I’ve heard many times that generally a student’s debt should not surpass the starting salary of their job. Is this a good rule to follow? I don’t think $30k or even $50k is too much debt if the student is smart and lives frugally. I understand there are kids who go out and buy beamers when they get a job, but if you know how to save money its not that hard is it? Let’s say a starting salary is about $50k and you have $50k in debt, the monthly payment would be about $500-600 which doesn’t seem too bad. Am I being too optimistic or does this seem reasonable?
Like any rule of thumb- it depends.
If a kid is hell bent on living in SF or another expensive housing market- or has a career aspiration which requires them to live there, then the rule of thumb is probably not going to work. Knowing that you can live in Tulsa and pay off your loans with a 50K starting salary, when the job you want pays 24K in Tulsa (maybe 50K in NY or Boston, where you might not be able to live on that AND pay your loans) doesn’t get you very far.
Frugal has different meanings in different parts of the country. I have relatives in the Midwest and to them- it means kid comes home after graduation, takes the bus to work, gets to borrow the car on the weekend. I have relatives on both coasts and to them it means living in a cruddy apartment with three roommates. In some housing markets, even with half a dozen roommates, you aren’t living frugally enough to pay your loans. But if you can get a job while living with mom and dad for a few years, you can likely whack that debt down quickly.
It depends.
@class0f2017 you’re probably going to take home only about $2500, maybe $3000 per month from that $50K salary (federal, state, and local taxes, 401(k) contribution, benefit premiums). $500-600 is a pretty good chunk - 20-25% before you even pay any living expenses. And you can’t reduce it by taking steps like refinancing a mortgage or downsizing to a less expensive car. Makes it more difficult to save for a first home purchase, start a 529 for children, or invest money for growth. Please think twice before considering taking on this magnitude of debt.
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don't think $30k or even $50k is too much debt if the student is smart and lives frugally. I understand there are kids who go out and buy beamers when they get a job, but if you know how to save money its not that hard is it? Let's say a starting salary is about $50k and you have $50k in debt, the monthly payment would be about $500-600 which doesn't seem too bad. Am I being too optimistic or does this seem reasonable?
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Most students aren’t buying BMWs when they graduate, so assuming that you’ll have more money because you won’t be doing that is a false premise.
What will your major and career be? Some jobs may start at $50k (with a lot deducted for taxes, FICA and insurance), but many jobs will have starting salaries of MUCH lower than that.
You also don’t know how expensive rent will be where you get your job. Some places where jobs are more plentiful have high cost of living.
You’re not likely used to paying for: rent, electricity, water, WiFi, cable, cell phone, car insurance, car repairs, gasoline, food, furnishings, toiletries, etc. You may not realize how much of your “take home” pay will be eaten up each month.
I was planning on finance and it said the average starting salary was about $55000, but I understand there is a lot of other expenses to think about. Thanks for the advice.
Well, I know students that were planning on finance too but they graduated into the 2009 job market and had to go work at Home Depo. One issue to consider is that you yourself can only borrow 27k in 4 years, so the person who has to take the additional loan for you may be stuck with the repayment. OK 50k is not the worst amount but paying 500 or 600 a month on a 50k salary is quite a burden.
Majoring in finance is terrific if you love finance. And there’s not a single path or job that a finance major has to take- there are many roads.
BUT if you don’t love finance- and are taking on a lot of debt- you need to think carefully. It’s not a golden ticket. You will be competing for jobs with kids who really, really really love the subject and if you have grit your teeth for four years to get through it because it’s “marketable” it might be a tough slog.
Anyone else see the irony in a future finance major ignoring sound advice regarding student loan debt?
I agree with @BrownParent - there’s no way to predict at the time you’re choosing a school what your starting salary is going to be when you graduate, and what your total debt will be at that time.
You could change majors, you could take 5-6 years to graduate due to circumstances beyond your control, your school could jack up tuition so that you need more and more loan aid each year, you could graduate into a recession.
Go conservative. Have at least one school where you won’t need loan aid.
