Educational debt: How much is too much?

You've probably heard that pursuing higher education is good but getting into debt is bad. Unfortunately, in today's climate of rising college costs, many people can't afford one without the other.

Whether you want to help a loved one make smart decisions about debt or you're a student yourself, the tips below can help answer the question: How much educational debt is "too much"?

Things to consider

Some students have enough money saved to cover their higher-education costs, while others get merit-based scholarships, participate in work-study programs, maintain full- or part-time jobs, or borrow money to offset educational expenses. In reality, most students probably rely on a combination of resources to fund their education.

Not all debt is bad. In fact, making timely loan payments can demonstrate a borrower's ability to handle an installment loan responsibly. And in some cases, it's not advisable to pay for something in full if it means depleting all your reserves, including your emergency fund, to do it.

Students can start figuring out the maximum amount of debt they should take on by asking the questions below.

  • What's the average salary of entry-level graduates in my field of study?

    The general rule of thumb is that the total amount a student borrows shouldn't exceed what he or she will make during the first year on the job. Students can create a hypothetical budget based on their probable salary, factoring in taxes, and estimate the loan payment they'll be able to manage each month (allocating 10% or less of monthly take-home pay is ideal). Check out FinAid for calculators.
  • What's the total cost of school?

    Websites like College Board have the financials for various schools. When tallying up costs, consider registration, room and board, and meal plan costs; technology, activity, and lab fees; and transportation expenses.
  • How much financial aid am I eligible to receive?

    Visit the Federal Student Aid website to learn about the federal financial aid process, including the types of aid available and the corresponding eligibility criteria.

Before signing any loan agreements, borrowers should understand the types of loans they're eligible for; then compare interest rates and terms of payback. Failing to make loan payments in accordance with a loan agreement can result in default, which can have serious consequences.

Think long term

The U.S. Census Bureau estimates that a college degree can be worth as much as $1 million more than just a high school diploma over the course of a career. In spite of this, it's important to maintain a balanced perspective—students should weigh the probable salary associated with their dream job against the cost of their dream school, and analyze the pros and cons of both public and private schools and universities.

Students will do themselves a disservice if they're not prepared to handle the consequences of their decision. Will they feel comfortable committing to a monthly payment for the next 5 years? What about the next 10 or 20 years? Chances are students will spend a longer period of time paying back college debt than they spend in college.

Save

It's never too early—or too late—to save! A dollar saved is a dollar that doesn't have to be borrowed.

529 college savings plans can benefit anyone, adults and children alike, and offer significant tax advantages, like tax-free withdrawals* and potential state income tax deductions on contributions.** Even if the tuition bills are already coming, saving today could provide tax benefits at year-end.

*Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. The availability of tax or other benefits may be contingent on meeting other requirements.

**Contributions to a plan in a tax year may be deductible from state income tax up to certain limits but may be subject to recapture in subsequent years if you make a nonqualified withdrawal.

Investment returns are not guaranteed, and you could lose money by investing in the Plan.