Q: I’m about to go back to grad school to get a master’s degree in accounting, which will put me in about $40,000 of debt. I know it’s ironic that I’ll be going pretty heavily into debt for a career that counsels other people about money. I’ve got a running tally in my mind of why this is the right decision for me, but I know it’s a lot of debt. I know that this choice will be putting me on the path to where I’d like to see myself in the future. But every once in awhile, I start freaking out over the amount of debt I’ll be taking on. I really believe I’m going to be way better off once I graduate, but it’s still a little daunting to think about.
You’re not wrong to be concerned about the amount of debt you’re taking on – but you’re certainly not alone. An estimated 44 million Americans have student loan debt, for a total of $1.48 trillion owed. But when considering going into student loan debt, it’s important to understand what you’re signing up for.
“The most important thing before taking on a substantial amount of debt is to take the time the time to understand what you’re signing up for, and what that’s going to mean after you’re done with school,” says Asha Srikantiah, vice president of Workplace Emerging Products at the Fidelity Student Debt Program. “Will you be able to afford your monthly student loan payments? Are you prepared to pay down that debt for years to come?”
It’s also important to evaluate your earning power post-graduation.
“Evaluate (your) intended path through and after college: What are the realistic prospects of finding a job related to your area of study? What can you expect to make realistically in the first few years? For example, if you intend to work in a field where the average salary is $40,000 why would you take out $75,000 in school loans?” says Brannon Lambert, a certified financial planner at Canvasback Wealth Management, LLC.
Is Student Loan Debt Worth It?
The answer to this question isn’t clear cut. For some, taking out a substantial amount of student loans may be a given, and the only way to realistically afford college or graduate school.
“It can be worth it up to a point,” says Carla Dearing, CEO of SUM180. “(But) I have known individuals who made student loan decisions as if the normal rules of sound financial decision-making don’t apply to education. This can be a very costly mistake. In a way, I sympathize with this point of view: higher education does have value far beyond simple financial return on investment. It offers you paths to intellectual and personal growth you would be unlikely to encounter anywhere else, and often results in many much-valued, lifelong friendships.”
Yet it’s still a financial decision, and should be approached as such, she says.
But for others, going into serious debt for an education isn’t the only option.
Whitney Hansen, founder of WhitneyHansen.com, a millennial-focused finance blog, suggests exploring other payment options before springing for student loans.
“Give yourself options before you sign your life away for student loans,” she says. “When I went back for my master’s in business, I discovered that working for a university in a full-time position gives you discounted tuition, so my master’s degree cost me $472 total. You have options for funding college. You just have to get creative.”
Good Debt vs. Bad Debt
But isn’t student loan debt considered “good debt,” comparable to real estate or starting a business? Not so fast, experts warn.
“Conventional wisdom has been that student loan debt is good debt,” says Lynn Ballou, regional director of EP Wealth Advisors. “However, we can’t just buy into that blanket notion anymore. By crafting a careful plan that models income potential, postgraduate lifestyle costs and debt payoff, each student can determine the true value of the loans they are contemplating and determine if that liability is worth the cost.”
Other stress that in order for a debt to be “good debt,” you must be able to pay it off.
“As for ‘good debt’ vs. ‘bad debt,’ again – not all student loans are created equal. Some student loans have high interest rates, whereas other student loans are very manageable. Debt can really only be ‘good’ if you’re able to consistently make your payments on time, and in full, as part of a plan to pay them off,” Srikantiah says.
How Much Debt is Too Much?
Considering that the average cost of tuition and fees for in-state residents at public colleges is $9,970 per year and $25,620 for out of state residents, according to the College Board, it’s no surprise that so many graduates leave college riddled with debt. That’s not to mention the average cost of a graduate degree, which ranges from $30,000 to $40,000, depending on if it’s a private or public university.
But how much student loan debt is too much? Your student loan payments should be no more than 20 percent of your income, and your should plan on paying off your student loans within 10 years of graduation so you can reach other financial goals, such as buying a home, Dearing says.
“The only way to know whether a particular student loan is worthwhile is to research the future earning power you can expect in the 10 years after you graduate and enter your chosen field,” she explains. “Twenty percent of that expected income needs to cover your debt payments. Otherwise, the student loan debt you are considering is, in fact, ‘too much.’ If that’s the case, you should rethink your plans.”
Others also warn of letting your student loan debt get in the way of other important goals.
“If student loan debt is going to prevent you from being able to save money for other important life goals, like retirement, for instance, be careful,” Srikantiah warns. “We’ve talked to a lot of parents who have stopped saving for retirement so that they can pay for their child’s education, and now they really don’t know what they’re going to do and how they’re going to live once they stop working. If your student loan debt is going to be more than you can comfortably afford, then it might in fact be ‘too much.’”
Numbers Don’t Lie
While student loans can undoubtedly be a daunting topic, there are some good numbers to report. For example, a person with a master’s degree typically earns $400,000 more over their lifetime than someone with a bachelor’s. Dissatisfaction with your career can also affect many other areas of your life, from your health to your mental well-being, which could end up costing you in the long run.
But when considering student loan debt, it’s always wise to keep the numbers in mind.
“Numbers don’t lie. If your future income is unlikely to allow you to pay off the student loan, you can explore other options such as scholarships or work study programs, but whatever you do, do not fall into the trap of thinking things will “somehow” magically work out,” Dearing says. “This may be the first big financial decision you make in your life; be thoughtful and strategic. Only borrow what you are reasonably sure you will be able to comfortably pay back.”