I happen to run across a post where Mitch Kantrowitz also mentioned the ‘one year salary’ rule, which I was really not familiar with except as an urban legend. But I can see the logic in it if you consider paying 10% of salary for 10 years or something. I think if it is your only choice, maybe, but if you are just going to a slightly prefered school for some frivolous reason it would be better not to take that on.
A more conservative rule may be to limit the debt to the federal direct loan limit for dependent undergraduate students.
Counting on a high pay level at graduation may result in an unpleasant surprise if you take on a lot of debt, since you may (a) decide you do not want to do the major that is more likely to lead to a high pay level, (b) not be admitted to that major or find that the major is too difficult, © graduate into an economic or industry downturn and find that the high pay level jobs are not there at the time you graduate, or (d) find that the actual pay levels found by new graduates in that major are lower than you assumed.
A good rule of thumb is no student debt.
You said the “average starting salary was about $55,000” which means that half the finance majors out there are making LESS than $55,000, and that’s when they actually have a job.
Don’t make the mistake of the ‘risk’ of borrowing money beyond what is absolutely necessary to go to college and getting the degree. If you have to borrow money, you need to be earning money somehow during the year, hopefully as much as possible during the summer. Many students have part time jobs during their school year.
Talk to your parents about how they got through school and how they can assist you, what is in the budget.
Many realize as soon as they are out of school and paying even minimum payments on school loans how they wish they could ‘go back’ and do things differently. Some will work really hard, including extra side jobs to get out of the debt after finishing their college degree.
“Talk to your parents about how they got through school and how they can assist you, what is in the budget.”
I got through school by going to a community college for the first two years (completing an AA For Transfer program) and then going to one of our two major in-state universities for 3 years, and of course working summers plus 15-20 hours/week during school.
Tuition was $700 per semester at the university ($25 per semester at the JC!) so this was actually doable. Room and board was 4 times as much as the tuition. Didn’t have to worry about limited merit aid for transfers because affordability didn’t depend on merit aid.
What got us through school in the 80’s is hopelessly outdated in these days of expensive OOS and private school tuition, and so little merit aid available for transfers. Even in-state tuition is $10K+ before room and board, $25K COA before merit aid.
As an aside (and admittedly not 100% relevant to the original post), at my alma mater the in-state tuition has increased by a factor of 8x in 30 years, while room and board has approximately doubled. Many including me would say the appropriate tuition increase would have been closer to 2x, at most 4x, not a near-exponential increase of 8x.
You’re being too optimistic if you’re expecting to be living independently (i.e. not with your parents or relatives for free.)
ADP (and others) have paycheck calculators that will estimate how much your take home pay will be. For $50K annual salary and average state tax withholding, you’re looking at about $3,000 take home after the requisite deductions. Many companies no longer pay 100% of your health insurance premiums; count on insurance costing $150-300 per month. The higher range applies if you also need dental, vision, etc.
Other things you’ll probably have to pay on a monthly basis: car insurance, rent, utilities, TV, phone, cell phone. Will you already have a car? If not, probably a car payment. Don’t forget food. Don’t budget yourself to the point of not having any discretionary funds; you’re going to need money to go out, buy clothes, car repairs, etc.
@Madison85 My only reply in this thread was an answer to a question and thanking someone for their advice… I don’t see where I ignored what people said? Unhelpful comments like these are where the hate on CC comes from.
I definitely have some of the lower ranked state schools in my state for safeties. I guess its hard to imagine all of the expenses now as a dependent living with family. Thanks for the reality check.
Ok. My apologies. So you are only applying to academic financial safeties and withdrawing any other applications to schools that would result in $30k-$50k or more debt that’s a combination of student loans / parent plus loans / private co-signed loans / loans from relatives?
Im only a junior so this wasn’t a last minute question before turning in apps. Any schools that’s not a financial safety due to merit scholarships/personal savings on my current list all have good financial aid which can sometimes drastically from net price calculators. The scenario in my post is a “worst case scenario” from a school that meets close to but not full aid. All of the other colleges I have looking at meet 100% of demonstrated need and my family is Lowe middle class. You or your kids never applied to schools with hopes of good enough financial aid? They only applied to automatic full rides?