I have a young friend who is thinking about going back to school. He called me up to ask me if it would be a good idea. I think he expected me to rubber-stamp his decision because, as he put it, “it’s good debt, right?” Maybe. Maybe not.
Student Loans As a Lifeline
If you’re considering using student loans to fund your way through college or university, you have to stop and think about how much debt would be too much debt for you to manage when you finally land a job.
I know there are all kinds of new breaks for students, but no “sale” is worth it if you can’t afford to pay for what you’re buying.
If you’re relying on the student loan or banking system to stop you from digging a hole that’s too deep to climb out of, you’re a dope. Students have been borrowing way more than they can afford to repay forEVER. That is why the bankruptcy rules won’t let people discharge student debt with a snap of their fingers.
How Much is Too Much?
Deciding how much to borrow to get you to your career is a business decision. Treat it as such. Don’t bother with all the yada yada about deserving an education or expanding your mind, or all the other bull crap people use as an excuse for digging a debt hole. Take the emotion out of the exercise and do the numbers based on cold hard facts.
Facts like this: How much money are you likely to make when you graduate?
Sure, your field may pay gobs of money once you’ve got some legs under you. But when you graduate and go to work, you have to start paying that student loan off lickety-split on your entry-level income.
If you were taking a business loan, the bank would want to know what kind of income the business is likely to produce to see if it can afford the loan repayments. Well, YOU are your business. Your income, once it starts, will play a big role in how long it’ll take to get out of debt, and the interest you’ll pay while you do.
Aftermath of Borrowing for School
Each career comes with it’s own potential income stream. Don’t let anyone tell you that a university or college education guarantees a better income. Every career choice has it’s own income scale, and knowing your potential earning capacity makes sense so you don’t end up over-paying for it. Teachers make more or less than lawyers, dentists, call-centre workers, engineers, writers, and nurses. Before you dive into more debt than you’re able to repay, figure out how much income you’re going to earn in the early stages of your career…so in years 1-5.
If you haven’t got a clue what you’re likely to end up doing, you’re not alone. Heaps of people graduate with a degree and no clue what they’re going to do with it. In your case, assume the worse: you’re going to get a minimum wage job. Yeah, I know it’s harsh, but suck it up. If that’s the best you end up with, you’ll be prepared. If you end up doing better, you’ll have more money to throw at your debt.
Let’s say you decide you want to be a pharmacist when you’re all grown up, and you’ll net about $52,000 a year (or $4,333 a month). Assuming your interest rate is 7.25% and you chose the ten-year repayment schedule, your monthly payment would be $663, which represents about 15% of your net income.
Do I have to say this?
The less debt you have, the better your life will be.
If you hope to have a car, buy a home, have a family, go on a vacation, or do anything else that involves having a life during those years of student loan repayment, less debt is better.
Please, please, please, before you head off and borrow too much money, look at your student loan debt in relation to your earnings ability. That’s common sense – right? But few people understand this relationship, which is why so many are buried in debt and unable to get on with their lives.