You can know if you're headed for trouble before you borrow the money!
Does Your Student Loan Make Sense?
by Rick Kahler
Tuition Free Colleges
Finding Weird Scholarships
Things to Know Before You Take Out a Student Loan
How do you know when the cost of a college education is really worth it? A lot of factors (both financial and emotional) go into making that decision. Weighing the pros and cons can be daunting.
Let's consider a couple of examples that will help conceptualize the process of determining if a college education makes financial sense.
First, here are some numbers for traditional students. The cost of an average four-year education at Yale is around $240,000, and the average starting salary for its graduates is $55,000. The monthly payment on a student loan for that amount would be $2,420 or $29,159 a year. That equals 53% of the starting salary. There are a lot of other variables to consider, like potential scholarships that would lower the tuition or lowering the loan payment by stretching out the amortization period (which actually increases the overall cost). But given these facts, the answer to whether this education makes financial sense is a no-brainer. No, find another school.
At the South Dakota School of Mines, by contrast, the cost of an average four-year education is around $65,000 and the average starting salary is $68,000. The monthly payment on a student loan for that amount would be $648, or $7,897 a year. That equals 12% of the starting salary. The cost of this education makes complete sense.
For traditional students, my personal rule of thumb is don't pay more than one and a half times the average starting salary of a job for the education to obtain it.
For non-traditional students who are looking to switch careers, the calculation is a little more involved. You must weigh the salary you earn in your current career with the cost and net increase in the career you are considering.
Recently a reader emailed me this question: "I have a bachelor's degree in my chosen career and am unable to find a full-time, benefitted, permanent job. When is it no longer a good financial decision to not go back to college? I can pick up a degree in a different field for $8,000. If I am 12-13 years from retirement, is it worth it?"
The average salary for a job in her career field is $20 an hour or $42,000 a year. The problem is that she has not been able to find employment in her career field. She has only been able to find temporary jobs with earnings of $9.77 to $12.75 per hour.
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So far, her four-year degree has netted her around $12,500 a year. Her research shows that if she went back to school for two years, she could switch to a career field more in demand in her area and earn $45,000 a year. That's $32,500 more per year. If she invests two years and $8,000 in education and then works in her new career for 10 years, she can earn an additional $325,000 before retirement.
If she were to borrow the funds needed for her education and repay the loan at 4% for 10 years, her monthly payment would be $81 or $972 a year. That equals about 2% of her salary. Given these facts, going back to school makes clear financial sense.
Of course, financial factors are not the only ones to consider in deciding whether to invest in education. Looking at the numbers is essential, but it's equally important to find a career field that suits your talents and interests. It makes no sense to spend time and money preparing for a career you don't want. The most rewarding college investment is one that provides worthwhile returns in emotional satisfaction as well as financial success.
Take the Next Step:
- Educate yourself about student loans now so you avoid a debt problem later.
- If you have already borrowed, make sure you create a plan for paying off your student loans.
- With approximately 69% of students leaving school in debt, you don't want to miss 5 ways to save on student loans.
- Stop struggling to get ahead financially. Subscribe to our free weekly Surviving Tough Times newsletter aimed at helping you 'live better...for less'. Each issue features great ways to help you stretch your dollars and make the most of your resources. Subscribers get a copy of Are You Heading for Debt Trouble? A Simple Checklist And What You Can Do About It for FREE!
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