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##### Can You Afford That Student Loan?

Most parents want their children to achieve at least a four-year bachelor’s degree from college. Partly it’s emotional: “My kid graduated from Stanford. What about yours?” But the bigger driver is more commonly the fear that without a college degree, their son or daughter will simply be unable to compete for the higher-paying jobs of the future. Six years ago I wrote about an attempt to determine the lifetime return on investment (ROI) of a college education developed at PayScale.com (see Is A College Degree Still Worth It?). Unfortunately, the complexity of the analysis, compounded by the difficulty of collecting the necessary data, made the ROI estimates highly speculative. Not surprisingly, the website has since dropped the attempt.  However, data on college costs, as well as income estimates for different occupations, is more readily available today. While it may not be practical or even useful to try to determine the ROI of a particular degree at a particular college, it is certainly possible to determine how much money a student can afford to borrow based on the income expectations for the particular career he or she wishes to pursue.

Let’s take an example. Suppose your daughter is interested in becoming a software engineer and would like to attend MIT. We’ll use data from PayScale.com to figure out how much she can borrow. First, go to https://www.payscale.com/college-salary-report/majors-that-pay-you-back/bachelors.  Click on Major to sort the data. You’ll find software engineer as the degree with the 48th best earning potential. The site lists the median salary for software engineers holding a Bachelor’s degree as \$66,300 (as of this writing) during the first five years of their working lives, rising to \$104,300 for those who have been working for more than ten years. We’ll assume that for years 5-10 the median is the average of the two (\$85,300), making the average salary for the first ten years of your life to be \$66,300 + \$85,300 divided by 2, or \$75,800.

To answer the question ‘how much can she borrow,’ she first needs to decide how much of her income can be allocated to a student loan. Let’s assume that she can afford to spend no more than 10% of her income paying off the loan without seriously impacting her desired lifestyle. Next she has to decide how quickly she wants to eliminate the student debt.  Let’s suppose she plans to get married at age 30 (eight years after graduation) and would like to have paid off the student loan by the time her first child arrives at age 32, which is ten years after she started working. (This is outstandingly detailed life planning!)

Based on the above assumptions, the total student loan payments for the first ten years of her working life would amount to \$75,800 x 10% x 10 years or \$75,800. Note that this calculation does not take into account the compound interest that would be included in the payments (which for an unsubsidized Stafford loan is 6% as of this writing). Nor does it consider any salary increases she might receive based on inflation or merit. For simplification we will assume that they are both the same (i.e. will cancel each other out).

Next go to https://vanguard.wealthmsi.com/collcost.php#  to find out the yearly cost of an MIT education. First Click Look Up Cost. Then in the popup window click Out-of-state tuition and Include room and board. Finally enter the state (Massachusetts), and scroll down to MIT. The current annual cost is shown as \$62,662. Assuming college costs continue to grow at 6% annually, a four-year degree at MIT would cost \$62,662 + \$66,421 + \$70,407 + \$74,631 for a total of about \$274K. You can reduce this amount by any grants or monetary awards your daughter is expected to receive.

What this exercise tells you is that if your child wants to get a software engineering degree from MIT, and wants to pay off her student loans within ten years after she graduates using no more than 10% of her income, she can borrow no more than \$75K. That means you or someone will need to pay \$274K minus \$75K or \$199K out-of-pocket for her college education. If she would be willing to pay off the loans over a longer period of time, or pay more as a percentage of her income, she could borrow more. Her other alternatives would be (1) finding a less expensive school offering the same degree, and/or (2) going to a community college for two years before transferring to a four-year college offering the degree. Many parents find the latter to be a very viable option, especially given the excellent quality of the numerous local community colleges here in the Bay Area.

The spiraling growth in college costs over the last several decades is forcing parents and students to address cost more and more as the major factor in selecting a school. Rather than taking the approach of choosing the school and then loading up on as much debt as you can acquire, determining debt affordability first could be a more financially sound strategy.

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