Teenagers don’t understand risk. (I admit, why parents don’t grasp this, is beyond me.)
Let’s look at the problem from another angle.

How great a salary do you need to support the monthly payments on $50,000 of student loans?

Assuming you qualify, you would be able to borrow $27,000 over four years in Federal Direct Student Loans at very attractive interest rates. The balance, $23,000, would be in private loans with much higher rates.
Let’s assume you are going to live in the Midwest (Ohio) where the cost of living is very reasonable.

Your Budget

Monthly gross income=$4166
Taxes=$766
Student loan payment=$600 (Ouch! That’s more than 14% of your gross monthly income.)
Apartment rent (700 sq ft)=$1000
Gas & electricity=$100
Internet=$50
Telephone=$100
Auto expenses=$500
Groceries=$400
Net monthly discretionary income=$650

You should be able to afford three homecooked meals a day, but I hope you weren’t planning on dining out a lot, dating, or expensive travel.
You are still going to be living like a student. It is going to be tight. You’ll need to consider a roommate, or perhaps a side-gig.

Conclusions

Instead of beginning your search for a suitable college by comparing the heights of their respective climbing walls, start with an analysis of “affordability.”
Limit your student loans to HALF your targeted starting salary.
With your parent’s help, you need to prepare a four-year financial plan.
You need to have a targeted job and starting salary, in order to intelligently plan for the student loans in that financial plan.

Notes

College Planning Tools
https://www.edmit.me/cost-of-college
Edmit-College-Student-Budget-Template

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