What is the right amount of student loan debt?

Simple; the answer should be $0, but for most families that is not a reality. So, the question needs to change: What student loan debt can I support?

First, a quick look at a few important numbers.

  1. The past few years have seen 70% of graduating students leave college with a loan (or loans) (1.)
  2. The average graduate holds $37,172 in student loan debt (1.)
  3. Fifty-nine percent of millennials do not know when their student loans will be paid off (1.)

How does this affect other financial behavior?

According to a study from Jake Spiegel, “we found that student loans do appear to have a small crowding-out effect on retirement savings.” In fact, using data from HelloWallet, Speigel found that each dollar of student loan debt results in a $0.17 decrease in retirement savings. Data from the Survey of Consumer Sciences revealed similar results, with a $0.35 decrease in retirement savings (2.)

A Navient report shares data showing that people are less likely to have children if they still have student loans (3.) This is the trickle effect of student loans. Less spending takes place because of higher debt that must be paid off. The same survey goes on to note that 32% of people who borrowed for college did not feel financially stable (3.)

From a behavioral standpoint, a lack of confidence often results in the halt of financial progress. Preserving and gaining a reasonable confidence level helps build financial momentum, leading to success. Student loans are a big factor inhibiting younger workers from building motivation and confidence when it comes to their finances.

What about after the loan is paid off?

In a separate but related article, Spiegel notes, “I found that workers who had paid off their student loans contributed nearly 12% more to their retirement accounts than workers who had not yet finished paying down their loans. This evidence reinforces our theory that there is significant interplay between student debt and retirement savings.” He goes on to discuss evidence compiled by HelloWallet that workers who do not have student loans spend less and save more for other priorities than do workers with student loans.

Even though the 12% increase helps retirement account balances, workers miss the compounding effect of higher contributions to retirement accounts from the start of their careers. As time passes, the differences between those who saved more versus those who did not create a widening gap because of this compounding.

Reality Check

The evidence clearly shows an inverse relationship between saving and student loan debt. However, most families cannot pay for college easily out of current assets or cash flow. Even if a family saves much of its income, competing priorities may take money away from college savings. The biggest competing goal: retirement, of course.

Joseph Hurley notes in a post on savingforcollege.com, “A realistic goal for many families is to aim to save 25% of projected college expenses” (4.) The article discusses a few of the assumptions behind the goal of saving for 25% of college expenses. One example reveals that, on average, a public four-year school offered $5880 in grant and tax benefits (4.)

Of course, the later a family starts saving, the more money it will need to put away every month.

The Right Amount

In an article posted last year, Mark Kantrowitz notes, “student loan debt is affordable if half of the after-tax increase in income that a student gains from obtaining a college degree is sufficient to repay that student’s loans in 10 years or less.” Mark continues, noting his rule of thumb later in the article that total student loan debt at graduation should be less than the starting salary of the student (5.)

The Chicken or the Egg

While Mark gives great information about how to gauge where you end, this information is most helpful to the parents of a young child, who have a longer time frame during which to save. What if you or your child will be attending college soon? Worse yet, what if you are in college now?

As you can imagine, the normal “save as much as you can” advice will not be new or groundbreaking. What students can do is start working during the summer months to amass funds for college. Since the admissions process is less focused on grades and more dynamic, emphasizing extracurricular activities, including work, will help in several ways:

  1. Acquire increased savings for college.
  2. Create experiences that students can use for writing admissions essays.
  3. Gain lifelong work skills that will be helpful in landing internships and possibly jobs.
  4. Increase confidence. A few students become nervous while asking questions about schools during visits or class. Universities are big and intimidating. A work history forces most of us to ask clarifying questions when we do not understand a task or situation. Gaining the confidence to seek clarification helps a young student make informed decisions.

In College Now:

  1. As noted before, start working to reduce the amount of student loan debt required for current or future semesters.
  2. Take stock of your current student loan debt. Are you on pace to meet the guidelines noted above? If not, are there similar fields of work through which you can increase your pay so the debt load will be serviced easily?
  3. Still feel overwhelmed? Start building a small emergency fund of $500-$1000. This small act helps address most emergencies after you graduate and gives you the freedom to aggressively start paying off your student loans.

Should you have questions or concerns, you can contact me at 317-805-0840 or ncarmany@thewatermarkgrp.com.


  1. “10 Student Loan Facts College Grads Need to Know | Paying …” N.p., n.d. Web. 11 Feb. 2017. <http://www.usnews.com/education/best-colleges/paying-for-college/slideshows/10-student-loan-facts-college-grads-need-to-know>
  2. Speigel, Jake. “How Student Debt Affects Retirement Wealth.”Morningstar Advisor. N.p., 16 Apr. 2016. Web. 11 Feb. 2017. <http://www.morningstar.com/advisor/t/114659614/how-student-debt-affects-retirement-wealth.htm>
  3. Kitroeff, Natalie. “Four Ways Student Debt Is Wreaking Havoc on Millennials.”com. Bloomberg, 10 Dec. 2015. Web. 11 Feb. 2017. <http://www.bloomberg.com/news/articles/2015-12-10/four-ways-student-debt-is-wreaking-havoc-on-millennials>
  4. Hurley, Joseph. “The Magic Number for College Savings.”com. N.p., 08 Feb. 2017. Web. 11 Feb. 2017. <http://www.savingforcollege.com/articles/the-magic-number-for-college-savings>
  5. Kantrowitz, Mark. “Why the Student Loan Crisis Is Even Worse Than People Think.”com. Time, 11 Jan. 2016. Web. 11 Feb. 2017. <http://time.com/money/4168510/why-student-loan-crisis-is-worse-than-people-think/>

Leave a Reply

Your email address will not be published. Required fields are marked *