Personal Finance Considerations for Going into Debt for Education

I think taking on debt for education is a sensible financial decision. But the level of the debt that is sensible must be considered.

When I went to college (too long ago) it was expensive, but not nearly as expensive as it is now (in the USA at least – I am not as familiar with the costs outside the USA other than knowing in many places that university education costs are very reasonable).

I don’t have any hard cutoff where I think taking on debt no longer makes sense. But I do think I would include cost as a major factor when deciding what college to attend if I were facing that decision today. From a personal finance perspective I would only consider my debt or the spending of my savings.

If my parents or the school or someone else want to pay for a large portion of the the costs that is wonderful. I do believe the expensive and highly rated schools provide a great education and great benefit. If I were a parent that was well off I would have no problem paying the very high costs if I could afford it (which would mean I was far ahead on reaching financial independence).

photo of building at Davidson College

Davidson College

The costs of college in the USA are so huge now that it may well be wiser to find a less expensive school in order to create the best personal financial base as a young adult.

The huge costs also mean I think it is much more important to take into account the likely financial picture after one graduates. It is much different to go into debt for a engineering or math degree than one with much lower expected salaries (Engineering Graduates Earned a Return on Their Investment In Education of 21%).

As I wrote on my other blog: In the USA More Education is Highly Correlated with More Wealth.

As I have said before the reason to chose a career is because that is the work you love, but in choosing between several possible careers it may be sensible to consider the likely economic results. And in choosing how much to spend on your education considering your future earnings is wise.


Having to pay more than 10% of your income for education loan repayments is crippling (if your income is not very high – 10% of an income that is say above 3 times median, which would be about $90,000 is not so bad…). Again if we are talking a not very high (using 3 times median income) I would prefer that education repayments are under 5% (which limits how much you would want to borrow). The number of years you will have to repay is also an important factor paying 10% for 3 years is probably not a huge burden, paying 10% for 20 years is a huge burden.

The huge advantages of compound interest provide a powerful force to secure your retirement. But if you can’t afford to save for retirement (and other long term financial needs – health care, house downpayment, raising children…) early in your career it puts you at a huge disadvantage. The advantage of compounding investment returns is one of the most powerful ways to get ahead even if you don’t have a huge income. But if paying off a huge education debt prevents taking advantage of this it creates huge problems for the prospects of personal financial independence.

Taking on large amounts of education debt to get a very high paid job (medical doctor, engineer, lawyer…) are much less of an issue financially. But they do greatly limit your lifestyle choices. Once you take on that huge debt burden you need to make a great deal of money to pay that debt back. As long as you enjoy your career in the highly paid field you studied for that is fine. But if you don’t it creates a hardship you must endure.

Related: The Time to Payback the Investment in a College Education in the USA Today is Nearly as Low as Ever, Surprisingly (2014)Highest Paying Fields at Mid Career in USA: Engineering, Science and Math (2015)

From the Federal Reserve Bank of Cleveland, Is There a Student Loan Crisis? Not in Payments:

Fifty percent of the borrowers had payments of $203 or lower, and another 25 percent had payments between $203 and $400. This means that 75 percent of student loan borrowers in this age range would be, in the simplest sense, better off with a student loan if going to college increased their monthly take home earnings by $401 or more. In 2014, labor force participants aged 20 to 30 who had at least some college on average earned $2,353 per month, $750 more than people the same age with just a high school degree.

Student loans have an attractive feature that most debt doesn’t have: payments can adjust to current income levels. Direct federal student loans enable borrowers to apply to make their payments a fixed percent of their discretionary income, with the percent ranging from 10 percent to 20 percent depending on the program. These programs also set a maximum number of years that people have to pay, up to 25 years, and any debt remaining at the end of that period is forgiven.

I think the idea that education is extremely important for a person’s personal financial future is shown to be true (in this quotes and several of the links I show above). The question I am looking at here is not whether to get a post secondary education or not (it is very wise to do so based on the data). But the question still remains of how much debt to take on in order to get that education.

Many schools offer worthwhile educations. Don’t even think of using the for-profit fly by night schools that have a horrible track-record and have been found guilty of fraud over and over. Sadly on these schools Trump University and the current administration in the USA has now opened the door for more abuse through policy decisions the administration has made. This makes it even more important to avoid these schools as they are not even getting the lackadaisical vetting they had been getting before.

Once this administration is out of office there will be many more fines for running fraudulent education schemes that are being made possible by the current administration.

But many actual educational institutions (state school and private schools) offer real education at more affordable prices and are a great choice. The quality of education available at schools that are highly regarded is quite good. Even if the branding on the diploma isn’t quite as good as Princeton or Stanford you can get a great education that will serve you well. The biggest advantage of the top 30 schools is really the likelihood of great connections that may well pay off (and is one reason why families with more money than they can spend are usually wise to spend some of it on such educations). But if you don’t fall into the extremely wealthy demographic find a school that is affordable.

The truth is that many of the top 30 schools are so rich they will pay for the full cost of education for those that can’t afford it themselves. This is a great option. While they have always offered some scholarships and some grants in the last 10 or 20 years these offerings have actually increased quite a bit (at those highly competitive very rich schools).

The hard part is actually getting accepted at these schools as they have easily 5 applicants that are qualified for every student opening they have. But if you can qualify it is a great option. The odds are actually higher that the most competitive schools will waive fees than that others will (those schools are nearly universally extremely rich with huge endowments).

My father actually had Princeton pay for his education. I however, was not such a good student so I had to pay.

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