Get Smart About Student Debt

September 14, 2023

Three years ago, I wrote two articles for college students and their parents. The first encouraged students to be careful as they made decisions about their major; the second warned about the perils of student loans. I received zero complaints about my discussion of student debt, but I stirred up a hornets’ nest when I suggested that certain college majors made little economic sense—especially when paid for with large amounts of student debt. This week, my objective is to once again urge caution. It’s time to get smart about your student loans.

While a college education can enhance your earning capacity, too much student debt stunts economic growth. The Federal Reserve reports outstanding student loans topping $1.76 trillion in the second quarter of 2023—up more than 60 percent from a decade ago. The burden of student loans has become a major national issue. If you aren’t careful, it could become a major issue for you, too.

If you plan to take on student loans, first figure out how much you can prudently borrow. You need to think about your future, including how much you expect to earn and what it will cost to live after graduation.

Years ago, college students relied on anecdotal evidence to understand how much they would earn with a given major. These days, we have large amounts of survey data to guide our thinking. One valuable resource is PayScale.com’s Annual College Salary Report (payscale.com/college-salary-report). Using data from 1,539 colleges and universities, this survey describes pay levels for graduates in hundreds of majors over the first five years of their careers. While many factors determine what you will earn upon graduation, this data can give you a sense of what to expect.

Cost-of-living databases are also useful. One of the most striking is MIT’s Living Wage Calculator (https://livingwage.mit.edu/). This tool shows what you need to earn to get by (i.e., a “living wage”) in every county in the United States. That amount isn’t fancy living, but it’ll give you a baseline to work with.

Using these financial estimates, we can begin to calculate how much student debt is sustainable for you. Suppose you graduate with a bachelor’s degree in business management, and you get hired as an entry-level business analyst earning $51,000 per year. You’re excited. That’s 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 $3,400 a month. You will need to budget for rent ($1,500), food ($387), transportation ($443), medical insurance ($260), going out with friends, and other personal and miscellaneous items ($380), leaving you around $440 per month before your student loan payments.

With the help of a financial calculator, we can estimate the amount of debt $600 of free cash flow can support. Given that current interest rates on unsubsidized Federal student loans for undergraduates hover at 5.5% over a ten-year repayment schedule, $600 will cover monthly payments on up to $40,543 of student loans. But remember—this hypothetical budget doesn’t include savings for retirement. Nor does it account for the impact of life emergencies. A more responsible debt limit would be $27,600, with an estimated monthly payment of about $300.

Since we live in a very uncertain world, it’s important to build atop a solid financial foundation. Debt works against that objective, especially when monthly payments stretch your cash flow to its limits. Don’t put yourself in a position where a slight stumble becomes a financial disaster. Avoid debt wherever possible, and when it is necessary, keep it well-within prudent limits.


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Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey.   He welcomes questions 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 smerrell@montereypw.com.