The Rule of One: A Guideline for Student Loan Borrowing
The Rule of One states that a reasonable amount of student loan debt to incur while in college is equivalent to the average of one year’s salary in the profession you plan to enter.
A few decades ago the American economy was very different than it is today. A household could make a family sustaining income without the advantage of having earned college degrees. This is no longer the case. This dramatic change occurred gradually over the past 30 years as new laws took effect and our U.S. labor market transformed. We left an industrial-manufacturing based economy to an information based one as our well paying manufacturing jobs gradually moved to Mexico, China, Malaysia, Taiwan and other third world countries. The same products are now manufactured overseas with a small fraction of the labor costs that were previously being paid to American workers. Since then college degrees have become increasingly necessary for Americans to earn family sustaining wages and still live relatively “normal” lives.
The purpose of this article is to present a sensible guideline for borrowing money to complete a college degree. What is a rational benchmark to guide one’s thinking when it comes to funding college? The answer will take into consideration your college major and career goals when you consider this simple guideline.
Our U.S. Census data tells us the average American worker’s earnings in 2017 was $56,516. The average cost for one year of college was $34,740 as reported by the College Board. Simple math tells us that in most cases student loan borrowing will be necessary to finish college.
For example, if you become an RN Nurse with a BSN (Bachelor’s of Science in Nursing) the BLS (Bureau of Labor Statistics) shows the average salary in 2017 for a nurse in the US workforce was $68,450. This is your guideline for student loan debt. Considering you work as a nurse during your 30 year career you will earn in excess of 2 million dollars and also receive other work benefits. It will probably be the best investment you will have made. Of course, if you can graduate with no debt, better yet.
A high school teacher for example has a median salary of $58,030. If you were able to enter this profession and work for 30 years, an investment or loan repayment in this amount is economical and reasonable. Yes, it can be done for less and that is certainly encouraged. But if there is no other way in which you can get through college other than borrowing, we have provided you a benchmark for guidance. Again – no debt is better, but finishing college comes first.
A Bachelor’s Degree is the gold standard in U.S. employment. Without one it can be hard to be taken seriously in many professional environments. This is with the exception of the few entrepreneurial thinking individuals, and highly creative theatrical and artistically minded, and musically talented people who with luck have made an exceptional living for themselves without finishing college. We’ve all heard the stories of Bill Gates and Mark Zuckerberg dropping out of prestigious colleges in order to jumpstart their careers. You and I are not of these people, so we are going to have to finish college. So let’s do it the smart way and not spend or borrow more money than necessary.
Know Your Financial Aid: Understanding the Money
The most difficult part of earning a Bachelor’s Degree has become managing the finances involved. The terminology is often ambiguous or too confusing for the average student or their parents to understand. College employees who process grants, scholarships and loans sometimes assume you understand everything that is being said. Terms are frequently vague, the numbers are large and the cost of college rises annually. For example, a single text book can cost $300.
Imagine buying a new car with payments for 4 years. Now imagine that your car payment goes up each year because the cost of the new car has risen. This is like paying for a college degree. The annual increases in tuition are difficult to budget for and they create hardships. Tuition will never go down, and it usually increases each year.
When financial aid officers do presentations, they explain how grants, scholarships and loans along with family contributions work together to finance a college degree. Students often select one school over others for non-financial reasons. They sometimes bully or cajole their parents, who have limited knowledge and resources for help. Parents often do not understand the ramifications of cosigning student loans year, after year, after year.
Anyone who works for a college is going to encourage the family to take on student loan debt in order for you to remain or enroll in college. It makes sense. After all, this is our livelihood and most of us have done the same thing. We borrowed to get through college so it makes sense for us to encourage you to do the same. As employees of colleges, we do everything in our power to get students to enroll which keeps the big wheel of higher education moving.
For first generation students, this issue is made worse due to the lack of knowledge within the home/family. Parents will often remain silent when college financial issues come up.
Students may intimidate parents into debt to finance their college to mostly live out what they hear is the best college on earth with hopes and dreams that are sometimes not fulfilled. What is often left is debt, and unfulfilled ambition and no college degree.
