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Excessive Debt at GraduationMark Kantrowitz, Who Graduates with Excessive Student Loan Debt? December 14, 2015Download the Excessive Student Loan Debt paper in Adobe Acrobat (PDF) format.
Executive SummaryStudent 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 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.
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