How Much Student Loan Debt Is Too Much?

Q. How much is too much for student loans? My daughter wants to study a field that I think will get her $45,000-$50,000 a year as a starting salary, and she’s trying to figure out how much she can afford to borrow. Otherwise she may go to community college instead. — New college mom

A. The answer to your question is somewhat subjective.

And with so many Americans drowning in college debt, it’s an important question to address.

They say that college is an investment in your future, but like any investment, you need to look at the returns to see if you really want to take on the investment, said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton, New Jersey.

Looking at the numbers, your daughter’s future salary is not all “profit,” Lynch said.

She’d have living expenses, specific expenses for work and she’d also have to pay taxes. So the “profit,” Lynch said, would be the amount she’s able to save. Let’s use $2,500 as an example.

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“The question is how much would you pay for a company that produced $2,500 in earnings?” Lynch said. “I would reasonably pay $25,000 for a company that generates $2,500 in profit. That would give me a 10% return on my money.”

Lynch said if your income estimate is a reasonable one, he suggests your daughter pursue it in the most conservative way, starting with community college. She could get her core courses in, and hopefully she could work in the profession she wants at the same time.

This does two things, Lynch said.

“First, it lowers your cost substantially for school. Second, by working in the profession, it allows her to see if she really wants to pursue this career, saving lots of money and time,” Lynch said. “I am a huge fan of education and think that we all need to continue to grow our minds each year. You just need to ask if the cost of that knowledge worth the price that you will be paying.”

Ron Garutti, a certified financial planner with Newroards Financial Group in Clinton, New Jersey, said he’s seen a shift in the last few years when talking to parents of soon-to-be college students. He said many are considering this same question of money versus benefit.

“Many parents are also considering the maturity and preparedness of their children,” Garutti said. “A common thought among parents is that they don’t want to pay for their kids to attend a four-year party.”

He said some children are starting at a community college, and then if all goes well, they transfer to a four-year school. If credits properly transfer, this could be a significant savings for the payer, Garutti said.

One consideration is the cost of the schools your child is considering because prices vary so much.

“Always look at the net cost of a school,” Garutti said. “Aid, tax benefits and other considerations could reduce the actual cost of each school. A good guidance counselor can help identify aid or scholarship opportunities.”

Specifically in relation to your daughter, Garutti agrees that she should consider the expenses she will face after college. Will she be paying for rent, living at home, moving far away, paying for a car, commuting, etc.?

“The more her post-graduation expenses will total, the less I would recommend she spend on schooling in the near term,” Garutti said.

She should also consider where in the country she will settle, and whether the area is lower or higher than average for her future job.

“Another consideration is how certain she is about her field of study,” he said. “Is she definitively dedicated to it or might she change majors? If she is uncertain, she should consider a school with many paths for her to choose from.”