Very few institutions will guarantee a student their college degree with a fixed cost attached to it. This is due to tuition increases which tend to happen annually. When college employees and college faculty receive pay increases, the money must come from somewhere. These increases usually come from tuition.
One exception to this can be found in a partnership with Rowan University and two surrounding community colleges in Southern New Jersey. Through what they call the Rowan Connection, a 3+1 Bachelor’s Degree will cost a family as little as $26,350. Rowan has been able to map out five different pricing plans for a Bachelor’s Degree. They vary from $26,350 to $97,500, these fixed costs are guaranteed.
Having advised students through college for many years, a recurring theme I have witnessed is the lack of understanding from most students regarding the financing of their college degrees. I continue to meet students who have received PELL grants for several semesters and not know if a grant is to be repaid. Students speak of their financial aid awards without a sense of ownership and express a willingness to drop courses when tough times occur during the semester. We see students repeat the same course several times and remain steadfast in their reluctance to accept free campus tutoring. Occasionally, some will submit their FAFSA late which disqualifies them from receiving state grants and other forms of scholarship money. OUCH!! Mistakes are costly! Very costly!
Grants are monies that are given to the student and do not need to be paid back. The most common given by the Federal Government is a PELL Grant. These started in 1970 and were initially called BEOG (Basic Educational Opportunity Grants) Grants. State grants are also awarded on the basis of financial eligibility from the Department of Education from the state in which the student resides. Federal grants may be awarded to a student attending college in any state in the U.S. and qualifying U.S. territories, whereas state grants tend to be restricted to enrollment at a college within the student’s state of residency.
Scholarships are monies given to a student on the basis of a characteristic. That might be income or academic performance, or any characteristic the benefactor wishes to promote or protect. For example: The Overseas Press Club Foundation sponsors an annual $2,000 scholarship to Journalism students who aspire to become foreign correspondents. The students may attend any college, public or private, in the United States.
The Parkersburg Area Community Foundation in West Virginia supports high school students graduating from Ritchie County High School. They must show promise and aptitude in math and sciences and attend a college in West Virginia. These kinds of financial awards are not expected to be repaid. Locally you can find many service organizations in most cities and small towns offering college scholarships to local students.
When grants and scholarships fall short of paying the bill for the year of college, student loans come into play. When you must borrow, always use Federal Direct Stafford or Perkins student loans that are subsidized. This means the government will pay the interest on the loan while you are in college. Never use credit cards to fund your college as the high interest may bankrupt you. The rules which monitor student loans are very generous and permit expenditures of student loan money for things other than tuition, books and fees. There are a lot of situations where students will use student loan money for things other than college. For instance, their living expenses or a car purchase to travel to school and possibly a job to help with college costs. This makes sense because you do need to pay rent and buy food and have transportation, but remember that if you use student loan money for these items, you are artificially inflating your student loan indebtedness.
To watch short videos on resources for paying for college see this link: https://cccnj.financialaidtv.com/. It addresses the difference between grants, loans, scholarships, and provides a concise glossary of financial aid terms. This is an extremely valuable resource presented in an easy to understand format.
If you are reading this article we can assume that you have done something very smart and have attended a community college for your first two-years of your education. You likely spent about $10,000 for two years of college which could have easily cost you $60,000 to $90,000 at a four-year residential college. So good for you! You have already saved a bundle of money by attending your local community college. You are well ahead of the game of financing your college education. Now you can relax a bit and know you are half way through the burdensome task of finishing college. But remain smart about the finances involved in the last two years of your studies.
Borrow Money for College, but Not More than You Need
If you keep in mind The Rule of One, which states that a reasonable amount of student loan debt to incur while in college is equivalent to the average of one year’s salary in the profession you plan to enter, you have a guidepost for borrowing. However, the sheer thought of borrowing any money at all scares some to the point of avoiding college.
Most people will advise you on the conservative side and provide a guideline of not borrowing more than $5,000 per year or $20,000 in total. However, this implies that you will not return to college because you have reached the 20K limit. You will then need to reevaluate your position.
