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How Much Should My Child Borrow for College?

What's a "Reasonable" Student Loan Amount?

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Mixed race mother and daughter using laptop together
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You’ve heard the horror stories: Joe the Student graduates with $50,000 in debt. He can’t find a job, and winds up waiting tables at a restaurant while making $400 monthly payments on his student loans.

Sally the Student leaves State University with $60,000 in debt. She also can’t find a job, and files for bankruptcy – only to discover that student loans can’t be discharged in bankruptcy. These scary stories have you frightened for your own children’s future. What can you do?

Step One: Relax.

The horror stories you hear on TV are the tales of outliers. One-third of students graduate from four-year colleges and universities without any student debt at all, according to 2008 statistics (the most recent year for which there is complete data) cited by The Project on Student Debt, a nonprofit advocacy group.

The remaining 67 percent of seniors who do graduate with debt carry an average debt burden of $23,200. That’s a far, far cry from the $50,000+ horror stories you hear on the news.

Also, don’t forget: student loans tend to be low-interest loans with tax-deductible interest. That’s one of the best loan structures you can hope to get.

Step Two: Assess.

Before you send Junior off to college, take a moment to consider what his earning potential will be when he graduates.

The average college grad earns $1 million more than a non-college grad over the span of his or her lifetime, but that data is so broad that it’s arguably useless. It lumps electrical engineering majors into the same category as sociology majors. It also lumps Harvard graduates into the same category as all other graduates.

It's more important to ask yourself how much money Junior will earn based on his major and his choice of college. In the next two sections, let’s take a look at both.

What’s His Major?

The average Class of 2009 college graduate with a degree in engineering earns an entry-level salary of $53,400, according to Forbes Magazine.

That’s still pretty broad data – there’s certainly discrepancy between, say, civil engineers and biomedical engineers – but at this stage, it’s hard to predict which branch of engineering Junior wants to major in. It’s easier to predict that he’ll enroll in the College of Engineering.

If your child wants to major in something else – specifically something that’s not math- or tech- heavy – weigh what the child’s potential starting salary will be. College graduates working in retail management get starting salaries of $27,900, Forbes Magazine reported.

What About College Choice?

The reputation of a particular college or university can also weigh heavily on a student’s likelihood of finding a job within their field and their starting salary. A graduate from Florida State University will enjoy a median starting salary of $38,500, according to the FSU website, while a student graduating from the University of Illinois at Urbana - Champaign will enjoy a median starting salary of $51,500.

Remember that data Forbes quoted about engineering majors getting starting salaries of $53,400? That’s a broad nationwide average. A student graduating from a top-tier school like M.I.T. will get a starting salary of $67,270 – a full $14,000 more.

How Much Should You Borrow?

Consider the "starting salary" rule of thumb: borrow no more than your expected starting salary.

According to this rule of thumb, you can justify a loan of up to $67,270 if your child is going to study engineering at M.I.T. If Junior is pursuing a liberal arts degree at Florida State, though, you might consider limiting the loan to $38,500.

This is just a rule of thumb, not a rigid law. The guiding principle behind this concept is that the graduate can repay their student loan in roughly 10 years, if they apply 10 percent of their gross starting salary to the loan repayment.

Over time, the graduate will likely get pay increases that will allow them to accelerate their student loan repayments. But new expenses like weddings and babies might demand the bulk of their raise.

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