It’s no secret that student loan debt has been on the increase in the United States. In its 2021 consumer credit report, Experian reported that the average student loan balance is over $39,000. If you’re considering taking out student loans, you may be worried about borrowing too much money and struggling to repay it after graduation. But how much college debt is too much? Although there isn’t a particular number that applies to everyone, you can use the following information to set your own loan maximum.
How Much College Debt Is Too Much?
When thinking about how much student debt is too much, keep this rule of thumb in mind: The Consumer Financial Protection Bureau’s (CFPB) recommendation is that students should borrow less than they expect to make in one year in an entry-level job after graduation. That number may be surprisingly low, especially when you compare it to how much money lenders may offer you. However, it’s a good guideline to keep in mind, and following it will keep your payments relatively manageable. Because starting salaries can vary so much by field, your major and career path affects how much college debt you can afford. For example, a student planning to pursue a career in one of the top-paying fields can likely afford to borrow more than a student pursuing a lower-paying career, such as social work. To give you an idea of what graduates make after college, here are the average salaries for entry-level positions in five different fields:
- Computer engineer: $69,365
- Accountant: $52,636
- Human resources specialist: $47,530
- High school teacher: $37,691
- Social worker: $37,328
Following the CFPB’s recommendation, a student majoring in computer engineering should borrow $69,000 or less, while a social work or education major should stay under $37,000.
5 Factors to Consider When Deciding How Much to Borrow
When evaluating your financial aid options, there are five factors that can affect your ability to repay the loans:
1. Interest Rates
The interest rates on your student loans significantly affect your overall cost. The higher the rate, the more interest that will accrue, and the more difficult it will be to repay the loan. Consider this example: You need to borrow $10,000 to pay for school. One lender offers a 10-year loan at 4.75% interest, while another offers a 10-year loan at 2.75% interest. Those rates may sound fairly low, so you may not think there’s a big difference. But with the loan at 4.75% interest, your monthly payment will be $105 per month, and you’ll pay a total of $12,582 by the end of your loan term. By contrast, your monthly payment on the loan at 2.75% interest will be $95, and you’ll repay just $11,449 — a savings of over $1,000. Learn More: 3 Ways to Lower Your Student Loan Interest Rates
2. Earning Potential
In general, a college degree can pay off. The College Board’s Education Pays report found that bachelor’s degree holders earn much more than individuals with high school diplomas. In fact, the median pay for those with a bachelor’s degree was $24,900 higher than the median pay for those with only a high school education. However, your earning potential is dependent on your major, employer, and area’s cost of living. To find out how much you can expect to earn right after graduation and throughout your career, you can use a tool like PayScale to get information specific to your city and field.
3. Employability
Although earning a college degree can mean taking on a substantial amount of debt, it could improve your employability. The unemployment rate for individuals between the ages of 25 and 34 with a bachelor’s degree is just 2.2%. For individuals in the same age group that only have a high school diploma, the unemployment rate jumps to 5.7%. Employment rates can vary widely by field and location. A useful resource is the U.S. Bureau of Labor Statistics’ occupation outlook handbook. It can tell you if your field is expected to hire at a higher rate than average and what the top-paying locations are for your chosen major.
4. Eligibility for Student Loan Forgiveness
Depending on your career goals, you may be eligible for student loan forgiveness programs. If so, taking on a higher amount of student loan debt may not affect you since you can get a large portion of the balance forgiven. For example, federal student loan borrowers who work for government agencies or non-profits can qualify for Public Service Loan Forgiveness after 10 years of employment.
5. Future Goals
Before signing a student loan agreement, think about your plans for after graduation and what you want your life to look like. If you dream of moving to another part of the country or overseas, launching a business, or starting a family right away, having as little student loan debt as possible could be much more important so you can make those goals a reality. If your goals are more focused on building your career and you are willing to make sacrifices to your lifestyle, taking on more debt could be more manageable since you’re more likely to be able to afford the payments.
Financing Your Education
How much college debt is too much? It varies by individual, but in general, you should aim to borrow less than you think you’ll make in a year at your first full-time job. Following that guideline will keep your payments affordable. If you need to take out private student loans, keep in mind that interest rates and loan terms can affect your overall cost. Use ELFI’s Find My Rate tool to get a rate quote without affecting your credit.*
