How much college debt is too much?
It’s a simple question. But whether you’re a prospective student—or the parent of one—it’s really hard to answer. This VICE Money tool can help. Just plug in your family income, the schools you’re interested in, and the major that the prospective student intends to study. Then click the button. The tool will spit out median levels of debt, by school, for people from your family background, as well as the median national first-year salary for someone with that major. Here’s a simple rule of thumb: You don’t want your total amount of debt at graduation to exceed your first-year earnings.
While you sometimes hear horror stories about people struggling with over $100,000 worth of debt, that’s actually usually more of a problem for people who go to grad school. And for some professions—such as law or medicine—even debt burdens of those levels can be easily managed, given the fatter paychecks doctors and lawyers eventually earn. But with U.S. college debt outstanding topping $1 trillion and delinquency rates edging up in recent years, we figured it was worth trying to design a tool you can use to get a sense of whether you’re in danger of loading up on debt that would prove problematic later on.
First things first. A college degree is almost always worth it. Over the course of a working lifetime, college graduates earn more than $1 million more than those who don’t graduate. But determining how much to pay for that degree can be a complex calculus involving how much your family makes, the field you want to study, your career ambitions, and the salary you can expect to earn in your first years after graduating.
In researching this topic, we repeatedly came across the advice that your total amount of college debt upon graduation should be less than your first-year salary. This tool is designed to give you a simple way to eyeball whether your plan for college could put you in a tough spot when it comes to managing your student debt.
Under this rough rule of thumb, your monthly debt payment shouldn’t exceed roughly 12 percent of your monthly earnings before taxes and deductions for things like retirement contributions. (This model assumes a 10-year repayment plan and loans with a roughly 4 percent interest rate.) That’s considered a fair benchmark of a manageable debt load, when you first graduate. The percentage you spend on college debt payments should go down as you start earning more over time.
How’d we come up with this method? We first took individual school data on median college debt by family income level for people who finished school in both the 2013-14 or 2014-15 academic years from the U.S. Department of Education’s College Scorecard. We then blended it with Census Bureau data on average first-year salaries broken out by college major— the data was collected by the Hamilton Project.
We then ask what your major will be and use that to find what the U.S. median first-year, full-time earnings are for someone who graduated with a degree in that field. Keep in mind, these are national medians, they’re not specific to people who pursued those majors at individual schools. (It’s likely that someone who studies math at the Massachusetts Institute of Technology would make more than somebody who studies math at a less august institution.)
The tool then spits out a chart that shows the average debt at different schools, charted against the U.S. median first-year salary by major. (One note: the numbers for public colleges and universities are calculated using assumptions for in-state students.) The closer your debt approaches to salary, the tougher the debt may be to handle. If debt surpasses the first-year salary number, you might want to think twice about the amount of debt you’re about to take on.
Full disclosure: the Census Bureau data that Hamilton Project used to estimate median earnings by major was collected between the years 2008 and 2012. Given that salaries fell during the Great Recession, which lasted until the middle 2009, it’s reasonable to assume that these salary figures could be somewhat lower than today’s salary levels. Moreover, the median debt figures we’re using are more recent, coming from the most recent update to the college debt data from the College Scorecard. So, all in all, the levels of debt might look a bit high relative to incomes. It’s best to use these numbers as a broad guideline, to what you can expect, rather than a precise estimate.
Also in recent years, there have been changes to the U.S. student debt system that makes repayment less of an issue. For instance, the Obama administration’s Income-based repayment program allows participants to cap their monthly payments relative to their income. It’s a great deal. But only 24 percent of students receiving direct loans from the Federal Government had signed up for the program as of June of 2016. Given that the program has had a higher cost than originally envisioned, it’s possible that the Trump administration could do away with them at some point.
In other words, it’s always worth thinking about the amount of debt you’re taking on when you’re considering which schools to go to. We hope this tool helps.
Interactive by Ron Rosenman