With a collective $1.73 trillion in federal and private student loan debt as of the first quarter of 2021 according to the Federal Reserve Bank of St. Louis, it’s no wonder that it seems like everyone is talking about student debt. Most would like to avoid student loan debt, but 70 percent of students who receive a bachelor’s degree have education debt by the time they graduate according to the Urban Institute.  With a single year at a 4-year public university costing $21,950 or $49,870 at a private college, borrowing student loans are a reality for most students and their families.  So if you want to borrow student loans responsibly, how much should you borrow?  The answer should differ depending on your potential earnings. 

Simple Rule of Thumb

Our friends at College Ave Student Loans shared this straightforward way to decide how much student loan debt is doable for a college graduate.

“If your total student loan debt at graduation, including capitalized interest and loan fees, is less than your annual starting salary, you can afford to repay your student loans in ten years or less.”

This seems easy, but it has some really good math behind it.  First, 10 years (or less) is a reasonable amount of time to repay student loans.  Yes, lenders (even the Federal Direct Student Loan program) offer various repayment lengths.  At Quatromoney, we typically use 10 years to estimate repayment for all student and parent loan debt in our college finance planner.  Of course, this means that some students and their parents may opt for shorter repayment lengths to pay off debt sooner.  Conversely, other students and parents may opt to extend repayment beyond 10 years (especially if they have over $30,000 of student loan debt). 

Second, most borrowers find it easy to make the minimum monthly student loan payment that is 10% or less than their gross monthly income.  Most people create budgets on a monthly basis to measure income coming in and the spending that is going out for expenses.  To keep your finances in order, many use the 50/30/20 budget. 50% goes to must-haves like housing, utility bills, health insurance premiums, groceries and transportation.  30% goes to discretionary expenses or wants like eating out, travel, designer clothing, daily lattes gym memberships.  The final 20% is for savings and debt like emergency funds, retirement funds, and student loan repayment. 

Figuring Out Earnings

If you are just starting out college and don’t know what your targeted career is, then consider looking into the average earnings of a graduate for your top choice college.  The College Scorecard will show you the range in annual earnings of students two years after graduation.  Plus, they let you dive into the numbers even further by your field of study as long as the sample size is big enough.

If you already know of a specific career that you are headed for, you can check out the data in the U.S. Bureau of Labor Statistics Occupational Outlook Handbook.  You can not only get the median annual wage but you can also get:

• Description of what you do
• Education and training requirements 
• Job outlook national and sometimes by state 

Also, compensation posting websites like PayScale and  Salary.com may also be useful to understand your potential earnings.

What if Student Debt Exceeds Annual Income?

Sometimes students and their families make incremental choices along the way that increase the student debt beyond the starting year annual income.  This may mean that you will struggle to repay your student loans in ten years. In fact according to the Pew Charitable Trust, nearly 20 percent of the nation’s 43 million federal student loan borrowers are struggling to repay their debt. 

If student loan repayment is more than 10% their gross monthly income, then the borrower is going to have to make some decisions.  One option is to shrink their “wants” budget to handle monthly repayment of the student loans within the 10 years.  If you have Federal Student Loans, another option is to consider asking your loan servicer for a longer repayment period or find out if you can qualify for income-based repayment.  Since this is not an option for Private Student Loan, these borrowers often consider student loan refinance to lower their monthly payments.