Daily Aid 115: How much to borrow in student loans, selective service question

Student Financial Aid News

From the New York Times:

They bought into the notion that if they went to college — never mind the debt — their degree would lead to a lucrative job. And repaying their student loans would never be a problem. But the economic crisis has turned those assumptions on their ear as thousands of recent graduates have been unable to find jobs or are earning too little to cover the payments for loans that are sometimes as high as $50,000. The result has been rising default rates for student loans. And unlike other debts, student loans cannot easily be renegotiated.

Commentary

We’ve been talking about how much to borrow as far back as Episode 463, way back in February of 2007, and reran the numbers later on, and came up with this statement:

Never borrow in total more than your estimated first year’s after tax earnings.

Let’s walk through exactly how to compute this.

First, go to the Bureau of Labor Statistics. Go to the National Compensation Survey. Find your state where you expect to live after graduation.

Identify the metro area if applicable. Here, we’ll use Boston, headquarters of the Student Loan Network.

Find your presumed occupation after graduation. Let’s say for example Public Relations Specialist.

Choose All Years for the most comprehensive data.

You get a data point: 30.92. This is the average hourly wage of a PR specialist in the Boston area. Multiply this times 40 for earnings per week, and times 52 for weeks in a year, and you get $64,313.60.

Now, apply a tax calculator to this number to find out your after tax earnings. Here’s an example calculator. You’ll need to know your state and federal income tax rates – for federal, most students earn between $32,000 and $78,000, which is the 25% tax bracket. Add in any local taxes if you know them.

Surprise – at $40,493, your actual take home pay is 37% less than what your gross salary is, courtesy of the government.

This number – the net pay, take home pay number – is the amount of money you have to live on every year and pay all of your bills with. This is the number that should not be more than you borrow in total student loans for your entire education, because as this example shows, relying solely on gross salary to compute how much you borrow leaves out the sizeable chunk that Uncle Sam takes out of your pocket before you even see it.

This is the borrowing rule of thumb: do not borrow more than your first year’s estimated take home pay for all your student loans, and this tutorial guides you through exactly how to compute that.

Scholarship Update

The Tampa Bay Advertising Federation is offering a $1,000.00 scholarship to one high school or college student enrolled in an advertising, marketing, graphic design or mass communications curriculum at any accredited school in Hillsborough, Pasco or Pinellas Counties. Graduating college students and graduating high school students who plan to pursue a degree of higher education are also eligible to apply.

Details at our free college scholarship search site.

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