When Are Student Loans Beneficial Debt?
When Are Student Loans Beneficial Debt? When student loans assist you better your financial future, they are a positive debt. Remember that education is an investment, and you want to make sure you get a good return on your money. It is usually a good debt if going to college helps you earn more money.
When compared to high school graduates, acquiring a college degree will increase your first wages by at least 25%. Check out this latest study from the US Department of Education, which illustrates the wage discrepancy between high school and college graduates:
But it goes farther than that; it's not only about going to college to increase earnings; it's also about choosing the right degree. Engineers had the highest beginning income among college graduates, earning on average $62,062 in their first year, according to a recent poll by the National Association of Colleges and Employers. Humanities and social science majors, on the other hand, had the lowest beginning income, at $37,791. That's nearly a $25,000 gap in starting incomes, and it begins to build a picture of when student loans become bad debt.
If you're going to take out student loans, your main goal should be to get the most out of your money. That means obtaining the best potential pay while incurring the least amount of student loan debt possible.
How Do Student Loans Turn Into Bad Debt?
Student loans can soon become bad debt if you don't remember this basic arithmetic. Keep in mind that a student loan is really a mortgage on your future wages. When you buy a house, the house serves as collateral for the loan. When you buy a car, the vehicle serves as collateral for the loan. If you don't pay back these loans, the lender can seize your home or car. The collateral for student loans, on the other hand, is your future wages. The government will garnish your future earnings if you do not return your school loans.
The Crucial Calculation That Every Student Loan Borrower Must Perform
This simple equation is the key to keeping your student loans as good debt and not allowing them to grow into bad debt: the Student Loan to Salary Ratio.
This is how it works: you want to look at how much money you'll need to borrow to get to a certain starting income. Take your initial starting wage and divide it by the amount you'd have to borrow to pay for your preferred school's degree. Returning to the average starting salary, let's examine some debt ratios. We'll also use the most recent College Data data on the costs of private and public education. We'll assume a private school tuition of $30,094 each year (for a total of $120,376 over four years) and a public school tuition of $8,893 per year (for a total of $35,572 over four years).
Engineer: $62,062
Public School Ratio: 174%
Private School Ratio: 52%
Business: $55,635
Public School Ratio: 156%
Private School Ratio: 46%
Education: $40,337
Public School Ratio: 113%
Private School Ratio: 34%
Humanities: $37,791
Public School Ratio: 106%
Private School Ratio: 31%
The goal should be to achieve the best feasible ratio. Any ratio less than 100% should cause you to be concerned about the amount of student loan debt you'll need to take on. Keep in mind that this computation is only based on expenditures and the amount borrowed. Obtaining a scholarship or other form of financial aid may alter the amount you need to borrow and so improve the equation.
Another Crucial Debt Calculation for Students
Calculating your student loan debt payments and comparing them t
o your monthly income after graduation is a second equation. The goal should be for your student loan debt payments to never surpass 10% of your take-home salary from your post-college work.
For example, if you earn $62,062 per year as an engineer, your monthly take-home pay will be around $3,550. That means you shouldn't pay more than $350 each month to pay off your student loans. If you plan to use the normal repayment plan, you should not borrow more than $38,000 to make this work. Other repayment plans may be available to assist with this ratio, but please remember that you will always need to return the debt, whether over 10 or 30 years.
The objective is to make an informed financial decision regarding student loans. The point is to simply examine the return on your investment, regardless of which calculation you apply. You don't want to spend thousands of dollars on a degree that will only increase your income by a few hundred dollars. That isn't a sound financial decision, and it will result in you defaulting on your student debts.
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