This spring, the New America Foundation reported that 40 percent of outstanding student debt in this country is held by graduate degree holders, including MBAs, JDs, and MDs. This means that the percentage of graduate debt (vs. undergraduate debt) in the U.S. is much higher than many previously thought – by about double – and underscores the need for sensible solutions.
Part of the solution calls for a more thoughtful conversation about how much students should borrow in the first place.
Focusing the conversation on “what is a reasonable amount of debt vs. an unreasonable amount of debt” can help facilitate responsible lending and borrowing. In fact, there are a few ways to avoid drowning in student debt, which include:
1. Understanding your projected income after graduation. It is critical for students to have a very strong understanding of their employment prospects and earning potential upon graduation. This is the first step in figuring out a manageable level of debt. Ask your school for these statistics – they should have them readily available. (If they don’t, then that’s not a very promising sign.)
2. Determining if your income will be sufficient to cover your education debt. You can figure this out by calculating your debt to income (DTI) ratio. In other words, what percentage of your expected monthly income will go to paying off debt? If it’s 20% or less, then you likely have a healthy debt load; if it’s around 30%, then you likely have a manageable debt load; if it’s 40% or more, then you might have an excessive debt load. (Everyone’s personal situation is different – these figures are meant to be simple guideposts). Yet another rule of thumb comes from student loan expert Mark Kantrowitz of Edvisors, who says, “… undergraduate and graduate students should borrow no more for their entire education than their expected annual starting salary at graduation.”
3. Making a final call: Either move forward or adjust income or debt. If your projected income is sufficient to cover your debt, then great – go for it! If not, then you’ll likely have to either (a) increase your expected income (i.e., you might want to consider a different field of study that leads to higher pay upon graduation – STEM subjects generally lead to higher pay) or (b) decrease your expected debt load (i.e., consider attending a less expensive school).
We all share responsibility in ensuring that student borrowers are taking on a reasonable amount of debt: the private sector, government, academia, borrowers. One of the best ways to do that is through strong financial literacy. We must work together to equip borrowers with the information, tools, and resources needed to make informed and responsible financial decisions. (At CommonBond, for example, we have built a student loan budget calculator and a refinance calculator, so that students and graduates can determine whether certain levels of borrowing make sense.)
Our collective objective should be to ensure that debt is used for its noblest of purposes: take advantage of opportunity that otherwise would not exist. It’s what allowed my grandfather to come to America penniless, build his own chain of local shoe stores, and provide for his family. It’s what has allowed me to gain a quality education and build a company that is expected to save borrowers as much as $10M in student loan payments.
Debt is not necessarily a bad thing. To the contrary, it can lead to economic growth that is otherwise impossible. It’s up to all of us – and our responsible approach to borrowing – to keep it that way.
CEO | CommonBond