New Rules for College Loans: Matching a Career to Debt Repayment

by Ken O'Connor

The reason most students attend college is to secure a job after graduation. The job that college graduates are searching for is one that can help them afford to take care of themselves and allow them to repay any student loans they took out. However, many students that have graduated in the past few years find themselves working but unable to earn enough income to pay back their school debts easily. What is a student entering college now to do?

Before starting college, a student needs to account for what career path they envision after they graduate. If they plan to take out student loans to attend college, they must be prepared for repayment.

The amount of debt used to complete a degree should relate to a minimum expected income after graduation.

It is critical for students to consider this because going heavily into debt to achieve an education without job prospects does not add up. Using student loans of $80,000, $90,000, or $100,000 toward an undergraduate degree is a major financial commitment that requires dedicated planning and preparation.

Quite simply, it is a huge amount of money, and will force a student to push back other big-ticket purchases like a house or car if they cannot pay student loans back quickly. The following tips can help a prospective college student figure this out.

1. What kind of career do you want? Do you love to work with children and want to be a teacher? Are you interested in chemical engineering? Do you have a passion for film production? Is being a chef a dream occupation for you? These are all great career options that offer a range of salaries. You first need to be aware of what kind of income potential there is for the field you want to enter.

   Take a look at the average salaries associated with these careers online at Payscale.com or Salary.com. Keep in mind that these are average salaries; you could be making more or less. But at least you have an idea of what is out there.

2. What school can help you reach that career goal? Whatever your career goals are, there is a college that can help you achieve them. There are a variety of schools that offer education, skills, development, and support to get you going in the right direction. Figure out which schools can offer you the best education for your career goals.

3. Compare costs: When comparing costs for college, you will want to consider financial aid eligibility and how much in loans you would have to take out. Do this by applying for admission to schools you are interested in and comparing the financial aid offered at each school. Then you will know how much in student loans you need to pay the rest of the bill. Multiply that by 4 or 5 years to estimate your total debt when you finish school.

4. Compare total debt to income prospects: Use a loan repayment calculator (check out FinAid.org for a student loan calculator) to figure out what your loan will cost you. The rule of thumb is that your student loan debt should not exceed your expected first year income. Financial planners recommend that monthly payments toward debt should be
   

   Don't let debt crush you.

   no more than 8% to 10% of income in a year. You will be able to make a better decision by considering both your career goals and debt needed for school.

Example A:

A career in special education has an average starting salary of about $31,000. If a school needs you to go $60,000 into debt to complete the degree, you would need to make payments of about $690 a month every month for the next ten years to pay it back, costing about $23,000 in interest alone. A $31,000 salary equates to about $1,940 in net earnings each month after taxes. A $690 payment would account for about 36% of monthly earnings, an enormous figure leaving only $1,250 each month to manage ALL other living expenses. In this case, the student should find a way to pay for this school through grants, scholarships, or cash payments, or they should consider attending a different school that requires less loans.

Example B:

A career in biotechnology has an average starting salary of about $47,500. If you use about $20,000 in student loans to complete a degree for that, you would have a monthly payment of about $230 every month for the next 10 years. A yearly income of $47,500 would produce a net monthly paycheck of about $2,900. Debt payments would be a manageable 8% of net income and would cost about $7,600 in interest to repay. This would be a reasonable school choice based on career goals and debt used.

Example C:

A career in petroleum engineering has an average starting salary of about $93,000. If it cost about $75,000 in student loans, there would be a monthly payment of about $863 for the next 10 years. After tax, monthly income of $93,000 is about $5,400. In this case, the monthly debt payment would be about 15% of income. However, there would still be about $4,500 each month available to handle living expenses. This appears to be a reasonable trade-off, although careful financial planning would be beneficial. In this case, the student should make extra payments to the loan to eliminate debt quickly.

Lesson Learned: Students must recognize that using debt for higher education comes with the responsibility of repayment. Students should avoid situations where they are taking excessive debt to go to school without any real career options apparent. If a student is having a hard time figuring out what to do for a career, then they should avoid debt as much as possible.

The student should attend a community college his or her first year to allow some time to figure out some goals. Community colleges are substantially less expensive than name-brand universities and will not require lots of student loans to attend. When the student does figure out what he or she wants, the student can transfer to a school that can offer a better opportunity. This way, students do not waste money at expensive schools trying to "find themselves." By following these steps, students can be well-prepared to handle loan repayment when they start a career.

Ken O'Connor is a financial aid expert and the director of student advocacy at cuStudentLoans.org. Learn more about credit union private student loans and college planning by visiting his blog.

Published March 21, 2011

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