How Much Student Loan Debt is Too Much?

on September 7, 2017

Student loan debt is good debt because it is an investment in your future. Too much of a good thing can hurt you, though. Try to minimize the amount you borrow so repaying your student loans does not drag on your lifestyle after graduation.


How do you determine how much you should borrow to pay for college?


You graduate with too much student loan debt if you graduate with more debt than you can afford to repay in 10 years or less.


If your total student loan debt at graduation is less than your annual starting salary, you can afford to repay your student loans in 10 years or less.


The key is to keep your student loan debt in sync with your income after graduation.


If your total debt is less than your annual income, your monthly student loan payments will be less than 10 percent to 15 percent of your gross monthly income. This is the equivalent of having student loan payments that are half to three-quarters of the average increase in net income of bachelor’s degree recipients as compared with the average net income of workers with just a high school diploma, assuming a 10-year repayment term.


If your total student loan debt at graduation exceeds your annual income, however, you’ll struggle to make student loan payments using the standard 10-year repayment plan.


Instead, you will need an alternate repayment plan, such as extended repayment or income-driven repayment, to manage the monthly student loan payments. These repayment plans reduce the monthly payment by stretching the term of the loan to 20, 25 or 30 years. Not only will this increase the total interest you pay over the life of the loan, but it also means that you will be repaying your own student loans when your children enroll in college.


So, how do you ensure that you graduate with an affordable amount of student loan debt?

  1. Calculate the typical income for someone graduating with your degree and major. There are many sources of salary data, including the Bureau of Labor Statistics (BLS), and If you use BLS data, which is for all workers, not just recent college graduates, use the 10th or 25th percentiles as a substitute for starting salaries. The Center on Education and the Workforce at Georgetown University has analyzed U.S. Census Bureau data to link academic majors with occupations and income.
  2. If you expect to graduate in four years, divide this total debt figure by four, otherwise divide it by five, to arrive at an annual figure for affordable debt. Hint: If you are taking only 12 credits a semester, you will need at least five years to graduate. You must take and pass 15 credits a semester to graduate in four years.
  3. Compare this annual debt figure with your first year student loan debt. If your first year student loan debt is less, you probably will graduate with a reasonable amount of student loan debt.
  4. However, about half of all colleges practice front-loading of grants, which gives you a better mix of grants vs. loans during your first year than during subsequent years. If so, reduce the annual affordable debt figure by 15 to 20 percent to compensate.

Note these figures are based on averages. If you are pursuing an academic major that pays less, you should borrow less. For example, a student who is graduating with a bachelor’s degree in nursing can afford to borrow more than a student who is majoring in underwater basket-weaving, which presumably pays a lot less.


If you have exhausted the Federal Stafford loan limits and need to borrow a parent or private loan, it might be a sign that you are borrowing too much money.


The total debt less than annual income rule also applies to parents. Parents should borrow (or cosign) no more for all their children than their annual income. If total parent debt is less than the parents’ annual income, the parents will be able to repay the parent loans in ten years or less. However, if retirement is less than ten years away, they should borrow proportionately less. For example, if retirement is only five years away, the parents should borrow half as much. 


Student Loan Debt is Affordable If:

  • You can afford to repay your student loans in 10 years or less
  • Your total student loan debt is less than your annual income
  • Your student loan payments are less than 10 percent to 15 percent of your monthly income
  • You are able to devote half to three-quarters of the increase in your net income to repaying your student loans in 10 years or less

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