How Much Student Loan Debt is Too Much?

Millions of Americans are struggling under the weight of student loan debt. By mid-2021, the outstanding amount of student loan debt owed in the U.S. was more than $1.7 trillion, as reported by the Federal Reserve. About 45 million Americans have student loan debt, according to an article in Forbes Magazine. If you have student loan debt, obviously you are not alone. Many people rely on student loans to pay for college and would not otherwise be able to attend or complete their degrees.

Is $50,000 in Student Loan Debt Too Much?

According to EducationData.org, student loan borrowers are in debt by an average of $39,350.  So, if you have $50,000 in student loan debt, you owe more than the national average among borrowers.

How much student loan debt is too much depends on your payment, income, living expenses, and other debts. In general, your student loan payments should equal no more than about 10% of your gross monthly income, according to the Consumer Finance Protection Bureau.

For example, if your rate is 5% on a $50,000 student loan with a 10-year term, your payments will be around $530 per month for 120 months. To afford your payments without being overburdened, your salary should be at least $63,600 per year ($5,300 gross monthly income) If you live in an area with a high cost-of-living, your student loan payments might need to be kept at a lower percentage of your gross monthly income.

Depending on your income and other debts, buying a house with student debt might also be difficult. Mortgage lenders generally look for people with modest debt-to-income (DTI) ratios, according to Fannie Mae. If your total debt, including your student loans and proposed mortgage payment, equals more than 36%, you could have trouble being approved for a conventional mortgage. There are cases, however, where your DTI can go as high as 45% if you have excellent credit and substantial cash reserves. Of course, you should always be careful before taking on too much debt.

How Much Will It Cost to Repay with Interest?

How much it will cost to repay a $50,000 student loan debt with interest will depend on your interest rate. Using the example above with a 10-year term at 5%, the total cost of a $50,000 student loan would be $63,639. This means that you would pay $13,639 in interest on top of the $50,000 that you borrowed. Ten years is a common repayment term for federal student loans, according to the U.S. Department of Education.

If your interest rate is higher, you will pay more over the life of your loan. If it’s lower, you’ll pay less. However, this example assumes that you’ll make all of your payments on time. If you don’t, according to the Department of Education, your interest may capitalize, meaning unpaid interest will be added to your principal balance and then, interest will be charged on top of that. In other words, you will be charged interest on your new higher balance.

Similarly, if your loan is unsubsidized by the federal government, any interest that accrued while it was in deferment will also capitalize once your deferment period ends. This in turn could increase your principal and the total amount you will have to pay over the life of your student loan.

Is It Worth Refinancing for a Rate That is 0.25% Less?

Refinancing your student loan could be a good option to pay it off faster and may reduce how much you pay over its term. While a fraction of a percentage point reduction may not seem like a lot, it could result in you paying less over the life of your loan.

Using the example above, refinancing a $50,000 loan with a current interest rate of 5% to 4.75% over 10 years means that your new loan will cost $62,909 (the APR would be 4.75%, finance charge $12,909, and 120 monthly payments of $524.24). This means you would save $730 over 10 years.

In today’s environment, interest rates range between 3.73% and 6.28% for federal student loans and between 2.25% and 12% to refinance with private lenders. With private lenders, borrowers who are the most creditworthy and willing to make automatic payments typically receive the best rates, according to EducationData.org.

If you’re thinking about refinancing with a private lender, more than 80% of borrowers who refinanced through Splash Financial received a rate lower than 4.27%. If this interests you, click the button below to explore your options.