How much student debt can you carry?

Steve Merrell |

Last week I wrote about the need for college-bound students to carefully plan for their education. College is expensive and paying for college can be tricky. Unless you have built up a substantial college savings account, student debt will likely be a fact of life.

According to the latest figures from the Federal Reserve, nearly 45 million Americans have outstanding student loans with an average loan balance of $37,333. Total student loan borrowings now top $1.68 trillion, up nearly 30 percent from five years ago and more than 100 percent higher than ten years ago. Delinquencies are also rising and now total $186 billion. According to the Federal Reserve, if you adjust for deferments and forbearance agreements, total student loan delinquencies are probably closer to $360 billion. The bottom line is that student loans are a big problem for a lot of people.

You definitely do not want to be one of those people. If you plan to use student loans, you would be wise to figure out how much you can prudently borrow. This requires you to think about your future, including how much you expect to earn and what it will cost you to live after graduation.

In the old days, college students had to rely on anecdotal evidence to get a sense of how much they would likely earn with a particular major. Nowadays, we have large amounts of survey data to help guide our thinking. One valuable resource is PayScale’s Annual College Salary Report ( Using data from 1,566 colleges and universities, this survey ranks 835 majors and includes information on pay levels for graduates in each major in the first five years of their careers. While there are a lot of factors that play into what you will earn upon graduation, this data can help you get a sense of what to expect.

There are also a number of cost-of-living databases. One of the most interesting is MIT’s Living Wage calculator ( The Living Wage Calculator reflects a minimum cost of living for individual counties throughout the United States. This isn’t fancy living, but it probably reflects pretty well what a newly-minted college grad might expect to pay as she tries to get by. Using these income and expense estimates, we can start to calculate how much student debt is sustainable.

Let’s suppose you graduate with a bachelor’s degree in business management and take a job as an entry-level business analyst earning $48,000 per year. You’re excited. That’s probably more money than you’ve ever made before. But before you celebrate, you should run the numbers.

After withholding for state and federal income tax and deductions for social security and Medicare, your take-home pay will probably be around $3,325 a month. From that you will need to pay rent ($1,200), food ($200), car payment ($400), car insurance ($225), gasoline ($150) medical insurance ($200), going out with friends ($150) and various personal and miscellaneous items leaving you with around $600 per month left over before any student loan payments.

With the help of a financial calculator we can calculate the amount of debt that $600 of free cash flow can support. Given current interest rates on unsubsidized student loans of 6.08% and a ten-year repayment schedule, that $600 will cover the monthly payment on $53,849 of student loans.  But remember, this hypothetical budget does not include any savings for retirement. Nor does it allow you to build savings for other things like a rainy-day fund. A more realistic and responsible debt limit would be $27,000 which would mean a monthly payment of around $300.

I need to close with one final note of warning about debt. Given that we live in a very uncertain world, it is important to build a solid and resilient financial foundation. Debt works against that objective, especially when servicing the debt stretches your cash flow to its limits. In that situation, any slight stumble can become a personal financial disaster. That is why even those who expect to graduate in degrees with stronger earnings prospects would do well to minimize the amount of student debt they incur.



Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to