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Smart Student Loans

It’s a bit ironic that higher education sometimes results in uneducated and unwise decisions around debt. There has been media outcry at the level of student debt in our country. It’s true that the aggregate outstanding amount of student debt is at an all time high. But part of the reason for that is positive. More people are pursuing education beyond high school through colleges, universities, and trade schools. And many of these people are using debt to pursue educations that they believe will enhance their earning capacity. The average student debt for each individual isn’t substantially higher, after inflation adjustment, than historical levels. But some individuals do have high levels of debt.

The first thing to consider when borrowing for higher education is the type of loan. There are subsidized loans, unsubsidized loans, and private loans. Subsidized loans are available to full time students with income below a level specified by the government program offering these loans. Once a student is age 24 or older, the student’s income, not the parents’ is the income taken into consideration for these loans. Subsidized loans don’t start to accrue interest until the student is no longer a full time student. Unsubsidized loans do accrue interest while the student is in school. Both subsidized and unsubsidized loans must be taken in the year offered (you can’t wait until your last year and take all the loans you’ve been offered in these categories) and begin payments after a student is no longer in school full time. Private loans are generally at higher rates and some require payments to start immediately after the loan is received. Based on terms, it’s optimal to have subsidized loans be the first to pursue, with unsubsidized and private loans taken if additional funds are needed.

In terms of how much debt a student can afford, a good rule of thumb is to have all loan balances at the time of graduation be no more than the annual salary in the chosen career. So someone with a medical degree might be able to comfortably pay more in student debt after graduation than someone with a degree in education. That’s not a value judgement on the careers, but it does square with the earning power of each degree.

Many people believe they are better off taking longer to finish a degree than borrowing and finishing sooner. That’s not necessarily the case. If debt is kept at reasonable levels, borrowing at a reasonable level, graduating sooner, and having more high earning years in a career might be a better payoff than taking longer to get to those higher earning years.

 The Department of Labor data continue to show that average earnings are higher for greater levels of education. Pursuing an education that will allow you to be in a career you love – even if you borrow to do so – may be a great investment in your financial future as well as your happiness.

-Linda Leitz