Loans - Student Loans: Trick Or Treat?

      Halloween is a time for children and grown-ups to let imaginations run wild and that can be a bit scary at times but fear and worry related to student loan debt can haunt parents and children well beyond October 31^st. In today’s post, Doug Spencer, CFP®,a resident financial planner at Financial Finesse, writes about some important borrowing decisions and alternatives to consider. Who knows? They just might help you or your kids avoid a visit from the dreaded Three Headed Debt Monster.
In the spirit of Halloween, are student loans a trick or a treat for you or your student? Many experts still contend that the financial rewards of a college education more than pay for cost plus accrued interest. On the flip side, some think tanks are arguing that a married couple that both have “average” student loan debt will end up with over $200,000 less wealth than their counterparts without student loan debt. So who is right? That depends upon three important factors: how much you are borrowing or have already borrowed, what your expected income is and whether the loans are necessary to accomplish your goals.
We have all heard about the value of a college education. Recent data from the Bureau of Labor Statistics tend to back up that argument. If the average college grad makes about $1,000 more per month than the average employee, that would add up to roughly $480,000 of increased earnings over a 40 year career.
Borrowing some money if you have to in order to get that degree makes sense. Even an associate’s degree or some college with no degree shows a large increase in earnings compared to someone who only graduated high school. No matter what education you pursue, having a marketable skill – be it an attorney, a doctor, an architect, a plumber, an electrician or a teacher – is the key to earning a somewhat stable and sustainable income.
How Much to Borrow
So how much student loan debt is too much? There isn’t much hard data out there on the subject but some industry experts say that a student should not have more debt than their first year’s expected income. While that seems like a reasonable guideline for what is sustainable, what about that $200k in lost wealth?
It will all depend on your ability to pay the loans back. According to recent reports, the average student loan debt is $28,950. If a recent graduate has federal student loans fixed at 3.4% for 10 years then they would have to make monthly payments of $261.79 and the total cost would be $31,414.80. That would be expensive but reasonable for a registered nurse, accountant or engineer making roughly $55,000-$60,000 upon graduation. The student loan payment would be approximately 8% of their take home pay each month and the total cost is around one half of expected annual income.