Will Your Student Loans be a Burden?

31 Mar

 

Whether you’re an incoming freshman looking into financial aid or in the midst of senioritis ready to graduate from college, student loans have probably crossed your mind. Even if you know how much you will/ already do owe, it still ends up being an abstract figure in how it will impact your life.

student loan burden

A pretty simple rule of thumb to estimate your minimum monthly repayment without using a student loan calculator is to assume you’ll be repaying 1% of what you owe per month. That doesn’t sound like much, but that’s $100 every month for every $10,000 that you owe. So while the average 2016 graduate has $37,712 in debt that means they are paying about $377 every month to their loans.

And then there are people like me who borrowed a little more and are paying almost $550 for borrowing $48,600 ($54,800 thanks to interest).

If you’re not sure how much you’ve borrowed, you can check out the National Student Loan Database System (nslds.ed.gov) to double check how much in federal loans you’ve borrowed.

Even knowing what your repayment amount is doesn’t mean much unless you consider your future salary. A common problem here is that people overestimate their starting salary. Nearly half of 2015 grads thought they would earn $40,000 or more, but in reality only about ¼ of grads actually made it.

So if you’re earning a starting salary of approximately $35,000, your take home pay after taxes will be approximately $2,230 per month (depending quite a bit on your tax withholding and state you live in).

While there’s no hard rule about what a comfortable proportion of loan repayment is, we generally advise students that they are getting into a difficult territory if their monthly minimum repayment is over 20% of their take-home pay. So for the previous $35,000 salary that’s about $44,600 in debt according to this rough formula.

If you’ve ended up in a situation where your minimum amount due is a financial burden then you will want to explore the different repayment plans available to you. Just remember that the standard 10-year repayment plan that you are placed into automatically allows you to pay the least amount of interest and finish in the shortest time frame.

Additionally, if you seek out an income-based repayment plan with the hopes of earning public service loan forgiveness, keep in mind that it could be on the chopping block if politicians continue to see the program costs exceeding their original budget.

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