This question was inspired by the GOP’s proposed legislation, the Student Success and Taxpayer Savings Plan, working its way through Congress. This legislation caps student loans for undergraduate students at $50,000. The short answer that a cap of $50,000 is way too high and our members of Congress are not very bright. 

The current interest rate on federal student loans is 6.53%. Assuming the term of the loan is 10 years, a borrower is looking at a monthly payment of $565. 

Now we get to the tricky part: 

• You can’t plan intelligently for student loans if you don’t have a career plan. (See note.) 

• What constitutes a reasonable Rule of Thumb for the amount of student loans relative to the borrower’s targeted salary? 

Quora’s Mark Kantrowitz recommends limiting the amount of student loans to 100% of the targeted starting salary. I respect Mr. Kantrowitz. He is the only person I follow on Quora, but on this particular issue, I disagree with him. 

My Rule of Thumb is that the borrower’s monthly student loan payment should be no more than a conservative 10% of the borrower’s monthly take home pay. 

I live in Ohio. Using Ohio state taxes for this example, you would need to have a targeted starting salary of about $83,000 to meet my criteria for a $50,000, ten-year student loan with a 6.53% interest rate. Given that the average starting salary of a college graduate is $60,000, that cap is way too high. I’m just guessing, but I suspect that $50,000 figure was probably just pulled out of the air by some staffer with no thought of how the loans would get repaid. 

I described my Rule of Thumb as conservative. I actually don’t think it is conservative enough. I have been studying “college outcomes” for more than a decade. The most recent “college outcomes” study comes from the Burning Glass Institue and the Strada Education Foundation. 

Supply far exceeds Demand. There are two degreed candidates for every well-paying, professional job. College is a competition. The loser ends up underemployed, e.g. making lattes. 

I’m going to have to make an assumption here to make a point because there isn’t any data on this. 

• Most of that half of student borrowers who graduated and scored a well-paying, professional job probably landed on their feet. However, there will be a few who got carried away with a “dream school” or who needed more than four years to graduate. 

• Most of the other half of borrowers who graduated and ended up underemployed are probably going to have a very difficult time making their student loan payments. 

I don’t like this $50,000 cap for student loans for undergrads, and I don’t like some other provisions in this proposed legislation. For example, the legislation doesn’t address the core issues, i.e. too many high school students get funneled into college and the federal student loan system has no underwriting standards. I also don’t like the “skin-in-the-game accountability” for colleges. 

Notes 

Watch Borrowed Future, available for free on Prime Video. 

Salary Paycheck Calculator – Calculate Net Income | ADP 

ADP’s paycheck calculator shows you how to calculate net income and salary for employees. 

https://www.adp.com/resources/tools/calculators/salary-paycheck-calculator.aspx 

How Do Student Borrowers Get in Trouble with Student Loans? – Is College Really the Right Choice? 

The next big step. Is college the right choice for you? 

https://www.iscollegereallytherightchoice.com/student-borrowers-get-trouble-student-loans/ 

Career Planning 101  – Is College Really the Right Choice? 

The next big step. Is college the right choice for you? 

https://www.iscollegereallytherightchoice.com/career-planning-101/