Student Aid Policy Analysis Papers
Student Aid Policy

Excessive Debt at Graduation

Mark Kantrowitz, Who Graduates with Excessive Student Loan Debt? December 14, 2015

Download the Excessive Student Loan Debt paper in Adobe Acrobat (PDF) format.

Executive Summary

Student loan debt has been growing rapidly over the last decade. But, while milestones may be impressive, what matters more is the growth in excessive student loan debt at graduation.

A borrower has excessive student loan debt when 10% or more of the borrower's gross income must be devoted to repaying the borrower's student loan debt, assuming a 10-year repayment term

A borrower has excessive student loan debt when the borrower graduates with more debt than he or she can afford to repay in a reasonable amount of time, such as within 10 years of graduation. This paper defines excessive debt as occurring when the borrower's debt-service-to-income ratio — the percentage of monthly gross income devoted to repaying student loan debt — is 10% or more under a standard 10-year repayment plan.

This paper provides a rational justification for using the 10% debt-service-to-income ratio as a cap on affordable student loan debt. It derives the threshold by assuming that part of the after-tax increase in income for Bachelor's degree recipients (as compared with high school graduates) is available to repay student loan debt, assuming a 10-year repayment term. The 10% threshold corresponds to using half of the additional net income to repay student loan debt. The paper also derives a 15% debt-service-to-income threshold as a "stretch limit" by assuming that three-quarters of the additional net income is available to repay student loan debt.

The 10% and 15% debt-service-to-income thresholds are also consistent with the rule of thumb that total student loan debt at graduation should be less than the borrower's expected annual starting salary.

This paper presents several other new results concerning students graduating with excessive student loan debt.

  • The percentage of Bachelor's degree recipients graduating with excessive student loan debt has been growing for the last three decades. But, the percentage of Bachelor's degree recipients graduating with student loan debt who graduate with excessive debt has remained at slightly more than a quarter of Bachelor's degree recipients who graduate with student loan debt for the last two decades. This suggests that the growth in the percentage of Bachelor's degree recipients with excessive debt is driven by the overall growth in the percentage of students who must borrow to pay for college.
  • Students who graduate with excessive student loan debt are more likely to delay major life-cycle events, such as buying a home, getting married and having children, than students who graduate with affordable debt.
  • Students who graduate with excessive debt are more likely to take a job outside their field, to work more than desired and to work more than one job. They are also significantly more likely to say that their education debt influenced their employment plans.
  • Students who graduate with excessive debt are just as likely to own a car as students who graduate with affordable debt, but are less likely to have a car payment of $350 or more. Thus, graduating with excessive student loan debt can be the difference between owning a new car and a used car.
  • Students who graduate with excessive debt are less likely to feel that their undergraduate education was worth the financial cost, as of one year after graduation.