How Much Student Debt Can You Afford?

Students at school discussing student debt and deciding how much student loan they can afford.

Over the past 30 years, the cost to attend college at a public four-year university has increased by 126%. The same figure for private universities is a staggering 93%. This data by College Board begs the question: is making the investment in college still worth it?

The data shows that wages for college graduates are still significantly higher than those of high school graduates. The Federal Reserve Bank of St. Louis found that in the first quarter of 2018, college graduates had 80 percent higher wages than high school graduates. But the benefits of higher education transcend bank accounts and financial standing; college graduates live healthier and longer lives, according to research by the Commission on Health.

So should you get a student loan to be able to go to college? Yes—but you need to consider a few things.

The Golden Rule for How Much Student Debt to Borrow

At the individual level, financial outcomes are heavily influenced by the amount of debt that graduates have, so it's critical to understand how much student loan debt is too much before you jump in head-first. When it comes to student debt, the rule of thumb is that your payments shouldn't exceed 10% of your expected after-tax monthly income.

Having debt payments that exceed the golden rule can affect your ability to reach financial milestones like purchasing your first home, saving enough for retirement, or supporting your family.

Estimate What Your Anticipated Post-Graduation Salary Will Be

Graduating from college is exciting for many reasons—from that day on, you are free to go out and chase your dreams! But before you go barreling down a set path, you need to understand what you might stand to earn upon graduation. It's impossible to predict the future, but you can get a pretty good idea by looking for a few pieces of information.

First, pick a few jobs you find interesting and see which majors are best aligned for those positions. Many universities publish data showing the average starting salary of their graduates. See if your career services office has data by major or field of study.

Another place to look for relevant data is by using a free site to check for salary data based on location, skills, job title, and other criteria. A few free examples include PayScale, Salary.com, and GlassDoor.

If you haven't finished your degree yet, make sure you ask your school about job placement rates for recent graduates. If you find that few people studying what you intend to study are finding jobs after graduation, it may make sense to look at other programs or consider transferring to another school with better job placement rates.

To calculate your estimated after-tax earnings, use a paycheck calculator, and input the salary details from your research. Make sure you select a monthly pay frequency so that you can easily compare the total with your monthly loan payments.

Now that you have a rough estimate for what you can expect to earn after graduation, it's time to see what you can afford.

Calculate Your Projected Monthly Loan Payments

Monthly student loan payments are based on the size of a loan, the interest rate, and the term of the loan. Although some student loans have different repayment plans and schedules, a standard student loan has a 10-year repayment term.

Use a student loan payment calculator to see what your monthly payment would be given your expected total indebtedness at graduation. Get detailed cost information from the school you'd like to attend and include all costs that you would have to borrow for, including room, board, and meals.

Now that you know your approximate monthly loan payment and your potential monthly after-tax salary, you can check if your payments fall below the recommended 10%.

Affording Your Desired Degree

Finding the winning combination of an affordable degree and a high paying job is easier said than done. But if your goal is to graduate with affordable loan payments, there are a few things you can optimize.

The first is to pursue a higher-paying field. Leverage the salary resources you used above to identify careers with higher salaries.

According to Debt.org, the average student debt for graduating students in 2017 was $37,172. Using a student loan calculator and assuming a 6% interest rate and a 10-year repayment period, we get an expected average monthly payment of $412.69. That means you'd want to find a career with an average after-tax monthly income of $4,126.90 or an annual after-tax salary of $49,522.80.

The average gross salary for new graduates is slightly higher and that's before taxes, so you'd ideally want to find a job that pays better than average if you graduate with the average amount of loans. Otherwise, you'll need to find ways to pay less for college.

One tried and tested way to lower the cost is to attend community college for the first several semesters and then use those credits to transfer to a 4-year university. You'll get the same diploma (and job opportunities) as the students who paid all four years at the university but at a fraction of the cost.

Another avenue you can pursue is to find alternative sources of funding by seeking scholarships, work-study jobs, or need-based grants and financial aid.

Finally, if you can't get the numbers to work, consider a more affordable alternative. Your education is only one aspect of your life, so while it may be disappointing to not go to your dream school, you'll be glad when you aren't struggling to keep up with the payments.

Taking the time to figure out what your future earnings might be and how much student debt you can afford may seem daunting. But doing it is more important than ever since the cost of college is so high. It may be the difference between joining the majority of Americans that live paycheck to paycheck or being in the driver's seat of your bright future.

The views expressed by the author are not necessarily those of Fifth Third Bank, National Association, and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank, National Association or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank, Member FDIC.