Loans and Bachelor Degrees; What is manageable debt?

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Loans and Bachelor Degrees

By Deborah Tollefson



In the 1999-2000 academic year 51% of financial aid distributed to students was in the form of loans (1). Loans can be a wonderful thing and I believe that students should be willing to help pay for their education. I personally borrowed money to earn my Master's degree and would not have been able to pursue that degree without some kind of help. It was a very worthwhile investment in my future and I would do so again without hesitation. The key is to keep the total amount of debt at a manageable level. This begs the question, "What is manageable debt?"

Banks have formulas that look at things like earnings, living expenses (things like rent, utilities, auto, etc) current debt, assets, and untaxed income. Students generally have very little income and even fewer assets so using the traditional formulas that banks use is problematic. The Federal Government has set maximum aggregate borrowing limits, but these are based on school costs as much as anything, not on what a student can reasonably expect to be able to repay. In the FFEL Stafford or Direct Loan program a dependent undergraduate student is allowed to borrow up to $23,000 and an independent undergraduate up to $46,000 (2). Also, higher cost schools are likely to offer more than one type of loan to a prospective student allowing the student to borrow even more.

By themselves these aggregate borrowing limits do not mean much. Let's put them into perspective. One helpful rule of thumb is that for every $10,000 in debt the monthly payment over ten years is $125.00. Now consider that the average college graduate earns between $21,000 and $35,000 when they first finish school (3).


Example One:

John Jones graduated with a degree in Teacher Education and has been offered a starting salary of $25,000 per year. He borrowed $10,000 in student loans while in school. He also often thought about what he would be able to do when he was out of school and earning a good income; he saw a new sports car, cell phone, nice clothes, and state of the art computer equipment.

John's Sample Budget


His monthly gross income is: $2083
State and Federal Taxes: $626
Medical Insurance: $75
Net Monthly Income: $1382
Necessities:
Rent-share a two bedroom apt. $325
Food-includes meals out $200
Utilities & Phone $175
Payment on used car $125
Insurance/gas for car $150
Clothes/Misc. $150
Sub-total $1150
Student Loan Payment: $125
Total Necessary Monthly Expenditures $1275
Discretionary Income $107
If John is careful with his budget and does not over spend the first year or two out of college he will be fine. As his income goes up he can start putting money away for retirement and perhaps save for a down payment on that new car. He also has the $107 in discretionary income in case unexpected expenses come up.


Example Two:

Renee Wilson graduated with a degree in Art History. She has found a job that also pays $25,000 per year. She borrowed $17,125 in student loans, the maximum for a dependent student for four years.

Renee's monthly take-home pay will also be $1382 and her budget necessities will come to $1150. The difference is that her loan payment will be $214 per month which gives her just $18 extra each month, only $216 per year.

Renee and John already have very bare-bones budgets. Renee is at serious risk, as she has almost no discretionary income. She will have no way to pay unexpected expenses like major car repairs or medical expenses. If either Renee or John are frequently late making payments on their loans or default on their loans it could create credit problems that can last for years.

In the two examples both students graduated and found good jobs. Not all students that borrow money graduate, but they all have to pay the money back. Also, not every graduate finds a job right away. There are generous provisions for borrowers having a hard time economically, but bottom line the money must be repaid and often the deferments and forbearances just prolong the time it takes to repay a loan and cause the borrower to pay more in interest.

The answer is to be very careful when borrowing money to attend college, be a smart consumer. Think about how much your payments will be when you finish and what your income and resources will likely be. If you are considering graduate school think about what you will borrow over your whole student experience not just undergraduate study. Only borrow what you absolutely must. Some ideas of ways to borrow less are: not owning a car while a student, getting a part-time job, living at home for the first year or two or starting at a local community college and transferring to a four-year institution.

Education is one of the keys to a quality life and using credit wisely is the first step to long-term financial stability.

(1) Benchmarks: Student Aid in North Carolina 1990-1999, The North Carolina Association of Colleges and
Universities.
(2) 2000 - 2001 Financial Aid: The Student Guide, The U.S. Department of Education
(3) United States Office of Employment and Unemployment Statistics' Bureau of Labor Statistics