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Thought-Provoking Thursday: The College Debt Equation

XSmallWe’ve long cited a rule of thumb, on this blog and elsewhere, about the amount of money you should borrow for college. It comes from Mark Kantrowitz, the publisher of Edvisors, and it is this: Don’t borrow more for college than you expect to earn in your first year out of school.

The trouble with this rule is that it can be hard to do the math. How do you know what your future salary will be? Many students enter college unsure of their major, let alone their career path. But making an educated decision about where you go to school — which largely determines how much debt you’ll be taking on — means making some assumptions and running through a few scenarios.

Luckily, Junior Achievement USA and Pricewaterhouse Coopers have partnered to develop a (free) app that can help you run the calculations. It’s call JA Build Your Future, and using average cost of college figures from The College Board, and salary information from the Bureau of Labor statistics, it can tell you how your future plans stack up.

Here’s how it works, says Stephanie Bell, the director marketing and media relations at Junior Achievement USA: You start by entering your career, using a drop-down menu of many options. The app will tell you the median salary of that career, as well as the educational requirements and the potential for growth. Once you add your career to the calculator, you can select the level of education you plan to complete, where you plan to complete it — in state or out, public or private — and whether you want to include room and board. You then include payment options, including how much your parents will contribute, any amount you might receive from scholarships and grants, your own wages that you plan to contribute, and student loans. You can ask the calculator to auto-adjust student loans based on the other figures.PWC app image

What you find, at the end of the exercise, is what percentage of your future monthly salary could end up going to student loans. The calculator will then evaluate the information you plugged in and return an ROI (return on investment) score of between one and five.

In the example I ran, in which I was planning to be a public relations specialist (which, according to JA Build Your Future, has a median salary of $57,550), if I were to attend a public, in-state college for a bachelor’s degree, my four-year total costs, including room and board, would be $71,440. With a few contributions from my parents and scholarships, I could bring my borrowing down to around $10,000 per year, making my student loan payments about 9% of my future monthly salary. The calculator gave my hypothetical scenario a ROI score of four, the second highest. A one would mean my eventual student loan payments would take up 21% or more of my future salary; two is equal to 16 to 20%; three is 11 to 15%; four is 6 to 10% and five — the best possible outcome — means the app predicts your student loan payments will take up between 0 and 5% of your future monthly salary.

Bell suggests using the calculator early — once your student is a high school senior, it’s largely too late. “When you’re having conversations about what your kids want to do when they grow up, they can have this information at their fingertips and that will help them make decisions as they progress through middle and high school.” Should you encourage your kids to give up a life-long dream if the calculator spits out a 1? No. But you might encourage them to spend two years at a community college to lower costs, or aggressively apply to scholarships, or set their sights on an in-state school rather than a pricey private option. “Once you get around a three, you might want to rethink some of your options,” says Bell. “Anything that says your loan payments are 10% of your monthly income or less is probably going to be okay, but families should make these decisions based on their own circumstances and how much debt they feel comfortable taking on.”