Most don’t think twice about borrowing money for education. After all, borrowing money to pursue a college or graduate degree is an investment, right? We even call student loans “good debt” (as if there can be such a thing)! It’s true: Education unlocks opportunity and, often, the doors to higher income. Still, it’s wise to ask yourself: Is that degree really worth the student loan debt?
Determining What Your Degree is Worth
If a few simple math problems don’t scare you, there’s an easy way to determine if the degree you’re thinking about pursuing is worth the loans.
First, subtract your current age from the age you think you’ll retire. For example, 65 minus 25 equals 40 years to work. Next, determine how much you’ll think you’ll earn over your lifetime education level at your current education level. (You can use this lifetime earnings calculator).
Then, estimate how much you’ll earn after you get your new degree by placing your anticipated starting salary after graduation (see median salaries by degree for help).
Determining The Total Cost of Student Loans
Now that you have a rough estimate of how much you’ll make in your lifetime both with the degree and without it, it’s time to find out exactly how much those student loans will cost. Add up how much you think you’ll have to borrow. (And it’s probably wise to tack on 10-15% to your estimate for unexpected expenses and annual tuition hikes).
Then, use this amortization calculator to find the total cost of the loan. (If you don’t know the exact interest rate, 8% is a good average for student loans). For example, a $75k student loan at 8% paid back over 30 years would cost $522 a month and mean a total cost (principal plus interest) of $198,115.
Missed Investment Opportunities
That’s a lot of money. But wait, you say! The increase in my lifetime earnings is still a lot more than that. Plus, I could repay the loan faster, so the degree is worth it! Perhaps, but don’t jump to conclusions just yet. There’s something else to consider: What would happen if you invested the student loan payments you would’ve made?
If you invested $522 for 30 years and earned an average of just 6.5% interest (probably a conservative estimate), you’d add $577,425 to your bank account. That’s a net difference of $775,540! Now, you can make an accurate judgment.
If your anticipated lifetime earnings after earning your degree are more than $1 million more than your lifetime earnings without the degree, it’s probably worth a $75k loan. If not, you have to ask yourself long and hard whether it’s worth it. Certainly, you can’t put a price on happiness—and sometimes pursuing what you truly love is all that matters.
I would personally love to go back for a degree that would almost certainly increase my income, but after struggling with debt for more than five years, the last thing I want to do is to take out $50k, $75k, or $100k in more debt. No thanks! Instead, I’ll wait until I’m totally debt free and I have saved and can pay for all of my living expenses and at least 50% of my tuition as I go to school. But that’s just me.
What About You?
Have you made the decision to take out big student loans knowing they are a good investment? Do you have huge student loan bills and find you aren’t making what you thought? Let me know!
Editor’s Note: Check out the 197th Carnival of Personal Finance hosted by Four Pillars, in which we were included.