A growing number of students are deferring college degrees for vocational careers and avoiding student loan debt all together. This is a sound argument:
“Why should I pay more than $100,000 for a college degree when I can make nearly that much money if not more in the same amount of time. Furthermore, I could buy a house for that much money.”
Who on earth would want to spend that much money on something that offers no guarantees? Suppose you had to borrow large amounts of money to complete a degree and then had to file for bankruptcy later in life. You could still have this debt that will follow you into your old age and your Social Security benefits could then be garnished. That is a crazy thought but it is true. Ten years ago student loan debt even surpassed credit card debt.
After completing high school, most 18 year olds do one of the following:
* Enroll in a traditional residential college experience
* Remain at home with parents and attend a community college
* Gain entry to a skilled labor union and become a trade apprentice
* Enter the military or a reserve unit
* Go directly to work.
The first half dozen years after high school are the building blocks for an adult life and preparation for earning a sustainable living. If you can figure out how to do that, and come up with something that you will enjoy doing for the rest of your life, you win!
Some enroll in the military to get educated and earn benefits that will finance an education upon discharge. This is a good strategy but the military is not for everyone. Others have discovered creative options to obtain a free education. This can happen in the form of employee benefits from educational friendly companies. These companies tend to have good benefits packages that encourage employees to obtain degrees. Some students are lucky enough to earn athletic and academic scholarships to help with finances. These opportunities account for a very small percentage of students actually enrolled in colleges across the country. Others can benefit from what is called a 529 Savings Plans. The federal government created this plan help parents shelter money that will be used later for educational expenses.
If you look at the data on lifetime earnings of students with two year Associate Degrees, four-year Bachelor’s Degrees, and Master’s Degrees, with each additional degree, lifetime earnings increase significantly. This is not always a guarantee, and it should not be read as such. It is simply a trend that occurs among the population of people who have gone to college and graduated.
When you finish your college degree and begin your career, you are very likely to have between 30 to 40 years of work ahead of you. Hopefully, you will enter a career you love which will allow you to grow. There is a saying: “If you love your job you never work a day in your life.”
People who do this tend to have a happy, fulfilling lives. Let’s say for example your life plan is to be a teacher in a public school with a state teaching certification. This occupation will allow you to earn about $50,000 per year when you start work. Now consider you will work as a teacher or in education for the next 30 years. When you do the math, you will discover that you will make in excess of $1.5 million during your working years. This does not account for raises you will receive, your pension benefits, or your health care. But conservatively you can anticipate making $1.5 million at a minimum.
The question which begs to be asked is how much would you borrow to be able to earn that much money? Would $20,000 seem appropriate, or $50,000--what about $75,000 of student loan debt? Remember the Rule of One. In this scenario, loan debt of $50,000 would be the upper limit to stay within, one year’s salary. This is the Rule of One.
We hear outrageous horror stories of doctors coming out of Medical School with loans well into six figures. Most physicians are very highly paid, so a ratio like one year of average earnings is still in line. An Internal Medicine specialist earns on average $247,319 and a surgeon’s pay averages $409,665.
This line of reasoning reminds me of a story about Walt Disney. He was once asked if he thought he was successful. His answer: “Of course I am successful, I’m a billion dollars in debt.” The rationale for the debt is relative to the income you will be making in the future. If you believe in yourself and your dreams, taking on some debt may be the only way to make them come true.
A webpage maintained by the Department of Labor monitors occupations through the Bureau of Labor Statistics. This webpage address is www.bls.gov. It is somewhat of an encyclopedia of occupations in the United States workforce. As a Student Development Advisor, I use this page frequently to show students the kind of salaries they can anticipate earning after finishing their degrees. In addition to salaries, this page also addresses educational requirements, professional affiliations, licenses required for various occupations, and the kinds of workday you will have performing that set of job skills on a daily basis.
It's only a matter of time before state governments figure out a way to make community colleges tuition free. Until that day arrives, it behooves any thrifty minded aspiring student and their families to enroll in schools that they can afford.
Steven M. Solar, Ed.D. is Student Development Advisor at Cumberland County College in Vineland, New Jersey. I. Zoraida Cortez, A.A., Technical Assistant for Financial Aid at the College, is co-author of this article.