Consumers have hit a new milestone: Student loans now exceed credit card debt.
Student debt reached nearly $830 billion in June, surpassing credit card and other revolving debt for the first time by more than $3 billion, according to The Wall Street Journal, which recently reported this troubling statistic. This spurred FinAid.org to launch a student debt clock that shows borrowers slipping deeper in the hole, by $2,854 per second.
Consumers have been paying down card debt in the past two years, while student borrowing has been rising. Nearly two-thirds of students at public universities take out loans, and borrowing is even more widespread at private schools. The average debt for graduating seniors rose to $23,200 in 2008, a 24 percent increase in four years, the most recent figures from the advocacy group Project on Student Debt shows.
So how much debt should you assume for a college education? If you're a high school senior weighing schools to attend next fall — or the parent of such a student — you need to ask yourself that question.
College is an investment in your future, and many employers require a degree just to apply for a job. But you don't want to select a school that puts you so far in the red that you wind up delaying a home purchase, marriage or children because of loans.
"Students pick schools and worry about paying for it later. Those are the kids that get in trouble and get in over their head," says Kalman Chany, author of "Paying for College Without Going Broke."
With the mounting student debt load, some financial aid experts say they are encountering more families who are wary of piling on loans these days and are even saving more for college.
They aren't the only ones worried about student debt. The government is concerned that for-profit career colleges are encouraging students to borrow heavily from the federal loan program but don't provide the necessary training so those students can land jobs to repay that debt.
The Department of Education has proposed rules that could cut or eliminate federal loans for career education programs that fail to prepare students for "gainful employment." Schools would be graded on loan repayment rates and the amount of debt graduates carry compared to their income. For-profit schools oppose this.
Mark Kantrowitz, the publisher of FinAid, who is considered a leading authority on student aid, says he would like similar standards for all colleges to protect students from overextending themselves.
Alys Summerton of Baltimore has been trying to dig out from under student loans for years. Grants and scholarships kept her debt from undergraduate and graduate studies manageable. "Law school was what tipped me over the edge," says the 41-year-old, who took out federal and sizable private loans to attend American University, from which she graduated in 1996.
Her loan payments, which she describes as "a house mortgage on my brain," eat up half her take-home pay as a government public interest lawyer. (The federal government offers a loan forgiveness program for public service workers, but it's not available for private loans.)
Summerton makes a good income, but nowhere near the six figures she could earn in the corporate world. And though she loves her job, her mountain of debt — as well as a 10-year-old car with 250,000 miles — make her question whether she should have gone to law school. She wishes she better understood the consequences of debt before she signed up for her first loan.
"When I grew up, we never talked about money," she says. "I was totally unprepared."
So how much debt should a student take on? There isn't a one-size-fits-all answer, but consider:
Income after college A student's expected starting salary after graduation should be a factor, but a survey last year by student loan giant Sallie Mae found that the majority of families — 58 percent — didn't take this into account when borrowing.
Many teens aren't sure what career path they will take, but they can use average starting salaries for grads to get a ballpark figure, says Mike Schenk, vice president of economics and statistics for the Credit Union National Association. The typical starting salary for 2010 graduates with a bachelor's degree dipped slightly to $48,288 from a year earlier, according to the National Association of Colleges and Employers.
You can contact the college's placement office to learn what jobs new grads are finding and the pay, Schenk says. Or check the Bureau of Labor Statistics' Occupational Outlook Handbook online for details of specific jobs.
The most recent data, for example, shows there were 61,600 reporters in 2008, and that number is expected to shrink 8 percent by 2018. The median reporter salary: $34,850. Gerontology aides, with a median pay of $27,280, are expected to grow by 23 percent, to 431,500, over that same period.
Debt-to-Income Once you have an idea of starting salary, calculate how much debt you can comfortably manage on that pay. Doctors might easily handle a six-figure debt that would overwhelm a reporter or gerontology aide.
Kantrowitz suggests that you never borrow more than your first year's salary.
Sallie Mae says borrowers should have no problem juggling loan debt that's 10 percent or less of income. Debt up to 19 percent of income can be manageable if you don't have other high expenses, such as an auto loan. For higher debt levels, you would have trouble meeting payments and might have to consider a less expensive school.
Investigate schools "A stock might be good at $40 a share, but at $60 it's not a good investment anymore. The same is true with college," Chany says. In other words, the priciest school might not be the best investment, at least for you and your area of study. When comparing schools, talk to people who graduated a few years earlier and ask them whether the college was worth the price, Chany says.
No-loan schools Not all schools require you borrow up to your neck. Dozens, including endowment-rich Harvard University and the University of Maryland, College Park, pledge to use grants-in-aid packages to reduce or eliminate loans for middle-income families. At Harvard, for example, grants and work study replace loans for families with income of up to $60,000.
Find a list of these college aid programs at projectonstudentdebt.org.
Get financial advice upfront Schools provide financial counseling to students before they get a federal loan and before they graduate. Summerton also suggests that parents treat their child to a visit with a financial adviser who can explain money matters, including alternatives to loans for school.
"That could be a wonderful investment," she says.