Student Loans and SLOPE

In a perfect world, there would be no need for student loans. However, with rising cost of higher education, the reality is that most students need to take on some debt in order to achieve their academic and career goals. Up to a point, a student loan is a good financial investment, a reasonable tool to achieve a credential. You need to spend money to make money, as the saying goes. But where is the tipping point at which student debt becomes a burden, a failed investment?

The answer is: It depends. Since different careers earn different incomes, a reasonable amount of debt will vary from one person to the next. Lucky for us, there is a relatively easy calculation that will put student debt into perspective: Student Loans Over Projected Earnings, or SLOPE.

How can you estimate these amounts when you are still a student?

Total Student Loan Amount Take the overall student loans that you have already accrued (found at NSLDS) and divide by the number of semesters you have completed. This will give you an average per semester. Multiply this average by your number of semesters remaining, and add this to your current student loans in order to get your projected total. If you think your circumstance may require you to borrow more in future semesters – for example, if you will transfer to a more expensive school – you will need to figure these numbers into your calculations as best you can.

For example, let’s take an Elementary Education student – let’s call him Bob. Bob currently has $8000 in overall student loans after 7 semesters at the community college. $8000 divided by 7: he is averaging $1143 per semester. Bob has one semester remaining at the community college, so let’s add the average $1143 to his current total $8,000: $9143. Bob plans to then transfer to a university and complete his Bachelor’s degree in five additional semesters. He knows that tuition and fees at the university are about $2000 more per semester. Bob hopes to get scholarships, but for planning purposes, let’s assume he will get this extra $2000 through student loans. So, we add $2000 to $1143 (what he has been taking out at the community college), to estimate that Bob will need $3143 in loans per semester for five semesters at the university: $3143x5= $15,715. We add his community college total ($9143) to his university total ($15,715), and Bob projects his total student loan amount to be $24,858.

Monthly Loan Payment Of course, you will need to repay your Total Borrowed, with interest. The Monthly Payment is how much you will need to pay your loan provider each month. The Total Payoff is how much money in total you will repay on your loans once interest is added.

Let’s go to studentaid.ed.gov/repay-loans. Click on Calculate your Estimated Loan Payments. We will use 6.8% interest, which is the current rate. Enter your projected loan total. Let’s use Bob, our earlier example: $24,858. Hit Enter and here you have Bob’s monthly payment and total payoff for standard, graduated, and extended repayment. Notice how a lower monthly payment leads to a higher total payoff, and vice versa?

What is the difference between repayment plans? We can divide these options into four categories – Standard Repayment, Graduated Repayment, Extended Repayment, and Income Repayment.

In Standard Repayment, your monthly payment is evenly divided between 120 months, or 10 years. Standard Repayment will probably have the highest monthly payment, but you will pay less interest overall, and your Total Payoff will be less. You can also pay more than your monthly payment each month, to reduce the time and total pay off. If you can afford the  monthly payment, this is probably the best repayment option.

In Graduated Repayment, you also reach payoff in 120 months (10 years), but your monthly payment is lower in the beginning, and more in the end. If you cannot currently make payments under the Standard Plan, but expect your income to rise significantly in the next 4-8 years, then this is your best repayment option.

In Extended Repayment , you have more time to pay off your loans, up to 25 years. The downside is that your total payoff significantly increases as you take longer to complete payment. I would only recommend Extended Repayment after first considering the other three options.

There are a number of different options under Income Repayment, each with different eligibility requirements, but the general principle is the same: your monthly payment is based on how much you earn. If and when your income increases, then your monthly payment will increase. Based on the specific option, you will have between 10 and 25 years to repay your loans, and any remaining loan amount after 25 years of payments may be forgiven. Income Repayment will likely produce the most reasonable monthly payment, but once again, your total payoff will increase as time passes.

Projected Earnings Of course, not all careers offer the same salary. To get a general idea of what to expect for your career choice, let’s go to www.onetonline.org, the Occupational Network produced by the U.S. Department of Labor. Type in your desired career into Occupation Search. You will see all sorts of great career information here, but for today’s purposes, let’s scroll all the way down to the bottom to Wages and Employment Trends, where you will find your Annual Median Salary.

Now, a median salary is an average salary, so you can expect to earn less at the beginning of your career, and perhaps more at the end of your career. There are also salary differences based on where you work, your level of education, and so on. But the annual median salary is a good reference point.

If we return to Bob, our Elementary Education student, we see that O Net lists a median salary of $52,000. So, what would be the monthly take home pay for an elementary school teacher earning an annual salary of $52,000? Of course, we take $52,000 and divide by 12 months in a year, which comes to $4333 per month. Then we multiply $4333 by 75%, to get a monthly take home pay of $3250. Why the 75%? Roughly 25% of your monthly salary will go to taxes, health insurance, retirement accounts, and other benefits. This percentage will vary, but 25% is a good estimate for middle-income, benefited positions.

SLOPE Can Bob afford the $286 monthly payment required by Standard Repayment, which would allow the lowest total payoff? The answer is: it depends on his SLOPE. SLOPE stands for Student Loans Over Projected Earnings.

Bob's monthly student loan payment is $286. Bob's monthly projected earnings (take-home pay) is $3250. Bob's SLOPE is 286 divided by 3250, which equals 0.088, or 8.8%. In other words, 8.8% of Bob's monthly take home pay goes toward student loan repayment.

Generally speaking, a SLOPE under 10% is great, up to 15% is manageable, and 20% should be your absolute limit.

By estimating your SLOPE now (before you have accrued all of your debt), you can make proactive decisions regarding how much student loan debt you can afford.