I subscribe to several Twitter feeds. One is on higher education. A lot of posts with the #HigherEd tag are by institutions, but a fair number are by college students. Following their tweets is a good way for me to see what is on people’s minds and understand the challenges that college students face. It will surprise none of you that student loans and lending policies are a hot topic.
Interest rates on unsubsidized student Stafford loans are high. Student loans are for ten years and currently carry a 6.8% rate. To put this into a comparative context, a twenty-year fixed rate home mortgage is at about 4%, a five-year auto loan at about 3.75%. And unlike your home or car loan, you can’t walk away from your student loan. Discharging a student loan in bankruptcy is extremely hard in part because the lender can’t repossess your education like it can your car or house. So it is important that you take a good hard look at the numbers when making the decision to finance your education through loans.
A little data can go a long way toward bringing some reality into your decision-making process. Table 1 reports median starting salaries and earnings at mid-career for people with different undergraduate majors. I want you to note two things: (1) there are big differences among majors. The typical chemical engineer earns more than twice as much after graduation than the typical child/family studies major; and (2) these differences get larger by the middle of careers because majors in the top part of the table enjoy much greater salary growth than majors in the bottom part of the table.
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Now, there is a fair bit of variance around the median numbers reported in Table 1. Some child and family studies majors, perhaps those that go to ivy league schools, will earn more than the typical graduate with the same degree. And, some chemical engineers, perhaps those who go to really bad schools will earn much less than the typical graduate. But, I seriously doubt that those ivy league family studies majors are going to earn anywhere near what the typical chemical engineer can expect upon graduation.
The bottom line is this: Getting a college degree is about much more than just dollars and cents, but some majors offer way bigger financial returns than others. If you believe that your future job will be the sole source of your ability to pay back your students loans (not your parents or a rich spouse), you want to do a calculation similar to this and ask yourself just how much of your expected income over the next ten years are you willing to devote to loan repayment. Some loan reform is coming that should lower rates, but keep in mind that experts suggest that no more than 10 to 15% of your starting salary should go to loan repayment. Someday soon, the government may do this for you by putting debt limits on student loans based on your expected earnings. Until then, it is up to you to determine just how much debt you are willing to take on to get a particular degree.