Student debt has both a yin and yang – good and bad side – depending on how much debt there is versus how much the respective earning capacity has been enhanced by the education the debt facilitated. Should a person borrow money today (college loans, for example) to earn more in the future? Correspondingly, how much more do they need to earn in the future?
There is a great rule of thumb for student debt: When a person graduates, their total student debt should not exceed their annual starting salary following college. When a person’s starting salary is greater than the student debt outstanding, the graduate should be able to fully amortize their college loan(s) in less than 10 years. If an individual accumulates more debt than the first year of salary after graduating, then they perhaps should plan on being a renter for years to come.
As usual, I invoke the TINSTAANREM axiom — There Is No Such Thing As A National Real Estate Market. Nor is there such a thing as the best exact amount of debt for all in each and every state. Some have greater debt burdens and others less. Many have employment opportunities while in college – others do not. Some borrowers have way too much college debt given their respective potential income. Smart debt is all about having the cash flow to amortize those obligations.
To find out in which states student loan borrowers are the most and least impacted by student debt, WalletHub looked at these 10 key metrics, with a potential 100 point total score:
Student Loan Indebtedness – 85 Points
- Average Student Debt 44 Points
- Proportion of Students With Debt 33 Points 3X Weight
- Student Debt as a Percentage of Student Income 89 Points 2X WeightCalculated by dividing overall state-level student debt per borrower by cost-of-living adjusted median household income
- Percentage of Student Loans in Past-Due or Default Status 44 Points
- Percentage of Students Percentage of Student Loan Borrowers Aged 50 and Older 89 Points
Grant and Student Work Opportunities – 15 Points
- Unemployment Rate Among Population Aged 24 to 34 00 Points 2X Weight
- Underemployment Rate 50 Points
- Availability of Student Jobs50 Points
Student jobs per total civilian population aged 16 to 24 in the labor force
- Availability of Paid Internship Listings 50 PointsPaid internship listings per total civilian population aged 16 to 24 in the labor force
- Grant Growth 50 Points
Percentage change 2014 to 2015 in state- and local-government grants per in-district and in-state undergraduate student
Scoring was as follows: “Each metric was graded on a 100-point scale, with a score of 100 being granted to the state with the most student debt. …….we determined each state’s and the District’s weighted average across all metrics to calculate its total score and used the resulting score to rank order our sample.”
The following table ranks the states with the greatest incidence of student loan debt.
The next table shows the states with the least incidence and level of student loan debt — again using WalletHub’s methodology.
The next three tables show the best and worst states for three of the specific metrics. The first shows the average student debt. All of the top-10 states were in the Northeast part of the U.S., with the top being New Hampshire. Among the lowest 10 states, all but one, Florida, was West of the Mississippi.
The last table shows the relationship between student debt and income, adjusted for cost-of-living. The states with the greatest percentage debt-to-income also have among the lower income profiles along with lower overall home costs. States with a lower percentage of student debt to income typically have a much greater cost of living and higher housing costs.
Click here for a PDF showing all of the rankings for both the index of student debt developed by the WalletHub methodology, student loan indebtedness, along with rankings of opportunities for students regarding grants and work opportunities.
Managing Student Debt
What guidelines should a prospective college student follow regarding course of studies, debt management and how much limits should be placed on borrowing? To address this, take a look at the following site from Student Loan Hero at https://studentloanhero.com/featured/how-much-student-debt-is-too-much/
Their recommendations include:
- Don’t take out more (college debt) than your annual starting salary
- Start researching majors and careers today – focus on return on investment given personal interests, high school education and skills, and take a look at several employment sites that provide salary data for occupational salaries including:
US Bureau of Labor Statistics
- Learn about your repayment plan prior to taking out loans: interest rate(s), duration to pay off the loan, monthly payments
- Prefer federal loans vs private loans – federal loans typically have lower rates and built-in borrower protections
- Search for as much free money as can be found
- Learn and consider careers that offer loan forgiveness (there are hot links on this site) plus sites such as:
- Find a part-time job at college – I personally cleaned the restrooms and made coffee at 4:00 a.m. for three years at the University Conference Center while an undergrad at Colorado State University and had a research assistantship while in graduate school
- Do not spend student loan money on other expenses
To read the entire study and finding from the WalletHub study click https://wallethub.com/edu/best-and-worst-states-for-student-debt/7520/#methodology
As noted earlier, student loans, at least on a financial perspective, should be viewed from a cost versus return basis. If the rate of return warrants the cost (and pays for itself in a reasonable amount of time) then by all means proceed. Otherwise the prospective student may need to rethink their major, career path and perhaps even which school, college or university to attend. College is not always the optimum decision.
Education and college debt typically have life-long implications.