Say the words "college debt" and most people cringe. If you're committed to beginning adult life on sound financial footing, you're likely to view college debt as a huge obstacle to personal financial freedom, a constant drag on earnings and just more stress in the financial planning process.
Consider this: Students graduating college in 2008 owed $23,200 on average, a sum that doesn't even take into account the potential debt incurred from graduate school.
As I discussed in my previous column, "College Cost and Value: The Balancing Act," we are all looking for the biggest bang for our buck when it comes to financing a college education. After all, it is one of the biggest purchases most people will ever make—but also one with the largest potential payoff. So why not look for the best value we can find in the college-related debt we incur?
There is no standard formula for determining the amount of debt a student should take on. However, there are some smart steps you can take to ensure that your personal debt level is manageable.
One Size Doesn't Have to Fit All
Most families envision college as a traditional four-year experience at a public or private institution. But with projected tuition and fees in 2027 of $332,800 for enrollment in a private four-year college and $87,200 for a public four-year college (assuming tuitions grows annually at 6%), alternatives to the four-year college path are becoming more attractive.
For many students, it's hard to imagine completing a four year college curriculum in less time. Between studying, socializing, extracurricular activities, and potentially working, students have their hands full. But what if taking on a slightly larger work load for the first 3.5 years meant graduating with thousands of dollars less in debt? Based on the fact that students who graduated from college in 2008 with loans had incurred an average debt of $23,200, students could save a substantial amount of money by graduating slightly ahead of schedule.
A New Take on Debt
People tend to focus on the "lump sum" of indebtedness on graduation. It's easy to forget that the debt is paid back in monthly sums, according to a student's unique borrowing circumstances—and the monthly sum might or might not manageable, depending on one's earning and living situation post-college.
Generally, I advocate not taking on a total debt load greater than one year's anticipated starting salary. But in practice, determining how much debt is realistic can be tricky.
First, you need to figure out your monthly repayment amount. Rates on student loans are steady, so it's a straightforward exercise to figure out the interest on a potential loan and determine how the total debt translates into future monthly payments.
But keep in mind—it's also critical to accurately estimate your other, future monthly costs, like rent, food, etc., in order to really know whether your total debt load will be manageable. And to do that, you have to envision every aspect of your desired post-graduate "lifestyle." For example, are you planning on buying a house and/or starting a family soon? Living in a more expensive urban locale? Immediately pursuing a graduate degree? If you're comfortable that you can handle your anticipated monthly loan payments while maintaining your likely lifestyle, then you're probably taking on a reasonable debt load.
Look at the Big Picture
Finally, when it comes to smart debt decisions, it's really helpful to consider your long-term educational and professional aspirations.
That can be hard—for many students and parents, often the last thing on their minds when perusing college options is their potential post-graduate education or career path. However, what if you're pretty sure you want to become a doctor, a lawyer, or get some other kind of advanced degree—one that could really boost your earning power?
If that's the case, it could make sense to concentrate the bulk of your borrowing on achieving the highest-quality post-graduate education you can, and try to be as cost efficient as possible in "buying" your undergraduate credential. The advantage of this tactic is that if your plans change—and you decide not to seek an advanced degree—there's a greater chance that your indebtedness and earnings power will be in sync.
Taking on some debt will always be a necessity for many college and graduate students. But there are ways to fit debt realistically into your life, both personally and professionally. Achieve that, and debt, instead of being a burden, can be part of your launching pad to a successful and satisfying life.