How much should you be willing to go into student debt?
A discussion about student debt and how majors can affect how much you’ll owe… (or won’t owe) after you graduate school.
Ideally, a student would pay the expense of college tuition and living expenses with accumulated savings, scholarships, grants and/or earned income; however, these means are not always enough to last the duration of a four to five year degree program. Furthermore, many majors offer a substantially higher return for a master’s level or doctoral degree, which almost certainly requires the use of debt.
The amount of student loan debt that is reasonable depends on the return on investment. A student may be willing to go into debt to increase earning power above what can be earned without the degree. The return on the debt is calculated by dividing the debt into the difference between the starting salary with the degree and the salary without the degree which is at least the minimum wage of $15,000 per year on a full-time basis.
For instance, let suppose a student would earn $20,000 without the degree but $45,000 with a degree that costs $50,000 to attain. The return on the investment would be 50% [($45,000-$20,000)/$50,000]. If that same student were to pay $100,000 to earn the same degree, the return on investment would only be 25% [($45,000-$20,000)/$100,000]. If the return on investment is 25%, it would take at least 4 years to pay off the loan with no improvement in lifestyle.
The higher the return on investment the less sacrifice and discipline is required to pay off the loan. Although many lenders allow students up to twenty-five (25) year to pay off student loans, it can begin to feel oppressive to have a loan outstanding for such a long term. By striving to keep the return on investment above 20%, the student can plan to payoff the loan early and enjoy some material rewards in the meantime.
In 2012, the highest paying majors are expected to be engineering, most math and science majors, economics, finance, and international business which pay starting salaries in excess of $45,000 per year according to payscale.com. Engineers and pharmaceutical majors can expect to earn more that $65,000 per year. On the other end of the spectrum, the lowest paying majors include psychology, visual and performing arts, studio arts, communications, social work, theology and early childhood education. Time.com posted that the starting salaries are low and the average pay hovers around $40,000 per year.