Business & Real Estate

How to determine the actual affordability of student loans

A four-year bachelor’s degree is commonly considered the minimum entry point for the higher-paying jobs of the future. But if you are going to borrow money to complete one, you can and should determine in advance how much you can afford to borrow based on the career you wish to pursue.

Suppose you are interested in becoming a software engineer. You can use data from PayScale.com to figure out how much you can borrow. Visit payscale.com/college-salary-report/majors-that-pay-you-back/bachelors and click “Major” to sort the data. Software engineer is the degree with the 48th best earning potential.

The site lists the median salary for software engineers holding a bachelor’s degree as $66,300 during the first five years of their working lives (as of this writing), rising to $104,300 for those who have been working in the field more than 10 years. We’ll assume that for years five through 10, the median is the average of the two ($85,300), making the average salary for your first 10 years as a software engineer $66,300 + $85,300 divided by 2, or $75,800.

How much can you borrow?

To figure out how much can you borrow, two questions must be answered.

The first is the amount of your working income to be allocated to paying off your student loan. Let’s assume you can afford to allocate no more than 10 percent of your income to the loan without seriously impacting your desired lifestyle.

Second, you have to decide how quickly you want to eliminate the student debt. Suppose you plan to get married at age 30 (eight years after graduation) and would like to pay off the student loan by the time your first child arrives at age 32, 10 years after you started working. (This is outstandingly detailed life planning!)

Based on the above assumptions, the total student loan payments for the first 10 years of your working life would amount to $75,800 x 10 percent x 10 years, or $75,800. Note that this calculation does not take into account the compound interest that would be included in the payments (which for an unsubsidized Stafford loan is 6 percent as of this writing). Nor does it consider any salary increases you might receive based on inflation or merit. For simplification, we will assume that these will all cancel each other out.

Next, choose your college and find out its four-year cost. For this example, let’s select MIT. Visit vanguard.wealthmsi.com/collcost.php# and click “Look Up Cost.” Then in the popup window, click “Out-of-state tuition” and “Include room and board.” Finally, enter the state (Massachusetts), and scroll down until you find MIT. The current annual cost is shown as $62,662.

Assuming college costs continue to grow at 6 percent annually, a four-year degree at MIT would cost $62,662 + $66,421 + $70,407 + $74,631, for a total of approximately $274,000.

This amount may be reduced by grants or other monetary awards provided by the school.

In short, if you want to get a software engineering degree from MIT, and want to pay off your student loans within 10 years after you graduate using no more than 10 percent of your income, you can borrow no more than $75,000. That means you (or your parents) will need to pay $274,000 - $75,000, or nearly $200,000 out-of-pocket for your college education. If you’d be willing to pay off the loans over a longer period of time, or pay more as a percentage of your income, you could borrow more.

Other alternatives: (1) finding a less-expensive school offering the same degree, and/or (2) attending a community college for two years before transferring to a four-year university offering the degree. Many people find the latter to be a very viable option, especially given the excellent quality of the numerous community colleges here in the Bay Area.

The spiraling growth in college costs over the last several decades is forcing parents and students to address cost more and more as the major factor in selecting a school. Rather than taking the approach of choosing the school and then loading up on as much debt as you can acquire, determining debt affordability first could be a more financially sound strategy.

Los Altos resident Artie Green is a Certified Financial Planner and principal at Cognizant Wealth Advisors. For more information, email This email address is being protected from spambots. You need JavaScript enabled to view it. or visit cognizantwealth.com.

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