Student Loan Debt
Student loans are one of the top ways that students pay for college. It’s become an unpleasant fact in the American higher education system, but most borrowers don’t understand the risks. Student loans can be a fantastic way to fund a higher education, but they are also one of the worst types of debt for borrowers.
If you’re planning on borrowing for college (or plan on helping your student borrow for college), you need to really understand these key fundamentals of student loan debt and run the calculation below. This will help you make sure that student loans are good debt for you, and don’t spiral into a financial nightmare for your student.
How Student Loans Become Bad Debt
Remember a student loan is a mortgage on your future earnings. When you buy a house, the collateral for the loan is the house. When you buy a car, the loan is car. If you don’t repay these loans, the lender simply takes the house or car. But when you borrow with student loans, the collateral is your future earnings. If you don’t repay your student loans, the government will garnish your future earnings.
The bottom line is, if you don’t repay your student loan debt, the government will take your earnings and repay the debt for you.
The only way to prevent this situation is to avoid taking on too many student loans from the start. If the starting salary isn’t going to be high enough, it’s simply not worth pursuing the degree to go into debt. While that may hurt when you’re 18, it will save you from decades of financial pain later in life.
The Key Calculation Every Student Loan Borrower Needs to Do
The key to keeping your student loans as good debt, and not letting them spiral into unmanageable debt, is this simple equation: The Student Loan to Salary Ratio.
Here’s how it works – you want to look at the amount you must borrow to achieve a given starting salary. You should take the initial starting salary and divide by the amount you would have to borrow to pay for that degree from your target school.