Gone are the days when you could pay for college by working part-time while in school. With increasing higher education costs, college students need to borrow more money to pay for school. According to The Institute for College Access & Success, 62% of college graduates had student loans, with an average balance of $28,950 in 2019.
You may be wondering, “Are student loans worth it?” Studies have shown that college graduates vastly out-earn their peers without degrees. The College Board reported that median earnings for bachelor’s degree holders working full-time was $24,900 more than those of high school graduates.
Whether student loans are worth it in your case is dependent on several factors, including your selected major, goals, how much debt you can afford to take on, and your earning potential. Here is what to consider when calculating your college return on investment (ROI).
When Are Student Loans Worth Using to Pay for College?
How much debt you need to take on to pay for school can play a big part in deciding if student loans are worth it or not. This is especially true if you’re trying to decide between pursuing a four-year degree or alternatives to college, such as a trade school. When thinking about how much debt you can afford — and whether it financially makes sense — student loans can be a smart option in the following situations:
1. When you’re pursuing a bachelor’s degree
A bachelor’s degree is becoming increasingly necessary. According to a study by Georgetown University’s Center on Education and the Workforce , 35% of full-time job openings require at least a bachelor’s degree. With more people obtaining four-year degrees than past generations, it will become more difficult to find a job without one.
In general, people who have bachelor’s degrees earn more than high school graduates and are less likely to be unemployed. College graduates also tend to have healthier lifestyles; they are more likely to have employer-offered health insurance, and their employers are more likely to cover some of the premiums.
2. When a degree is marketable
When evaluating your ROI with college and student loans, it’s important to think about your degree’s marketability, meaning what job stability and income potential it offers.
You can use the U.S. Bureau of Labor Statistics’ occupation overview tool to look up median earnings for different occupations, how quickly the field is expected to grow, and the number of jobs available in the country.
You can also use PayScale to calculate your college ROI. With PayScale, you can find out how much people with your degree earn in your area in entry-level jobs.
Earnings and job security can vary widely by major. Considering that the average annual salary for all positions is $56,310, the college degrees with the best ROI include the following:
- Accounting: Median pay of $71,550
- Business analysis: Median pay of $85,260
- Operations research: Median pay of $84,810
- Petroleum engineering: Median pay of $137,720
- Pharmacy: Median pay of $128,090
Degrees with a lower ROI include marketing, English, and history. But that doesn’t mean you should avoid those majors. It just means you need to proceed with caution and try to limit your debt, so you aren’t overwhelmed by student loans after you graduate.
3. When the school’s ROI makes sense
Your school plays a big role in calculating whether your investment in your education was worth it. You may assume that attending big-name or Ivy League schools will pay off, but that’s not always the case.
Georgetown University did a study evaluating the short and long-term benefits of attending different colleges. The researchers found that community colleges and certificate programs pay off the most over 10 years. But for longer-term results, bachelor’s degrees have a higher ROI.
Public colleges paid off more in the short-term, but private non-profit schools gave graduates more returns over 40 years. Graduates from private colleges can expect to see an economic gain of $838,000 over 40 years. By contrast, public college graduates can expect $765,000.
The cost of your program is a big factor in determining your college ROI as well. However, make sure you consider the school’s net price, meaning how much you must pay after gift aid, including scholarships and grants, is deducted. Some private schools are more generous with financial aid than public schools, decreasing the need for student loans and making them more cost-effective.
How to Figure Out If Student Loans Are Worth It?
When thinking about your other options besides college and calculating the ROI on college education, keep these questions in mind:
1. What will my earnings be over my career?
Besides looking at your expected entry-level salary and field’s median pay, consider what your earning potential is over the length of your career. Some careers start as low paying but can have much higher salaries over time as you establish yourself.
To see what you can earn at different stages of your career, use a tool like Dice. It can tell you what range is likely in your field for your location.
2. How much will I owe in student loans?
Consider how much you will have to borrow in student loans relative to your expected salary. In general, financial experts say that college students shouldn’t borrow in total more in student loans than they’d expect to make in one year working full-time.
3. What repayment options do I have?
Before your loans enter repayment, develop a budget and a plan for managing your debt. If you can afford to make payments, even $25 a month, while in school, you can save money overall on the cost of your loan. You should build up an emergency fund and ensure you have enough money to cover your major expenses.
If the payments on your federal student loans are too high for your income under a 10-year standard repayment plan, you can apply for an income-driven repayment (IDR) plan. However, IDR plans may cause you to be in debt longer.
If you have high-interest debt, student loan refinancing can help you lower your interest rate, save money, and pay off your loans faster.
Are Loans for Grad School Worth It?
Getting a master’s degree or MBA can be a good decision for your career, especially if you intend to work in healthcare, engineering, or business management.
However, student loans for graduate school tend to have higher interest rates than undergraduate loans. Depending on the cost of your program, you could accumulate even more debt but at a higher interest rate. Carefully weigh the pros and cons of going to graduate school before making a decision.
Are Parent Student Loans Worth It?
Parents often want to help their children and will take out parent loans to pay for their education. While that’s an admirable goal, you should only take out parent student loans if your financial situation is stable. Parent loans can compete with your own financial goals including saving for retirement.
Student Loans Are Worth It If You Have a Solid Plan
Are student loans worth it? Depending on your selected major and financial situation, the answer is often yes. However, take out the smallest amount of federal and/or private student loans possible to pay for your program to make it easier to manage your loans after you graduate. By keeping your loan balance low, coming up with a budget, and developing a repayment plan, you can tackle your loans and enjoy a successful career.
TIP: Before considering borrowing any type of student loans, make sure you’ve exhausted all of your options for free aid, such as scholarships and grants.