Taking out a substantial student loan is not a decision to make lightly. If you’re considering it, my advice to you is to think it through as carefully and thoughtfully as you would any other big investment, such as a home mortgage. Do your homework. The terms of the loan need to be as fair as possible to you, and the loan should also make solid business sense in terms of the return you can expect on your investment.
Going into debt to further your education can be worth it – up to a point. But please do not assume that it is always the case. 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. But it is also, inescapably, a financial decision – and as such should be approached rationally. Do this and you will be able to enjoy your college and post-college years free of unnecessary financial anxiety.
As with many other financial questions, whether student loan debt is “worth it” depends on the specifics, so you will need to crunch the numbers for your particular situation. Consider these general rules of thumb:
- Your student loan payments should not be more than 20% of your income. This will allow you to make payments regularly, without undue stress.
- Your total loan payments (including student loan debt payments) should not be more than 40% of your income.
- You should plan on paying off your student loans within 10 years after graduation. (This timeframe will allow you to start planning on other major financial undertakings, such as buying a home.)
To determine whether a particular student loan is worthwhile, you need to research the future earning power you can expect in the ten years after you graduate and enter your chosen field. 20% 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. Perhaps a less expensive school or another field of study/career path altogether would be a wiser choice.
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. 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.