College Debt Rules of Thumb

As part of my self imposed Dave Ramsey immersion in preparation for teaching his class, I decided to listen to his radio show for at least an hour. I have tried to listen on two earlier occasions but after 10 or 15 minutes I turned it off. Frankly, I found it depressing. People call Dave with unbelievable intractable financial problems brought on by amazing stupidity. Dave yells at them and lectures them for a few minutes. Then he tells them, “Sell the car.” That by the way is a Dave Ramsey joke. He calls his radio show, “The sell the car show.”

One of the callers wanted to talk about her daughter. The young woman was pregnant and living with her parents. She was unemployed with $90,000 in college debt. Dave asked the lady where one might find the father of her grandchild. Turns out the father was living with his wife, earning $12,000 a year. When Dave asked what degree generated $90,000 in debt, the woman replied, “Culinary Arts.” Dave then launched into a tantrum that included the useful suggestion of creating a job if none were available. He suggested the young woman work rich neighborhoods looking for someone who would pay her to prepare meals or starting her own catering service.

Obviously $90,000 in college loans for a degree in Culinary Arts is stupid, really stupid, but $90,000 doesn’t sound like a problem for a neurosurgeon. Where to draw the line? What is a good rule of thumb for college debt? Turns out there is a rule of thumb. I found it an article by the well know financial columnist, Liz Weston. She suggests no more in college debt than the student can reasonably expect to earn in their first year following graduation. That is a tough rule of thumb but it sounds like a pretty good suggestion. Far too many young people are crippled for decades by college debt.

What does this mean in practical terms? Liz provides some starting salary data.

Selected Starting Salaries by Major

$36,000 Business Administration
$43,000 Management Information Systems
$26,000 Psychology
$28,000 English

Just for grins, I looked up what starting salary a graduate in media arts might expect. I could find no starting salary data for a media arts degree. Can you say, “Would you like fries with that?” $18,000 first year salary (assuming at least one raise and some overtime).

Parents don’t get into a guilt trip and cosign for your children’s college debt. Liz Weston observes that it is easier for your children to find a college loan than it is for you to find a retirement loan. She does not completely let parents off the hook. After all, having children was your idea. She suggests another rule of thumb, save $25.00 a month per child for their college education. These funds should be invested in a tax sheltered 529 plan. These accounts like their 401 (K) cousins are allowed to grow and compound tax free. As an added bonus, the money in these accounts is not included when calculating the student’s eligibility for need based aid.

Finally, as I have mentioned on numerous occasions, scholarships and work study money is a much better option. There is a ton of scholarship money out there, but finding it requires a lot of effort. I contend that a serious determined student can find or earn enough money to graduate with little or no debt. It isn’t easy but it is possible.