Are Student Loans Worth It? A College Affordability Calculator

College generally leads to more pay and steadier employment. Just be sure to limit student debt and graduate.

Anna Helhoski, Teddy NykielSeptember 25, 2018
College Is Worth It If You Keep Debt in Check

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You probably wouldn’t buy a car — or even a vacuum cleaner — without comparing prices, reading reviews and asking yourself, “Is it worth it?”

College shouldn’t be any different.

Yet, it is. Students are told that college is an investment in their future but hear almost nothing about the risk involved. Inflated college sticker prices and incongruous financial aid packages make direct cost comparison difficult. Many students have no option but loans to fill the funding gap.

Those loans come with a monthly payment that’s due regardless of whether the risk pays off — whether you graduate or not, whether you get a better job or not.

So, is college worth it?

The answer is probably yes, from a financial perspective, if you can keep in mind two crucial tests: You have to graduate, and you must be able to afford the debt you take on.

Why college is worth it

Statistics generally show that earning a college degree leads to:

  • More pay: Earnings typically increase with higher levels of education. The median weekly earnings for workers with a high school diploma and no college was $712 in 2017, compared with $1,173 for those with a bachelor’s degree and $1,401 for those with a master’s degree, according to the Bureau of Labor Statistics.

  • Steadier employment: The unemployment rate decreases with higher levels of education, according to the BLS. The unemployment rate for people who didn’t attend any college was 4.6% in 2017, compared with 2.5% for bachelor’s degree holders.

  • Better benefits: College-educated workers are more likely to have employer-provided health insurance and retirement plans, according to a 2016 College Board report. For instance, 54% of full-time workers with a high school diploma had employer-provided health insurance in 2015, compared with 66% of bachelor’s degree holders and 70% of advanced degree holders.

Additionally, there are the less-tangible benefits of college, like lifelong friendships, an expanded worldview and professional connections.

Compared with high school graduates, bachelor’s degree holders are more likely to be happy, vote, volunteer and participate in their communities, according to a 2015 paper by the Lumina Foundation, an independent group that supports higher education access.

Completing college is crucial

Taking out student loans and not earning a diploma is like financing a car and leaving it parked in the lot; you’re not benefitting from what you’re paying for.

Without a degree, you’ll be less likely to reap the earnings and employment benefits of higher education. You’ll also be twice as likely to default on student debt compared with college graduates, according to data cited in a 2017 College Board report.

Not all college degrees are created equal — the school, degree program and major you choose matter.

For instance, many graduates of for-profit colleges have had problems finding gainful employment, according to a 2018 report by IBISWorld, a global market research firm.

There are also some cases in which a lower-level degree is worth more than a higher-level one. For example, the median earnings for workers with an associate degree in science, technology, engineering or math is $60,000, compared with $50,000 for workers with a bachelor of arts degree, according to a 2018 report by Georgetown University’s Center on Education and the Workforce.

Potential earnings shouldn’t be the only factor behind your choice of major — your interests and skills matter as much, if not more. But if you choose a lower-earning major, take on less debt to avoid being overburdened when it’s time to repay.

How much should I borrow for college?

Even if you graduate, get a job and increase your earnings, college won’t feel worth it if you’re swimming in more debt than you can afford.

To estimate what a manageable college debt load looks like for you, aim for student loan payments that don’t exceed 10% of projected after-tax monthly income your first year out of school.

Aim for payments that don’t exceed 10% of projected after-tax monthly income.

For example, someone earning $50,000 a year — roughly the average salary for new bachelor’s degree holders, according to the National Association of Colleges and Employers — shouldn’t be paying more than $279 a month toward student debt.

To stay under this threshold, they’d need to limit college loans to about $26,800 throughout their degree program.

This example assumes a monthly take-home pay of $2,792, accounting for about 33% of gross income going to federal and state taxes, and 401(k) contributions. It also assumes a 10-year repayment schedule and 4.53% interest rate, which is the 2018-19 federal student loan interest rate for undergraduate direct loans.

The 10%-of-after-tax-income rule of thumb returns a conservative estimate for borrowers who don’t expect their wages to increase dramatically. Students considering professions such as business analyst, attorney or registered nurse — who may need to borrow more to pursue advanced degrees, but whose eventual incomes could climb more quickly — may have to do more complex calculations.

Student loan affordability calculator

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