How Does Student Debt Compare to Potential Salary?

Keeping Debt Manageable

Yesterday I spoke to approximately 100 guidance counselors at Bentley College for a training session sponsored by the Massachusetts Educational Financing Authority. The purpose of the talk was to open the discussion about when guidance counselors need to counsel students that they are accepting too much debt.

To put the topic in perspective, I had to gather some information which I would like to share with you:

:: 51 percent of all the financial aid distributed to students is now in the form of loans (The College Board)

:: In 2003, the average debt of a graduating senior was $19,200, not including private or credit card debt. (Project on Student Debt)

:: From 1993 - 2003 the average debt for a graduating senior has risen 108%; for students graduating from public institutions, it has risen 116 percent (Project on Student Debt)

:: For students graduating from public institutions, 10 percent of those students have debt in excess of $32,994 and at private institutions, 10 percent have debt in excess of $40,000. (National Post-secondary Aid Study, NPSAS)

So I did a few calculations regarding how much the payment on these loans would be and the income necessary to support the payments. I based this on the 8 percent rule (see blog of 6/26/06) which holds that students should not have loan payments which exceed 8 percent of their monthly income.

If a student has "average" debt of $20,000, the monthly payment on a 10 year repayment schedule would be $230.16. The student would need to have a starting salary of $34,500 to keep the payment within 8 percent of income. This seems pretty reasonable; manageable for most students, and a good investment in their future. But for those students who do have $40,000 in debt, the monthly payment would be $460.32, which would require a starting salary of $70,000. Let's face it: for most students that level of income for a starting salary with a bachelor's degree is pretty unattainable.

The discussion was lively surrounding the topic of "how do we keep students from borrowing so much?"

I'd like to hear your thoughts.

Best, Duane

Posted by Duane Quinn on December 01, 2006 at 01:13 PM EST

Blog Author

Mike Ryan
Vice President of Borrower Services

Biography

Michael T. Ryan is Vice President of Borrower Services for American Student Assistance, a position he has held since joining ASA in February, 2003. Mr. Ryan heads ASA’s Borrower Services Division, which is responsible for all aspects of the management and delivery of service to borrowers in ASA’s education loan portfolio, including all default prevention and recovery efforts.

In his 20-plus year career in higher education financing, Mr. Ryan has held key management positions at the Massachusetts Educational Financing Authority (MEFA), and Key Education Resources (formerly Knight Tuition Payment Plans). As MEFA’s Associate Director for Programs and Operations, Mr. Ryan facilitated MEFA’s entry as a Federal Family Education Loan Program (FFELP) provider. He also played an instrumental role in the introduction of the U. Fund, (MEFA’s Section 529 College Investing Plan), managed MEFA’s U. Plan (Prepaid Tuition Program), and was responsible for the operation of MEFA’s loan programs.

While at Knight and Key, Mr. Ryan held progressively responsible management positions, from Account Manager to Senior Vice President.

Mr. Ryan is a graduate of Merrimack College.

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