What is Affordable Debt?

By Mark Kantrowitz

Students and parents should borrow no more for college than they can afford to repay in a reasonable amount of time, such as within 10 years. They can achieve this by keeping the amount of debt in sync with income. Students who are majoring in low-paying fields of study should borrow less, unless their occupations will qualify for public service loan forgiveness or other loan forgiveness programs.

Needing to borrow a Federal Parent PLUS loan or a private student or parent loan may be a sign of over-borrowing.

The primary problem with student loan debt is the amount of debt, not the cost of the debt.

Affordable Student Debt

Total student loan debt at graduation should be less than annual income, and, ideally, a lot less.

Total student loan debt at graduation, including capitalized interest, should be less than the expected annual starting salary, and, ideally, a lot less. If total student loan debt at graduation is less than the student's annual income, the borrower will be able to repay the student loans in ten years or less.

If total student loan debt is more than annual income, the borrower will struggle to make the loan payments and will need an alternate repayment plan, such as extended repayment or income-driven repayment, to afford the monthly loan payments. But, these repayment plans reduce the monthly payment by stretching out the term of the loan to 20, 25 or even 30 years. Not only does this increase the total payments, significantly increasing the total interest paid over the life of the loan, but the borrower will likely still be repaying their student loans when their children enroll in college. That means the borrower will be less likely to have saved for their children's college education and will be less willing to help their children pay for college.

Income after graduation can be estimated using data published by the Bureau of Labor Statistics (BLS), PayScale.com, CollegeMeasures.org, the National Association of Colleges and Employers (NACE) and the Center for Education and the Workforce (CEW) at Georgetown University. See, in particular, The Economic Value of College Majors and What's It Worth? The Economic Value of College Majors. The U.S. Department of Education's College Scorecard will eventually include income data by academic major in addition to income data by institution.

Affordable Parent Debt

A similar rule of thumb applies to parent debt.

Total parent education debt for all of the parent's children should be less than the parent's current annual income. If total parent education debt is less than annual income, the parent should be able to repay the parent education loans in ten years or less.

Parents should aim to pay off all parent education loans in ten years or by the time they retire, whichever comes first. If retirement is only five years away, the parents should borrow half as much.