Putting Student Loans in Context at a individual level

I’m noticing a trend on Quora, where I answer questions on budgeting and paying off debt, of assuming that all student loan is inherently bad and you should avoid them. I don’t think that’s true for several reasons. But I also think that student loans need to be set in the context of other debts that may be in our lives.

Loans Can Be Useful: I’m not in favor of taking out loans across the board. But if you are pursing a degree in order to pursue a specific career path (say as a teacher, a nurse, an accountant, or an engineer as some examples.) In this case, the loans are setting you on a path of a career that will provide income far in excess of what you are paying out for student loans.

I don’t necessary think you should loan up for every degree though. While I love editing video, I never got a degree in Communications (where TV/Film was at my school) because I didn’t see it as likely that I’d be able to start a career there. I read about it on my own time, work on projects with friends, and treat that as a hobby in my life. That is enough for me. Research the career you’re thinking of and compare it’s earnings to see if you can expect an income in excess of your loans over a 5 to 10 year window. If so, the loans are a sensible way to fund your education.

The Amount of Loans Matters: For an average college student right out of high school, all student loans seem huge because even if they worked part-time while in school, they’ve never dealt with amounts of money this large. But not all loads of debt are created equal. I typically compare student loans by balance either to cars or houses. Remember, typical student loan loan repayment plans are structured for either 20 or 30 years. You certainly don’t have to hang on to them that long in most cases. (The exception may be at the $90,000 and above level.)

Relatively Small Loans ($50,000 and under)

For example, if you’re looking at $0 – $50,000 in debt, think of it as akin to buying a car. A basic compact car can coast around $20,000, a mid-size can reach around $30,000, and a luxury brand like BMW or Audi could easily be $40,000-$50,000.

Here’s why: Car loans, which many people have, are structured to be paid off in 5 to 7 years and people do that all the time. Here’s the breakdown of your payments on a few amounts of student loans in the $50k and under category, assuming the current federal interest rate of 6.8% on the loans:

Total Loan BalanceMonthly Payment (5 Year Payoff)Monthly Payment *7 Year Payoff)
$10,000$197.07$149.50
$20,000$394.14$299.90
$30,000$591.20$499.85
$40,000$788.28$599.80
$50,000$985.35$749.75
All calculations were made with the Student Loan Calculator at NerdWallet

It is possible to keep costs down to these levels if you’re smart about funding your studies as I talk about in this post. Also, don’t stress hugely if those amounts look daunting at the high end. You could extend these payments to 10 years, lower your monthly payments and you’d still have your loans paid back in a timely manner. An average 22-23 year old graduate could have these loans paid off by the time they are between age 27 and 30.

Relatively Large Loans ($60,000 and higher)

If you’re set on going to an expensive school and taking on a debt load from $60,000 to $100,000 for your undergrad, I’d urge to reconsider. School name recognition on degrees doesn’t matter nearly as much as you might think it does. Any decently rated public school would serve just as well in most cases. But if I can’t dissuade you, we can contextualize your loans by comparing them to mortgages.

Now, most plain-vanilla mortgages are set to pay off in either 15 or 30 years. We don’t want your loans hanging on that long or you’re paying a ton of interest, but it IS going to take you longer to pay off these loans than the $50k and less category could. In order to pay off the loans without destroying your budget, consider 10 years as the fastest you can manage and 15 years tops. For 22-23 year olds that would mean they would be paid by the time you are anywhere from age 30 to age 48. If those ages seem to high, consider going for a less expensive school.

Total Loan BalanceMonthly Payment (10 Year Payoff)Monthly Payment (15 Year Payoff)
$60,000$690.48$532.61
$70,000$805.96$621.38
$80,000$920.64$710.15
$90,000$1.035.72$798.92
$100,000$1150.80$887.68
All calculations were made with the Student Loan Calculator at NerdWallet

I extended the repayment in these cases because it is really hard to pay total balances like these in 5 to 7 years without a high income and tight budget. You could try it if you want to. But notice that in the extended payments for these loans, even up to a balance of $80,000, you’re monthly payoffs would be similar to those in the first table. And just like before, if these seem unachievable, then in your scenario a standard 20 year payment or extended 30 year repayment is something to look into.

Other Scenarios

If you want to text alternate payments I didn’t cover, use the calculator from NerdWallet that I linked in each table. For example, I can’t quite meet the 5 year goal for my $20k of loans remaining on my current budget. But I can manage to pay it off in just under 6 years, which is still very good in my book. And part way through that I leave school and my earnings will increase, so I can reevaluated my plan then. (We’re buying a house in about about 5.5 years, so that’s why I want them gone in that time frame.)

Last Words

As you can see, student loans don’t have to hang around forever. If you are considering them, use these guild lines to pay them off in a timely manner. In most cases, you certainly don’t have to just pay minimums on these loans. Paying them off faster does cost more a month, but it will free that money up faster in your life and save you money compare to a traditional repayment plan in terms of reducing the total interest you pay. Please see my posts on reducing college expenses and on paying off your debt in an Avalanche/Snowball plan if you’re trying to figure out the cost of college or figure out repayment.