Education is the greatest gift a parent can give to their children. It can also be the greatest gift you can give to yourself. However, education isn’t affordable most of the time, mainly if provided by globally reputable and well-known institutions. But having proper education is the cornerstone to growth, development, and a financially stable life.
Unfortunately, not every American can afford a college education. It’s a good thing that student loans exist to help Americans achieve their dreams.
However, are these loans really beneficial? Do student loans really help young Americans achieve their dreams? Or is it just a financial burden that hinders growth and development post-graduation? How much college debt is too much?
What Is the Average Student Debt?
As of 2020, the national student loan balance is staggering at $1.68 trillion. From 2003 to 2020, student loans increased by roughly around 600%. The data provided by Education.org shows that there are 44.4 million student loan borrowers. If you calculate the ratio with that of total debt, the average student loan debt per person is $37,584.
Furthermore, the Federal Reserve reported that more than half of Americans who went to college took loans for their education, including student loan debt.
Of all the ways to finance education through debt, student loans are the most common, accounting for 93% of students with outstanding loan balances.
Americans ages 18-29 years are the top borrowers for their education. At this age group, 60% borrowed for their Bachelor’s degree while 73% for their graduate degree.
Regarding payment status, the Federal Reserve reports that 12% are behind payments, 38% have current balances, and 49% are paid-off for all first-generation college students.
When Can You Say That It’s Too Much?
Indeed, how much student loan debt is too much? How much college debt is reasonable? Is there a guide available to know? Or is there a magic number to remember?
Frankly, the answer to this question is too subjective. Why? It’s because every person has their preferences and views about things. Simply said, what’s too much for you may be inadequate for others.
Instead of asking yourself this question, ask yourself, “what are my limits?” The main reason why some students get behind student loan payments is due to excessive student debt.
Aside from defaults, excessive debt burdens Americans in a way that it takes them a long time to settle. Either way, it’s detrimental to growth and financial independence later on in life and perhaps for a long time even after your education days are over.
How Do You Determine If It’s Too Much?
1. Make an honest appraisal of how much student loan debt is too much and how much student loan payment you can afford
Ask yourself, “how much money can I allocate for a college education?” Do you have extra money that you can use? Is it possible not to rely 100% of your college education on student loans?
2. Estimate your income potential
If you study civil engineering, the median annual salary is $86,000 annually. That would be $7,167 per month. Assuming that amount is after-tax, how much can you allocate from your monthly salary for your monthly student loan payment?
Some financial advisers recommend budgeting 10% to your loan repayment. If you follow that, your monthly loan payment should not exceed $717.
3. Evaluate your current financial status
Knowing your financial situation is an essential aspect of your decision. If you’re not financially stable, you need to weigh up the options. The last thing you want is making student loans a future burden that will hold you back in life.
So if you can finance a part of your education using money from your savings or from a side hustle, do so. As much as possible, keep debt levels low and manageable so it doesn’t become a noose around your neck for many years to come. Evaluate your current financial status. In the section below, we’ll talk about the inherent costs of college education.
What Are the Risks of Too Much College Debt?
Student loans are good debt because they yield lifetime benefits to you. However, it doesn’t mean that it’s good all the time. Remember that federal student loans or private loans can be bad debt as well.
If you take too much student loan, perhaps to live an overly comfortable lifestyle even when you are studying, it’ll take longer for you to settle it. In effect, you’ll have to sacrifice life events or milestones because of the financial burden.
A student loan is a good debt if you can reasonably pay it in five to ten years. If it’s beyond ten years, you have to think twice. If you graduated at age 21, you’ll likely start paying your loan by age 22.
Assuming you’re an excellent debtor, you’ll settle the loan by the time you reach 32 for a ten-year loan. But if you’re only making ends meet, age 32 or later may be considered a bit late if you want to start saving to invest in housing, cars, or other property.
So, borrow only the amount you can comfortably pay off in the future without severely constraining your lifestyle.
If you default on student loan payments, your credit score will be affected. You’ll have a hard time getting loans for your plans in life like buying a car or a house or building your retirement savings.
Important Considerations When Borrowing Student Loans
What Course to Take
Universities and colleges set their prices for different courses. Of course, more prestigious educational institutions charge higher than other colleges.
However, aside from the university’s reputation, the college degree you’ll take also plays a part in determining the cost of education.
When choosing an educational institution, consider the course you want to pursue. But don’t let the cost hinder your dreams, especially if you feel very confident that the cost justifies the degree you will get and your future earning potential.
Other Inherent Costs Of College Education
Tuition fees are just the tip of the iceberg because it is the commonly seen dollar amount in studying. What you don’t see most often are the costs you need to incur to go to school.
Here are some of the inherent educational expenses you need to consider as well:
- Board and lodging – You need to stay somewhere to go to college. But if you live nearby, that’s a cost saver. Based on the 2020-2021 school year, board and lodging can cost $11,600 to $13,000-plus. Include the cost of board and lodging in your decision-making.
- Daily allowance – There will be instances when you’ll need to buy stuff like school supplies and other necessities. Allocate a reasonable amount for this expense. On average, you may need $200 a month for this.
- School fees excluded from tuition fees – Some school activities are often excluded from the tuition fee, like field trips, internships, or out-of-campus activities. You have to set a contingent amount for this, ranging from $2,870 to $3,400 a year.
- Transportation – Whether you have a vehicle or travel by public transport, you need a transportation allowance. It’s up to you to estimate since transportation costs differ depending on the circumstances involved. On average, you need at least $1,000 allocated for transportation.
Student Loan Alternatives
Relying on student loans alone is not the only solution to get financing for your college education. Below are some non-debt financing options you can try to get additional financial aid for your college education.
Work-Study Programs
The Federal Student Aid provides employment opportunities for students who need an extra income source for their schooling. You can work either on-campus or off-campus, depending on available job offers.
You can be paid per hour or on a salary basis, depending on your qualifications. Visit studentaid.gov for more information.
Scholarship Grants
Applying for scholarship grants can ease the financial burden of college. However, scholarship grants can be hard to achieve if the application is competitive. The university or a third-party individual can provide scholarships.
That’s why you need to be alert regarding scholarship applications posted in bulletins or shared online. Check out this website for a list of available USA scholarships for 2021-2022.
In Summary
Incurring student loan debt is necessary if you want to finish your education. However, too much college debt is not good either. Knowing how much to borrow is key to having a smooth sailing repayment situation in the future.
In this article, you’ve learned some qualitative factors on assessing your financing capabilities like an honest appraisal of financial status and considering the inherent costs of education.
After that, you’ve learned the quantitative aspect of student loan debt. The calculations showed you how your future payments will look like and how the loan terms affect your ability to pay. By using the qualitative and quantitative factors, you can make a sound decision today regarding your student loans.
So, how much will you borrow after knowing all this stuff? Let us know your thoughts in the comments section below.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
