This post is part of an ongoing series called “Deconstructing Financial Rules Of Thumb,” where I break down generally accepted financial principles and give you my opinion if they are worth following.
If you know me, you know that I’m pretty critical of the way the current educational system is set up, especially higher ed.
Students are graduating with record sums of student loans, and the figures are getting worse every year. What’s worse, many recent graduates are having a hard time finding good-paying jobs.
In essence, college students are being forced to pay more and more for an education that is returning less and less. Not a good dynamic.
Simply getting your college degree is no longer the “sure path” to a better life that it used to be.
This doesn’t mean that you shouldn’t attend college. For many, college is still the smart route to take. But it does mean that you should be careful about how much you decide to take out in student loans to fund your education.
With the rising cost of college, it’s very difficult to get a degree without taking out some amount of student loans.
But where do you draw the line? How much is too much?
One rule you’ll see around the world of personal finance is that you should limit the amount of student loans to your first job’s expected salary.
So, let’s dive into the advantages and disadvantages, and I’ll give you my take on it.
The main advantage of this rule is that it gives you a framework to limit the amount of debt you’re getting yourself into.
As a student is entering college they aren’t thinking about how high the monthly payment on their student loans will be after they graduate. (They should be. Their future self will thank them.) So, having predetermined limits will help avoid getting themselves into too much trouble.
Another advantage is that this rule adapts the amount based on the earning expectations of each career path.
A teacher would have a difficult time paying off the amount of loans medical students have, so it makes no sense for them to take out similar loan amounts.
I actually don’t see many disadvantages to this rule.
Sure, it might not be a perfect calculation, but there aren’t many downsides to following it. Especially if we compare it to the amount of thought that typically goes into limiting student loans – which is none!
The main limitation I see in this rule is if you are entering a field where salaries grow quickly after your first couple years.
Maybe you are starting off as an entry-level worker at a tech company, but the typical career and salary trajectory quickly increases. In this case, it could make sense to go beyond this rule’s limitations, if necessary.
This could mean either going to a community college your first couple years, or even working nights and weekends to pay out-of-pocket for as much of your educational costs as possible.
Leaving college with a mountain of debt is a quick way to limit your options, and lock yourself into a career you might not end up enjoying.
If you aren’t sure how much debt is safe, this rule is a good place to start.
No matter what you choose to do, if you have a child entering college, make sure you set up a game-plan for how much you’re willing to take out in student loans. Their future depends on it.